Einhorn's GM plan poses conflict challenge for board

Thu Mar 30, 2017 1:07pm EDT
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By Michael Flaherty and David Randall

NEW YORK (Reuters) - Hedge fund manager David Einhorn's unusual plan to divide General Motors Co's (GM.N: Quote) shares into two classes poses a potential corporate governance minefield for GM board members.

The shareholder proposal, quickly rejected by the company this week, is aimed at boosting a lagging stock price, but did not appear to catch fire with other existing or prospective shareholders, who see it as an odd mix of hybrid security schemes.

The plan would create one class of stock for investors keen to capture GM's juicy dividend, and a second for those eager to bet on its growth potential.

Einhorn, who runs New York-based Greenlight Capital, has pledged to fight for it at the company's annual meeting and plans to nominate a slate of directors ready to advance his idea.

One obstacle cited by legal and financial advisers is the probable conflict it presents for GM's directors, who under Delaware law are required to be loyal to all shareholders. That could get tricky under Einhorn's plan as directors would oversee two classes of stock that each have voting powers but competing ambitions for use of company capital.

For instance, directors would have to square voting to raise quarterly payouts, which would exclusively benefit the dividend stock holders, versus allocating more toward capital expenditures or stock repurchases, which would benefit the growth stock camp.

"It puts the board in an odd position," said Charles Elson, a University of Delaware corporate governance professor who also sits on the board of restaurant chain Bob Evans Farms Inc (BOBE.O: Quote). "Do you plow money back into the business, or buy back the stock? You end up penalizing at least one of the stock holders. It gets messy."

Dividend holders would get one-tenth of a vote under the Einhorn plan, while the so called "capital appreciation" owners would have a full share.   Continued...

FILE PHOTO -- David Einhorn, president of Greenlight Capital speaks at the Sohn Investment Conference in New York City, U.S. May 4, 2016. REUTERS/Brendan McDermid/File Photo