Fast food giant McDonald’s may have questionable animal welfare practices—its suppliers use gestation crates for pregnant pigs, which are considered inhumane. To address this, billionaire investor Carl Icahn has proposed a proxy contest to change the composition of McDonald’s Board of Directors.
Gestation crates typically house pigs so tightly that they cannot turn around, but the practice of using them is widespread in the American pork industry. Though the company pledged to stop using the crates a decade ago, it failed to follow through. Icahn is an activist investor accustomed to attempting to change corporate behavior through shareholder actions, but an expensive proxy fight over animal welfare is not the historic domain of such activists.
Shareholder Activism
Traditionally, activist investors have focused on increasing economic returns from corporations and eliminating perceived waste. Public companies, registered under Section 12 of the Securities and Exchange Act of 1934, are subject to proxy rules for shareholder votes and face great pressure to increase profits from aggressive shareholders.
Shareholders who are unhappy with the board of directors’ oversight of management can initiate proxy contests under Section 14(a) of the Act and its corresponding rules promulgated by the Securities and Exchange Commission (SEC). Under these rules, activists either produce proxy statements and materials at their own expense to send to other shareholders to pool together votes for a slate of directors or seek to include proposals and board nominees on the proxy statement released by the company.
More and more, however, shareholders have pushed for actions from corporations on “ESG issues”—environmental, social, and governance issues. Blackrock CEO Larry Fink, for example released a letter in January 2020 calling on the boards of publicly traded companies to increase their sustainability disclosures in reports to the SEC or face being replaced through shareholder votes. The Business Roundtable in 2019 released a Statement on the Purpose of a Corporation which focuses on issues beyond shareholder return like embracing sustainable practices in business.
The SEC requires disclosure of ESG information if it is “material to the company’s performance,” a standard which can be vague. Moreover, companies that make predictions about their future and disclose too much could face liability in the future if their statements are found to be materially misleading. This has a tendency to lead to “greenwashing”—companies paying lip service about combatting climate change while avoiding real commitments to shareholders or enacting actual change.
The McDonald’s Proxy Fight
Icahn has asked for McDonald’s to set a timeframe for moving all of its U.S. pork suppliers to those that use only pigs raised without gestation crates. Icahn proposes to replace the McDonalds board with directors who would implement the change in corporate policy that he seeks. He has nominated Leslie Samuelrich and Maisie Ganzler, both of whom who have experience in sustainability, to stand for election by shareholders for the board at the company’s 2022 annual meeting. Icahn has noted that he holds only 200 shares of McDonalds, so his actions have only a minimal impact on the value of the shares he owns. Thus, he seems to be primarily socially-motivated in bringing this action.
In tandem with Icahn’s actions, the Humane Society U.S. has introduced a shareholder proposal to end the use of crates for pigs. The Humane Society was also involved in soliciting the pledge to stop use of such crates from McDonald’s 10 years ago; since that pledge was not followed through on, the Human Society fears the company will only limit but not stop their use. Their shareholder proposal is allowed by SEC Rules 14a-8, which allows qualifying proposals submitted by shareholders to be submitted on the company’s proxy statement for vote at the annual meeting. The company board also has a chance to comment on the proposal from their perspective in the same statement. But the proposals cannot be binding on directors, as this would run afoul of state corporate law divisions between shareholders and corporate management under SEC Rule 14a-8(i)(1).
Icahn’s proxy fight is reminiscent of the 1985 case of Lovenheim v. Iroquois Brands, Ltd., which involved an owner of 200 shares in a public company using SEC Rule 14a-8 to request that shareholders vote on a proposal for the company to investigate and report on its use of inhumane feeding procedures on geese to make foie gras. The court ultimately found that the proposal was important enough to the company’s business to go to a shareholder vote, even though the SEC had interpreted Rule 14a-8 proposals as requiring an economic focus, and even though foie gras sales comprised a very small share of the company’s business.
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In that case, shareholder Lovenheim was also acting on behalf of the Humane Society. His proposal, while it was listed in the proxy statement, ultimately did not pass the shareholder’s vote. Nonetheless, the company, Iroquois Brands, later sold their foie gras assets, so the shareholder pressure likely had an effect. This is one of the earliest examples of successful shareholder involvement in decisions on corporate social policies that are not welcomed by management or the board.
The McDonald’s Board of Directors Responds
In response to Icahn, McDonald’s released a press release and board statement claiming that they have led the industry in group pork housing systems since making their original commitment, in line with their overall ESG strategy. They claim that they expect the company to source 85% to 90% of its U.S. pork from pigs not housed in gestation crates by the end of the year. The statement went on to say that “McDonald’s Board of Directors takes seriously its role to ensure sustainable value creation for shareholders while acting on some of the world’s most pressing social and environmental challenges that are important to our stakeholders.”
The Board’s statement walks the line between focusing on ESG from a shareholder perspective and from a stakeholder perspective. Icahn represents a shareholder perspective, where shareholders are able to exercise some form of control over board policy. A stakeholder perspective, on the other hand, ostensibly takes into account employees, customers, suppliers, creditors, and communities. Martin Lipton, William Savitt, and Karessa L. Cain of Wachtell, Lipton, Rosen & Katz LLP argue in “On the Purpose of the Corporation” that the business judgment rule should allow boards to manage a corporation for the benefit of stakeholders over the long term. Martin Lipton has previously criticized shareholder activism and proxy fights as a strain on corporate resources, specifically pointing to overuse and abuse of Rule 14a-8 proposals for shareholder votes on corporate policies, and advocating that the SEC implement new rules in response.
On February 22, 2022, the SEC proposed amending Exchange Act rules to incorporate some reforms which are similar to reforms previously proposed by Lipton to increase disclosures for shareholder activists. Shareholders who individually or as a group come to beneficially own more than 5% of a target company’s shares are subject to mandatory disclosure under section 13(d) of the Exchange Act, which can tip an activist’s hand. The new amendments would require such shareholders to disclose such ownership earlier, within 5 days rather than 10 days. The amendments would also include some holders of derivatives as beneficial holders of the underlying stock. The SEC reasoned that owners of derivatives may exercise influence over the voting rights of the associated stock even if they do not directly hold the stock, but their positions in the derivatives did not previously require disclosure. The new rules if adopted could give a board and others access to more information faster in a proxy fight with activist shareholders.