It’s all in the Reeds

In the US, proxy fights and takeover battles are usually reserved for companies listed on The Nasdaq

Global Select Market? and the New York Stock Exchange.  However, there are occasions when companies with small market capitalization join the fray.  The most recent entrant to this space is Reed’s Inc., (REED) a smaller reporting company, with a market capitalization of $41 million based on the August 25, 2016, closing price of $2.88.

Reed’s has been the subject of a corporate governance fight with certain shareholders for the last four years in the form of a Proxy Access Proposal.  From 2013 to 2015, the shareholders argued that Reed’s should amend its “governing documents to allow shareowners to make board nominations”.  The request was based on: (a) the viewpoint that the interest of the Independent Directors were not aligned with the shareholders, which was evident by the directors owing little or no stock ownership in Reed’s; and (b) the directors lacked the experience necessary to provide effective leadership to move Reed’s forward.  The shareholders acknowledged that Reed’s “has a great product line but sustained profitability continues to be elusive even as revenue grows”.   The Proxy Access Proposal shareholders noted that “If nothing concentrates the mind like the prospect of being hanged in the morning, surely the prospect of financial ruin is a close second.”  

For three consecutive years, Reed’s Board of Directors unanimously recommended that shareholders vote against the Proxy Access Proposal, citing the potential for (i) significant additional expenses; (b) diversion of management time and energy in managing the election process; (c) “special interest directors” may have an adverse  affect the productivity of the Board of Directors; and (d) “special interest directors” may have a negative impact on the governance and Board of Director’s oversight of management.   In each year, the majority of the shares were Broker Non-Votes, and management’s 24-26% equity interest resulted in the defeat of the proposal.  

However, in 2014 and 2015, the Proxy Access Proposal shareholders received symbolic victories, when the Chairman of the Audit Committee did not receive the majority vote of shareholders to be reelected. Notwithstanding the vote, Reed’s allowed the Chairman of the Audit Committee to serve, which is a variance from corporate governance best practice.   During this time, Reed’s financial condition maintained its downward trajectory.

On June 1, 2016, one of the Independent Directors resigned from the Board, resulting in the Reed’s moving from its 11 year position of having a majority of Independent Directors, to 50% majority, but still in line the with NYSE MKT, LLC requirement.  More bad news followed, when Reed’s announced on June 26, 2016, that the company fell below the Exchange’s continued listing standards because its market capitalization was now below $50 million. The elusive profitability noted by the Proxy Access Proposal shareholders as an area of concern materialized in the form of the NYSE notice.

On August 25, 2016, shareholders with a beneficial interest in 350,000 shares,  The Committee to Rescue Reed’s (the Rescue Committee) filed notice with the SEC to solicit votes for the election of their slate of five director nominees at the 2016 annual meeting of stockholders of Reed’s.   The Rescue Committee stated in the filing that Reed’s has been plagued by poor financial performance and serious corporate governance deficiencies.  Of note was the fact that the Board allowed the Chairman of the Audit Committee to serve despite his failure to receive a majority vote support at the last two annual meetings and the other independent director has been cited by corporate governance experts for his failure ‘to attend at least 75 percent of his board and committee meetings since 2009’.  

Reed’s has been a publicly traded company since at least 2005, and moved from the OTC Bulletin Board to NASDAQ Capital Market in 2007, and to NYSE MKT in 2012.  Based on Reed’s public filings, the former and current Independent Directors became board members in 2005, and in the aggregate, their stock ownership never increased beyond 4,314 shares.  The above average board tenure of 12 years, coupled with extremely low stock ownership, and continuing losses should raise corporate governance concerns.

As noted prior, Reed’s stated position for not taking the views of other shareholders into account (motives aside), suggests a healthy measure of tone deafness. In fact, Reed’s argument appears to be that the CEO and his management team knows best.  Additionally, the company statements could be fairly interpreted as we will not be accountable shareholders, especially those with “special interest”.  

An October 16, 2014 article by John Wilcox in the Harvard Law School Forum on Corporate Governance and Financial Regulation notes that corporate boards should take charge of their relations with shareholders to answer the most basic question of corporate governance: “How effective is the board of directors?”.  Reed’s public filings suggest that the board has failed to answer this question.  With respect to aligning director and shareholder’s interest, a common corporate governance theory notes that restricted or deferred stock or unit awards create appropriate alignment between director and shareholder interests. However, Reed’s philosophy appears to be different. Over the last 8 years, the Reed’s Independent Directors received little or no stock or cash awards.  By contrast, Long Island Ice Tea Corp  (LTEA.OQ), a company with less than $2 million in annual revenue, provides stock based compensation to its Board.  Coincidentally, LTEA’s director’s bios appear more relevant to its business operations when compared to Reed’s directors.

It would be interesting to see the outcome of the Rescue Committee actions.  A settlement between the Board and the Rescue Committee may be in the interest of all shareholders. The Chairman & CEO owns about 25% of the voting stock with his wife, and the final decision may be vested in the Reeds.  

The writer does not hold an employment, advisory or consultancy position with the issuer or the Rescue Committee. The writer does not hold an investment in the issuer's securities.