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Elliott Management’s Letter to Arconic’s Board: Calls for Broader Investigation and Accountability

Elliott Management’s Letter to Arconic’s Board, March 20, 2017

  • Elliott Management owns a 13.2% economic interest in Arconic Inc (NYSE: ARNC)
  • Sent a letter to Arconic Board on March 20, 2017 demanding a full, fair and independent accounting of the secret vote-buying agreement that was disclosed on March 13, 2017
  • Previously sent a letter detailing management’s diversion of corporate assets for its own benefit related to a vote-buying agreement that was deliberately concealed from the Company’s shareholders for the better part of a year
  • On March 20, Company announced it would waive the provisions of that agreement
    • This is a necessary step but it is hardly sufficient
  • Problem with the Secret August Voting Lock-up1 wasn’t just that it affected the Company’s upcoming proxy contest but that it looks to have been contrary to law, contrary to its own Code of Ethics, and contrary to the fundamental principles of shareholder trust
    • Management traded shareholder value for votes promoting its own entrenchment and that of the Board
    • Board cannot simply waive the terms of the agreement and act as if nothing implicating management integrity ever happened
  • Evident fact patter plainly appears to be illegal conduct for the purpose of covering up other illegal conduct and the individuals must be held accountable
  • March 20th settlement also suggests the Board is not treating these illicit dealings with the necessary gravity
    • It cannot be the ongoing responsibility of the shareholders to police management misconduct; that is the Board’s job
    • If Elliott had not pointed out the Secret August Voting Lock-up, Board would have let management’s diversion of Company assets proceed apace
    • If March 20th statement is the sum total of the Board’s response, then the Board is treating the matter cavalierly
  • The Board must take immediate action to dismiss anyone who:
    • Devised, authorized or substantially participated in negotiating the Secret August Voting Lock-Up, thereby converting Company assets for personal benefit and/or
    • Participated in hiding, knew, or should have known that management was deliberately hiding the Secret August Voting Lock-Up from shareholders
  • The Board must not tolerate this conduct or efforts to cover it up
  • Board owes shareholders a full, fair and independent accounting of both the Secret August Voting Lock-Up and the waiver that it announced
  • Press Release contains misrepresentations of fact and actually raises more questions than it answers:
    • Company’s release: “The agreement did not restrict Oak Hill from selling shares of Arconic at any time, and if Oak Hill were to sell any shares, the voting commitment would terminate with respect to those shares”
      • This is not true – agreement had a dead-hand provision, forcing Oak Hill to vote the shares with management if it sold after March 1; given that the agreement was not disclosed until March 13, Oak Hill may have been free to sell but other shareholders were precluded from taking steps to allow the Seller’s shares to be voted on the merits
    • Company’s release: “The voting commitment was added only after the financial terms were finalized; no additional value was given for the commitment”
      • No reason shareholders should credit this assertion without a full accounting of the transaction that produced the Secret August Voting Lock-Up; all negotiated terms of a commercial agreement, by definition, relate directly or indirectly to value – otherwise a commercial enterprise, which exists for the purpose of making money, would not bother to negotiate them; as but one example, the terms and scope of a release from liability, while not a “financial term”, undoubtedly relate to value, especially as here in connection with an acquisition that resulted in the destruction of an immense amount of shareholder value
    • Before any credit can be given to the assertion that no value was given in exchange for the Secret August Voting Lock-Up, the process must be fully and fairly examined

Key Questions:

  • Terms and Origin of the Settlement and Secret August Voting Lock-Up:
    • Who proposed the Settlement and in particular, the Secret August Voting Lock-up?
    • When was the Secret August Voting Lock-Up proposed?
    • When were the outside advisers, including auditors, made aware of the Secret August Voting Lock-up? In particular, if outside advisers were aware of the Secret August Voting Lock-up prior to the Board, why didn’t the outside advisers brief the Board?
    • Was the Board made aware of the Settlement? In particular, what was the Board told, when was it told, and who presented that information to the Board?
    • Was the Board invited to vote on the Settlement and the Secret August Voting Lock-Up and if so, how did each director vote?
  • Failure to Disclose Material Information to Arconic’s Investors:
    • Why was the Secret August Voting Lock-Up hidden from Arconic stockholders for seven months?
    • Why was the Secret August Voting Lock-Up not disclosed until the filing of the Definitive Proxy Statement and after the record date for the 2017 annual shareholders meeting?
    • Why did the Company deliberately not disclose the Secret August Voting Lock-up in public filings including the 8-K filed on 10/11/16, the 10-Q filed on 11/9/16, the 8-K filed on 1/31/17, the 10-K filed on 2/28/17, and the preliminary proxy filed on 3/2/17? Who was responsible for this decision, which likely violated applicable securities laws?
  • Use of Corporate Assets for Personal Benefit:
    • Why did the management seek to obtain shareholder voting commitments relating to corporate governance matters as settlement currency in the resolution of an ordinary-course commercial dispute?
    • Does the Board believe Arconic’s management and/or its Board should be able to use corporate assets to purchase votes? If so, how much of the shareholders’ funds is management and/or the Board permitted to use to purchase votes?
  • In addition to the questions above, shareholders are owed a full accounting of the Secret August Voting Lock-Up waiver announced and Company must also immediately disclose whether there are any other such or similar voting lock-ups in place that have yet to be disclosed

The Board’s Highest Responsibility and Necessary Next Steps:

  • There are extensive personal ties – friendships, overlapping board service – between members of the Board and management
    • Mindful that the lead independent director, Patricia Russo, and Dr. Kleinfeld effectively supervise each other at Arconic and Hewlett Packard
      • At Arconic, Ms. Russo serves as lead independent director and supervises Dr. Kleinfeld as CEO and Chairman
      • At HPE, Dr. Kleinfeld serves on the Governance/Nominating and Social Responsibility committee and thus has reciprocal supervisory responsibility for Ms. Russo as Chairman of HPE
      • At Arconic, Ms. Russo sits on the compensation committee, responsible for overseeing the compensation of its executives and directors
      • Personal ties cannot be allowed to affect judgment nor should the expectation of future supervisory quid pro quo
    • Board should take note of the distinct and larger pattern which now emerges
      • Kleinfeld left Siemens under the clouds of a bribery investigation and upon his departure, faced an unprecedented lawsuit by the Siemens Board for failing to properly supervise the organization
      • Siemens scandal not only led to the largest FCPA penalty of all-time but also resulted in Dr. Kleinfeld paying 2 million euros out of his own pocket in order to settle potential personal liabilities
      • At Alcoa, while Dr. Kleinfeld was serving as a member of the Audit Committee and later during his tenure as CEO, Alcoa paid almost $200 million in bribes to foreign government officials and intermediaries, resulting the 5th largest FCPA penalty ever at the time
      • These repeated instances, at the very least, call into question Dr. Kleinfeld’s judgment and supervisory rigor
    • Board must go wherever the facts lead even if the direction of the investigation is unpleasant
    • Issue isn’t whether or not the seller of Firth Rixson can vote in May, it is whether management – having appropriated Company assets for its own benefit – is deserving of shareholders’ trust
      • If the Board fails to promptly take appropriate remedial action, it will have abdicated its most important responsibility
  1. On March 13, 2017, Arconic Inc. filed a Proxy Statement with the SEC which disclosed for the first time that the Company’s resolution of a working capital adjustment arising out of Arconic’s 2014 acquisition of Firth Rixson included entering into a vote-buying agreement. The agreement locked up the vote of approximately 8.7 million shares of Arconic common stock for a period of two years in exchange for the resolution of potential claims against the former owner of Firth Rixson. The Secret August Voting Lock-Up requires the former owner of Firth Rixson to vote any shares of Arconic common stock that they beneficially own as of the record date in favor of the election of directors nominated by the Company’s Board, including Dr. Kleinfeld.

Elliott Management Corporation manages two multi-strategy hedge funds which combined have more than $32B of AUM. Its flagship fund, Elliott Associates, L.P., was founded in 1977 by Paul Singer, making it one of the oldest hedge funds under continuous management. 

According Yahoo Finance, Arconic Inc. engineers, manufactures, and sells lightweight metals of aluminum, titanium, and nickel worldwide. It operates through three segments: Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions. As of March 20, 2017, Arconic had a market cap of ~$12.3B and an enterprise value of ~$18.6B.

Image Source: Wikimedia
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