April 12, 1999
The proxy war is over, but the wrangling has not stopped at the Yacktman Funds.
Donald Yacktman who ousted the independent directors of his two funds last December after a bitter proxy fight now is battling the proxy solicitation firm the former directors hired. The solicitation firm, Shareholder Communications Corp. of New York, and the Yacktman Funds of Chicago are arguing in federal court in Chicago over whether Shareholder Communications should be paid more than $465,000 in fees for its work on the proxy fight.
Shareholder Communications claimed in a suit filed Jan. 19 that the Yacktman Funds failed to pay $247,310 the funds owed in back bills. The funds counter-sued last month, asking the court to order Shareholder Communications to repay $220,468 the firm already received from the funds.
The Yacktman Funds contends that parts of four proxy statements and press releases which Shareholder Communications issued in the proxy fight are false and misleading, violating federal securities laws. That, the funds allege, means that Shareholder Communications violated its contract with the funds and should not be paid for its work on behalf of the ousted directors.
Yacktman, president of both the Yacktman Funds and fund adviser Yacktman Asset Management, and Robert S. Brennan, a vice president for Shareholder Communications, declined to comment last week.
The dispute between the funds and Shareholder Communications is the latest twist in what has been a unique fight for the mutual fund industry. Prior to last year, there was no instance in which a fund adviser moved to fire independent fund directors.
That is what happened in September, however. After several months of private squabbling, Yacktman initiated a proxy fight in which he asked shareholders to vote out of office the funds' four independent directors Jon D. Carlson, Stanislaw Maliszewski, Thomas R. Hanson and Stephen E. Upton. He also asked them to reduce the size of the fund board and elect a new set of candidates Yacktman supported.
Yacktman contended that the directors had exceeded their authority, becoming too involved in the investment process. The directors responded by alleging that Yacktman had drifted from his investment style and had improperly let others manage the fund. Yacktman was declared the winner of the proxy vote in December when roughly 51 percent of the funds' shareholders backed his proposals.
In October, the SEC took the rare step of coming out in support of the independent directors in a court fight arising out of the proxy campaign, saying that the directors could use fund assets to pay expenses such as proxy solicitation fees. Since that time, the Yacktman fight has been one of the events driving the SEC to take steps to provide more power to independent directors.
The Yacktman Funds' recent moves could discourage professionals such as lawyers and proxy firms from working for independent directors, said Douglas Scheidt, associate director of the SEC. The firms may find themselves going unpaid for their work, he said. In addition, they also may find themselves, after working for the losing side in a proxy contest, being pressed to reveal confidential information and strategies that they shared with ousted directors.
The litigation between the Yacktman Funds and Shareholder Communications, "could have a chilling effect on the willingness of firms to provide services when they are on the other side of an adviser in a proxy fight," Scheidt said last week.
SEC Chairman Arthur Levitt has been pressing for professional support for independent directors recently. In a speech last month, Levitt said independent directors should have access to outside experts to bolster their dealings with management. In fact, the SEC plans to require independent directors to have their own lawyers separate from those who serve the fund adviser.
Last week, professionals who worked for the ousted Yacktman directors said that no matter how the fight between the Yacktman Funds and Shareholder Communications plays out, the dispute will make it more difficult for independent directors to serve as watchdogs of a fund adviser.
"It's tougher for (independent directors) to do their duty if the people on whom they call aren't compensated," Paul H. Dykstra, a lawyer with Gardner, Carton & Douglas in Chicago who represented the ousted Yacktman directors.
Working for the independent directors in a fight now is a "huge risk," said C. Meyrick Payne, a senior partner at Management Practice of New York, a consulting firm that worked for the former Yacktman independent directors.
Vendors took steps in the Yacktman fight to reduce their risk of not being paid. Dykstra said in a recent law journal article about the fight that professionals who served the independent Yacktman directors sought retainers when they were hired. Those retainers, in fact, ultimately led the SEC to get involved in the Yacktman case.
Yacktman Asset Management moved in court in October to halt the independent directors from using fund assets to pay Shareholder Communications and other professionals. The SEC endorsed the directors' right to use fund assets in the proxy fight.
Scheidt said it was unclear if the SEC ultimately would get involved in the Yacktman-Shareholder Communications fight. Unlike in the dispute in October, the independent directors are not parties to the current case, Scheidt said. The legal issues differ as well, he said.
Whatever the outcome, the disputes have not helped asset flows at the Yacktman Fund and Yacktman Focused Fund.