The story so far of the battle between trade union Fast and America's largest nursing home operator Beverly Enterprises
Proxy votes come and go, but some leave a bitter taste. That's especially true when a poison pill is the issue, as in the case of Beverly Enterprises versus Fast and the AFL-CIO. Some 13 years into this vitriolic epic, the latest battle is being waged on the proxy front, and the results have deepened the rift between America's largest nursing home operator and the Food and Allied Service Trades Department (Fast) of the powerful AFL-CIO federation of unions.
In the event, stockholders gave the nod to Beverly's amended shareholder rights plan, voting 61 per cent in favour of a poison pill at the May annual meeting. End of story? Not quite. Fast is vowing to overturn the pill proxy vote, claiming that the rights plan entrenches company management; and it has slapped a lawsuit on Beverly's management for violating securities laws in its proxy solicitation materials.
In its efforts to turn the vote around, Fast pulled a page from the corporate secretary's book by hiring proxy solicitor Kissel-Blake. That raised a few eyebrows: one New York solicitor, asked if his firm would work for a union, said: 'That would be suicide. Unions evoke a visceral reaction in corporate America and working for one would poison the well with a large number of our clients.'
The Kissel team - led by president Bill Willis and his partner Joe Spedale - clearly suffers from no such queasiness. On the contrary, Willis and Spedale regard their trade union client in the Beverly case with the equanimity and integrity that they believe professionalism requires: 'A client is a client, regardless of whether it's a union, a raider or a Fortune 500 corporation,' avers Willis. 'My concern is to offer anyone the chance to hire a professional proxy solicitor, as long as they follow the rules. In fact, we took the case as a learning experience.'
In a twist of fate, Kissel-Blake wreaked havoc with a form letter to institutional shareholders requesting their holding size and custodial information. The blank for the client's name was filled in with 'Beverly' - instead of the name of the union. This might have looked like a dirty trick, but no-one doubts that it was just a clerical error. Nevertheless, when stockholders did finally sort out who was who, they could hardly believe a dissident with only 45 Beverley shares - and a union at that - was coming after them for support in a proxy fight.
Fast, representing two unions that count some 10 per cent of Beverly employees as members, is part of AFL-CIO, a federation of about 80 unions with 13.3 mn members. Fast itself comprises 15 unions and 3.5 mn members which include oil workers, plumbers, hotel, food and commercial employees and, relevant to Beverly's case, nurses' aides.
The Fast position was to urge shareholders to vote against the proxy, claiming that with its poison pill Beverly was not only discouraging future acquisitions and hampering shareholder value, but was also misleading shareholders. 'While we are pleased that nearly 40 per cent of votes cast were against the pill, we continue to believe Beverly sent false and misleading proxy materials to stockholders,' says Jeffrey Fiedler, Fast secretary treasurer. Fiedler filed a suit in federal court on April 26 over proxy materials, but was too late to stop the May vote. The union is pressing its case and a decision is pending.
Fast's opponent, the Beverly Enterprises management team, is based in Fort Smith, Arkansas, and listed on the New York Stock Exchange. The company is capitalised at over $1 bn and had 1994 revenues of about $3 bn. Founded in the 1960s, Beverly grew by aggressive acquisition to a peak of 1,500 nursing homes in the late 1980s, along with long-term acute care hospitals and pharmacy operations, before falling back to today's total of 720 nursing. The employee roll-call is 82,000 and the company's trail of hospital acquisitions was accompanied by the representation of a number of unions.
Beverly says the proxy fight is just the latest round in a 13-year saga of harassment by Fast on behalf of the two unions seeking to organise the company's workforce. According to the company, Fast president Robert Harbrant once said in a newspaper interview that his organisation's acronym stood for Fish Around and Start Trouble.
John MacKenzie, vice president, deputy general counsel and assistant secretary at Beverly, does not take the Fast lawsuit lightly. 'They claim we violated proxy rules, and I take that very seriously,' he says. 'After all, I drafted the proxy materials and talked to institutional shareholders.'
'Everything Beverly did was the best course of action it could have followed,' says Arthur Crozier of Georgeson & Company, Beverly's proxy solicitor. 'We were only trying to be responsive to the shareholders. It is unfortunate that Fast took a self-interested approach both in contesting the pill and litigating. Unfortunately, that's its right.'
It is a commonly held view that unions use shareholder proposals as another weapon in their armoury for fighting for labour causes. Fast, which describes itself as a long-time holder of Beverly, has a small but wide-ranging portfolio of stocks in the companies its members work for; well-oiled communications machinery; and a deep pocket. It chooses fights carefully, but in the past it has almost always solicited for itself, sending out its own proxies and communications.
Fiedler says Fast never goes out of its way to bash management. 'I don't want to oust Beverly management,' he says. 'I just don't want to perpetuate them. Fast is not enamoured of poison pills in principle - they don't do much for workers, and are unfriendly to shareholders' interests. And there is no doubt they favour corporate management.'
The history of the Fast vs Beverly activism dates back to 1982, when the union launched a proxy fight to replace an incumbent director with Arthur Fleming, former US president Ike Eisenhower's secretary of health, education and welfare. The same year it held a 37-hour sit-in at Beverly headquarters with more than 300 demonstrators. In 1983, Fast unveiled its first study criticising Beverly patient care and proposed two shareholder resolutions at the annual meeting, both of which were defeated.
The next fight was in 1994, when Fast called for a study to be published for stockholders outlining Beverly's patient care lawsuits, claims and settlements over patient care violations. The proposal was defeated easily. 'It sounds good, but it would have been devastating,' says MacKenzie. 'We would be working for the plaintiffs' lawyers, giving them a guidebook for lawsuits.'
Then in January of this year, Fast issued a study criticising aspects of Beverly's management, including quality of care. Beverly has its own quality assurance programme and Fast expected to find it lacking. The union concluded that while Beverly's inspectors could identify numerous operational problems, its management failed to fix them. The study questioned whether nursing homes as big as Beverly could still provide quality care. MacKenzie says the study focuses on exceptions rather than the rule, and cites mistakes that are years old.
Meantime, Clinton's health care reforms had precipitated a surge of M&A activity in the industry. In September 1994, amid a spate of rumours of accumulation in stock and a possible takeover of Beverly, the board adopted a poison pill. In March 1995, Fast notified Beverly that it was proposing that the board kill the pill or submit it to a stockholder vote. Beverly management was in a tight spot: losing the vote could mean another stockholders' meeting and twice the expense. But if it changed the pill and put it to a vote, Fast's proposal would be mooted. Beverly knew Fast would still fight, but it would only be a single meeting.
Beverly undertook a review of the pill with the help of Georgeson and New York-based M&A specialist Kekst & Co. With roughly 75 per cent of its shares in institutional hands, the Beverly team set out to discover how to win a shareholder rights plan vote. Georgeson and Kekst checked out the few pills that had gone to stockholder votes in the US, while MacKenzie began contacting Beverly's biggest holders. He managed to pick the brains of six of the top twelve, and learnt that most had a policy of opposing poison pills.
However, there were two provisions that would help sway them. At the Beverly board meeting on April 6, a new pill was voted in. It included a sunset provision, which would put the plan to another stockholder vote in three years instead of the original ten. Also included was a stockholder referendum or qualified bid provision, which meant that in the case of a tender offer, price and considerations would be the same for all shares. The new plan had to be approved by an affirmative vote of a majority of the shares present and voting at the annual meeting. MacKenzie called Fiedler to tell him of the new plan and, after reviewing it, Fiedler reported that Fast would be opposing it.
The same board meeting decided to spin-off Beverly's Pharmacy Corp of America (PCA) unit by an IPO. Fiedler felt there was a connection between this and the amended pill, since the spin-off would lessen the value of the company and be a powerful deterrent to any potential acquirer. Fast claims that Beverly has been aggressively building PCA, spending $231 mn in cash in 1994 to buy two drug distributors (a third acquisition is pending). The company expected these purchases to double PCA's revenue to $500 mn in 1995.
As it turned out, the PCA spin-off was all the fuel the union needed to head to the courts. On April 26, Fast filed a lawsuit seeking to enjoin Beverly from continuing to solicit proxy votes from its shareholders for its poison pill. Beverly was ordered to produce documents related to its amended poison pill and the decision to spin-off PCA.
'In plain English, Beverly learned that it would lose the vote on its original poison pill,' says Fiedler. 'It changed the pill to try to win the vote, and spun off PCA at the same time to make the remaining company a less attractive target. It's spinning off the crown jewel. Fast contends that the spin-off is relevant in the proxy vote, and yet Beverly's proxy statement neglects to mention that spin-off. Beverly shareholders should have all the information they need before voting, and we don't believe they did. That is the issue the courts must decide on.'
Fiedler was fast on his feet. Since the union was soliciting opposition votes on Beverly's proxy card, it was exempt from filing with the SEC. Kissel-Blake conducted two mailings for the union, as well as surveying institutions for comments which were included in its letter to proxy voters.
Fast quickly targeted the amended pill and, in a letter to shareholders which it put out as a press release, pointed to an institutional investor holding over a million shares of Beverly who expressed concern over two provisions in the amended poison pill. One was that any portion of a tender offer that is a non-cash consideration must be in the form of NYSE-listed securities, and excluded all non-NYSE companies as potential acquirers, severely limiting the number of companies in the fray. Fast pointed out the provision would prevent solid Nasdaq-listed companies from seeking to acquire Beverly using their own stock in the offer.
The second aspect concerning the investor was that a tender offer could not be subject to due diligence conditions. For his part, MacKenzie points out that hostile takeovers are not often based on the condition of due diligence: raiders have to take their best shot. Due diligence is only to be expected in a negotiated merger.
Finally, after three Beverly mailings and two from Fast, the pill came to a vote. Management got just over 60 per cent but MacKenzie believes that while most shareholders voted on the basis of the merits of the plan, many others were influenced by whether they were anti or pro-union.
Just after the May meeting, Beverly issued its own report giving its version of Fast's campaign. It claimed that the union had distorted statistics and that its January study contained 'malicious mistruths'.
Back on the legal front, with depositions taken on both sides, Beverly filed its answer to the lawsuit in late June. The case could get to court by the end of the summer for a preliminary injunction revoking the May vote, but if Fast pursues the case and it goes to trial, it could drag on for years.
From Fast's point of view, however, the attack on Beverly management has already been vindicated. Two weeks after the proxy vote, the company announced that, because of operational problems in PCA, earnings could be adversely affected to the tune of 5-7 cents per share in the next quarter, and that the problems meant delaying the spin-off for up to six months. Worse, PCA's president retired, helping the share price to crash from a height of $16 to $11.
But all may not be lost for Beverly's shareholders. After juggling the IR function between different staff members for several years, the company is now out looking for a full-time IRO. 'I have learned a lot in the last two years,' says MacKenzie. 'An IRO has to be proactive and always have a feeling of what stockholders are thinking. Investors don't always think the way management does. If we're going to be successful into the next century, we have to go out and talk to shareholders continually, not just deal with them when emergencies come up.'
At least one shareholder will be hard to sway, however. 'We have learned that you cannot apply logic to what Beverly does,' says Fiedler. 'Their decision is coloured by an ideology that says we are a union and therefore must be fought. But we are fighting them because they have not followed simple securities laws, which state that the PCA spin-off should have been disclosed on the proxy. If the courts find in my favour, that Beverly sent misleading proxy materials to voters, the vote would be set aside and a new one run. The second time around, we would win. I now have the support of the majority of the top ten shareholders.'
Beverly is not about to back down, however. 'The lawsuit is just another in Fast's campaign of dirty tricks against Beverly,' says MacKenzie. 'Beverly is a big and tempting target in an industry where unions have failed abysmally in their attempts to organise employees. This meritless suit, with its ludicrous allegations, is plainly and simply just another harassment tactic.'