Cliffs Natural Resources Breaks Activist's Way After ISS, Glass Lewis Support

Updated from 9:17 a.m ET to reflect Cliffs statement and additional information on proxy firm recommendations.

NEW YORK (TheStreet) -- Proxy advisory firms Institutional Shareholder Services and Glass Lewis have recommended that Cliffs Natural Resources (CLF) shareholders vote in favor of a proxy proposed by activist fund Casablanca Capital. Those recommendations come ahead of Cliffs' July 29 annual shareholder meeting and are Casablanca's first major break since proposing dramatic change at the struggling iron ore miner in early 2014.

For six months, Cliffs and Casablanca have battled over their competing strategies for the company's recovery from expensive acquisitions and a mistimed bet on a recovery in iron ore prices.

In mid-March, after lengthy discussions between Casablanca and Cliffs over strategy and board seats, it appeared a settlement to bring a slate of Casablanca-nominated directors onto Cliffs' board was near. However, talks soon broke down, causing Casablanca to take a proxy campaign directly to Cliffs shareholders.

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Casablanca asked for six seats on a nine-member board at Cliffs with one nominee, Laurenco Goncalves, acting as the company's senior-most executive officer. The firm also promised to withdraw Cliffs from what it sees as a failed international expansion, helping the company re-focus on its profitable U.S. operations.

By contrast, Cliffs asked shareholders to support its nine-member slate of board directors and a plan to cut the company's expense to preserve value for investors as it awaits a bottom in the iron ore market.

On Thursday, both ISS and Glass Lewis recommended shareholders support Casablanca's proxy. However, ISS and Glass Lewis only recommended shareholders vote for four of Casablanca's six-director slate. 

"The dissident has made a compelling case that a change to the composition of the board is necessary at this time," ISS said in its recommendation. "Ultimately, Cliffs will need a sober, expansive evaluation of its strategic alternatives, and the dissident has demonstrated the board would benefit from a greater shareholder perspective," the proxy advisory firm added.

"In our view, shareholder support for most of the Dissident Nominees would send a strong message to the board that the Company's long-tenured directors need to be held accountable for the Company's performance," Glass Lewis added.

Donald Drapkin, chairman of Casablanca, added that "we are extremely pleased that both ISS and Glass Lewis have issued strong recommendations in support of our campaign for change at the Board."

Egan Jones, a new entrant to the proxy advisory business, recommended shareholders support Cliffs.

Overall, the recommendations of ISS and Glass Lewis appear to give Casablanca an upper hand. Cliffs said in a statement that given the impact of cumulative voting, a recommendation to support Casablanca's proxy will allow the firm to elect a majority of the company's board. Cliffs urged shareholders to vote for their proxy.

Cliffs shares were little-changed at $15.19 in early Thursday trading.

On Tuesday, TheStreet reported that Casablanca appeared to have some key shareholder support in its campaign.

When Casablanca nominee Patrice Merrin was given a seat on Glencore Xstrata's board in late June, Cliffs shareholders reached out to Casablanca to ask for a replacement nominee, ensuring a full six-member slate, according to one source familiar with the situation.

Those calls indicated an appetite for change after years of apparent missteps. On July 1, Casablanca nominated James Sawyer, a longtime CFO at chemicals producer Praxair (PX), to replace Merrin on its six-director slate.

Meetings Lead to Standoff

It didn't always appear that Casablanca would need to run a hostile campaign. According to SEC filings posted by Casablanca, the fund believed a settlement with Cliffs was imminent in mid-March.

On March 14, Cliffs' executive chairman James F. Kirsch indicated he was willing to take three of Casablanca's director nominees onto its board, with one director, Lourenco Goncalves, assuming his role of executive chairman. That offer, Casablanca believed, was an acceptable starting point to bring about change.

Initial sketches of the settlement, disclosed in a June 11 filing with the Securities and Exchange Commission, show that Kirsch agreed Cliffs CEO Gary Halverson would report to Goncalves as executive chairman, subject to interviews with the company's board. Over the next month, Goncalves flew to Cleveland, Milwaukee, Houston, Washington and Ft. Lauderdale to interview with Cliffs' board members.

Cliffs concluded that Goncalves didn't have the experience the company required and said it would not accept a settlement that gave any Casablanca representative an executive role on its board.

A month later, Cliffs brought up the prospect that, if successful, Casablanca's slate of nominees could cause the company to have to repurchase its outstanding debt, creating a liquidity crisis. That move, seen as a so-called "proxy put," has been used unsuccessfully by companies as a means to defend themselves against activists. To remove a proxy put, all a board has to do is approve a hostile slate of nominees, even if they run their own slate.

Last year, a judge forced Sandridge Energy (SD) to approve activist board nominees. Recent cases such as Morgans Hotels Group and Health Management Associates (HMA), where a company threatened a proxy put, ultimately broke the way of activists.

Cliffs eventually approved Casablanca's board nominees.

Okapi Partners is running Casablanca's proxy contest, while D.F. King is working with Cliffs.

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-- Written by Antoine Gara in New York

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