March 29, 2024

Fair Game: When Two-Thirds Isn’t Enough

The owners of Cedar Fair L.P., a leisure and entertainment company in Sandusky, Ohio, have learned this the hard way. Cedar Fair owns 11 amusement parks, including Cedar Point in Sandusky, Dorney Park in Pennsylvania and Knott’s Berry Farm in California, as well as water parks and hotels. Last year, it generated almost $1 billion in revenue.

The company trades on the New York Stock Exchange under the happy symbol FUN. But its investors have not had much fun lately. From year-end 2005 through the end of 2010, Cedar Fair lagged behind the Standard Poor’s 500-stock index, the S. P. 400 and the S. P. index of movie and entertainment companies.

Now that’s a hat trick.

Given that Cedar Fair depends on people who are willing to spend money for a day out, it’s perhaps no surprise that the recession hit its business hard. The company cut cash distributions to its investors to $1.23 per share unit in 2009, from $1.92 the previous year. The stock fell 8.9 percent that year.

This grim performance attracted a suitor in late 2009. Apollo Global Management, a big private equity firm, tried to take over Cedar Fair on the cheap. Apollo bid $11.50 a share that December. Cedar Fair urged investors to accept that offer, but investors, led by Q Investments, a money management company out of Texas that owns 18.1 percent of the units outstanding, voted down the buyout.

The stock has since rallied 63 percent, closing on Friday at $18.76 a share, as the company’s results improved, and Q Investments has grown increasingly aggressive in pushing the board to be more responsive to stakeholders — that is, the owners.

Indeed, Q Investments has become something of a thorn in the side of Cedar Fair’s management and board. Late last year, the firm pushed for a special meeting of unit holders to vote on its proposal that the chairman of Cedar Fair’s board be an independent director who has not served as an officer of the company or any of its affiliates. Cedar Fair’s board urged unit holders to vote against this proposal, saying it would shrink the pool of candidates available for the position.

Nevertheless, the proposal passed, and Cedar Fair appointed a new chairman who is independent.

Q Investments mounted an even bigger fight earlier this year. It is trying to change the company’s practice of barring unit holders from nominating candidates to the Cedar Fair board.

Cedar Fair is set up as a publicly traded partnership operated by a general partner. Because of this structure, unit holders do not have the right to nominate directors to the company’s board. That right is reserved for the general partner.

“Giving shareholders the right to nominate directors is the most basic and fundamental right in corporate America,” said Geoffrey Raynor, senior managing partner and founder of Q Investments. “We cannot find one corporation in the Fortune 500 that does not allow shareholders this right.”

CEDAR FAIR’S board was unreceptive to the idea that the company’s owners be allowed to nominate directors to represent them. So, last March, Q Investments put forward another proposal that would require Cedar Fair to allow unit holders to nominate directors. Unit holders voted on the proposal at a special meeting on June 2.

It passed resoundingly. Investors holding 67 percent of the Cedar Fair units outstanding voted in favor of letting shareholders nominate directors to the board, according to company filings. An even greater majority of the units that cast a vote on the proposal — 96 percent — supported it.

The shareholders had spoken. Did the company hear?

Not exactly. While acknowledging that a vast majority of its owners wanted to be able to nominate directors, Cedar Fair said that investors’ wishes could not be granted. The partnership’s regulations, Cedar Fair said, require that changes in the company’s by-laws involving matters such as board elections, must receive the support of 80 percent of the units outstanding. So, even though more than two-thirds of the units outstanding had been cast in support of the change in the by-laws, the proposal failed.

Q Investments said that it had studied voting patterns among unit holders at the company and that roughly 30 percent of Cedar Fair units typically were not even cast at shareholder meetings. As a result, Q Investments said, the 80 percent threshold was virtually unachievable.

“This most recent vote was as close to unanimous as possible,” Mr. Raynor said. “Seventy percent of all unit holders voted, and 95 percent of those voting supported giving unit holders the right to nominate directors. Yet this board has refused to give unit holders this right.”

Stacy Frole, director of investor relations at Cedar Fair, said that the board could not abide by its owners’ wishes and change the 80 percent threshold. “These are the regulations of the general partner; we can’t circumvent those,” she said. “Within the general partner regulations, it would require an 80 percent vote to change the 80 percent voting requirement.”

But Mr. Raynor pointed out that when the 80 percent threshold was instituted, back in 2004, on matters relating to governance issues, it was required to be passed with only two-thirds of the unit-holder vote. “It’s like a third-world dictator being elected by a simple majority and then unilaterally instituting a rule that says, ‘in the future, any challenger must receive 80 percent of the vote,’ ” he said.

Ms. Frole said that Cedar Fair was examining alternatives to try to assuage its big and loud investors. But it sure seems that effecting change at a company should not be that difficult for its owners.

Article source: http://feeds.nytimes.com/click.phdo?i=06420ef8abb6c0aa9f6eb3910acca0b0