Activist hedge fund Third Point and Dow Chemical appear to be heading toward a full-blown proxy fight after the largest U.S. chemical company rejected Third Point’s nominees as directors.

Daniel Loeb, Third Point

Daniel Loeb, Third Point

Sources told the Wall Street Journal that negotiations over board seats broke down last week in part because Third Point, a $17.5 billion fund run by Daniel Loeb, plans to pay two potential board nominees more if Dow stock rises during their tenure — a controversial arrangement that critics have called a “golden leash.”

Dow has been under pressure from Third Point, which controls a $1.5 billion stake in the company, to boost profitability. According to a regulatory filing, if former executives Raymond Milchovich and Robert S. Miller join the board, they will receive two stock appreciation payments from Third Point, based on a bucket of nearly 400,000 shares.

The first payment would be based on the average selling price of the shares during the 30 days before the third anniversary of the date when the nominees began serving on the board; the second would be based on the average selling price of the shares during the 30 days before the fifth anniversary of that date.

“Activists say such payments reward directors for helping increase shares’ value, which benefits all company investors, not just the hedge fund that will make the payments,” the WSJ noted. “Detractors, including some corporate executives and their advisers, say the arrangement creates an uneven playing field in the boardroom, where directors don’t all share the same incentives.”

As a compromise, Dow had offered on Thursday to expand its board and add two directors who had previously served on other boards with Dow CEO Andrew Liveris, but Third Point rejected that proposal, sources told CNBC.

Dow’s annual meeting is likely to be held in May. The proposed stock appreciation payments could be “a central flash point” if Third Point does pursue a proxy fight.

Raising the pressure on Dow, the hedge fund launched a new website Thursday with a video that says the company has broken its promises and made excuses for lagging behind rivals.

Source: The Wall Street Journal

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