A Los Angles law firm says it is investigating The Eastern Co. about its plan to add a member to the board of directors as part of the Naugatuck manufacturer’s proxy battle with an activist hedge fund.
In late March, Eastern — a maker of industrial hardware, security products and metal castings since 1858 — announced two nominees for election to its board during its May 20 annual shareholder meeting, which was after press time. The company said it also plans to add a sixth member to its current five-member board after the election.
A month later, New York-based Barington Capital Group LP announced its own two nominees to Eastern’s board. Barington represents a group of shareholders owning 5.2 percent of Eastern’s outstanding shares of common stock.
“The most troubling thing to us is the addition of additional directors” after the election, said Avi Wagner, a principal with The Wagner Firm, a law practice focused on investment- and insurance-related disputes. “It smacks of electioneering.”
Wagner said the investigation was initiated at the request of certain Eastern shareholders his firm represents, but he declined to identify them. He said his firm is not representing Barington.
A company usually expands the number of seats on its board beyond the allowed limit set in its bylaws by proposing an amendment to its articles of incorporation that would go to shareholders for a vote, he said. Further, Eastern’s corporate documents state that shareholders are given the opportunity to vote on a proposed board expansion, he said.
“That’s the area where shareholders should decide,” said Wagner, who announced the investigation in a news release. “The way this is being done doesn’t give shareholders an opportunity, and actively denies them.”
Eastern amended its bylaws in 2014, however, to allow its board to add a director, said John Sullivan III, Eastern’s vice president and chief financial officer. Barington sued Eastern a couple weeks ago over its plan to add a director, but Waterbury Superior Court dismissed the suit because state law allows it, he said.
Wagner, however, said adding a new board member without a shareholder vote constitutes “entrenchment” — placing someone firmly in a position so it is difficult to remove that person.
“If a board takes action for the merits of fostering entrenchment, it could be a breach of fiduciary duty,” he said.
Shareholders can file a civil lawsuit if it is determined that Eastern has committed a breach of fiduciary duty — a legal duty to act solely in another party’s interests — by planning to add a board member, Wagner said. Any opposing board members can also sue the board members behind the decision, he said.
Adding a board member is legal, but the Securities and Exchange Commission could disapprove Eastern’s proxy statements if it takes issue with the board’s actions and delay the meeting, Wagner said. Proxy statements are documents a firm soliciting shareholder votes needs to file with the SEC before an annual shareholder meeting.
Eastern has already filed all of the proxy statements it plans to file related to the fight with Barington, Sullivan said. Further, Wagner has not contacted or sent anything to Eastern concerning the investigation, he said.
“We don’t believe they have any merits for a case against Eastern,” he said, adding that law firms often announce investigations into firms to drum up business. “We’re not aware of any investigation other than what we saw on the wire.”