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Red Rock Resorts’ deficient board diversity claims [updated 7.28.22]

Update 7.28.22: Red Rock Resorts Inc. disclosed a revised diversity policy on April 26, 2022. Based on those changes, Red Rock Resorts removed its commitment to being open to recruiting well-qualified diverse candidates. See those revisions here and the 2022 policy here. We originally published the content below on January 31, 2022.

Red Rock is the only one of the nine publicly traded Nevada-based casino gaming companies with zero women on its board of directors. Its five-person board has been the same white men since its 2015 IPO and its justification to shareholders for its board composition relies on deficient claims.

See our letter to the SEC about Red Rock’s deficient board diversity claims here here.

In the Corporate Governance – Diversity section in its 2020 and 2021 proxy filings, Red Rock tells investors that it considers gender among its diversity characteristics and then explains that:

“Gaming regulatory agencies in certain of the jurisdictions in which we operate may require our directors to maintain licenses. The licensing process is onerous, invasive, time consuming and expensive. Because of this, it is difficult to identify well-qualified candidates willing to subject themselves, as well as their families, to the rigorous and intrusive process necessary to obtain a gaming license. As a result of the limited pool of potential directors and the strong qualifications of our present Board, we believe that the current composition of our Board is in the best interest of the Company. We remain continuously open to recruiting well-qualified diverse candidates to our Board.”

There isn’t a limited pool of potential directors for Nevada-based gaming companies

There are several indicators that suggest there is not a limited pool of potential directors for Nevada-based gaming companies. Every publicly traded Nevada-based casino gaming company except Red Rock has at least one woman serving as a director, amounting to 20 out of 76 directors, or 26%, with half of them joining these boards since 2018 [1].

Nationally, women now make up 30% of all directors in the S&P 500, which is up from 28% last year and 16% a decade ago. And in the Russell 3000 index, women of all races account for 27 percent of all directors, up from 24 percent.

The pool of female directors for Nevada casino gaming companies appears to be no smaller than national averages so it is concerning Red Rock justifies its board composition through the problematic idea that if only there were a larger pool of candidates then the Board might look different.

[CHART JANUARY 27, 2022]

A gaming license is not a justifiable obstacle to board diversity

Red Rock’s claims about board diversity also rely on the problematic assumption that the pool of potential directors is too small because of the gaming license process. The gaming license process is not a justifiable obstacle to board diversity, as evidenced by the presence of women on the boards of every publicly traded Nevada-based gaming company except Red Rock.

In fact, at least in Nevada, the licensing process should present no obstacle. Nevada gaming regulation 16.415 does not require licensing of every director of a publicly traded corporation, only of directors who are actively and directly engaged in the administration or supervision of gaming activities. The regulation identifies the board chair and chair of the audit committee as among the directors who must normally be licensed.

Meaning Red Rock can elevate directors to the Board without their undergoing the rigors of the licensing process where they do not require licensing.

Red Rock has an obligation to assess the effectiveness of its diversity policy

Red Rock shareholders deserve to know whether the Company’s diversity policy is effective or not. SEC rule 229.407(c)(2)(vi) states that “if the nominating committee (or the board) has a policy with regard to the consideration of diversity in identifying director nominees, describe how this policy is implemented, as well as how the nominating committee (or the board) assesses the effectiveness of its policy.”

So, what does Red Rock mean when it states in its diversity policy that “we remain continuously open to recruiting well-qualified diverse candidates to our Board”?

Red Rock’s three independent directors, Mr. Robert Cashell Jr., Mr. Robert Lewis, and Mr. James Nave, have been on the Red Rock board since its IPO, comprise the Nominating and Corporate Governance Committee, and were board members of Red Rock’s predecessor company since 2011.

What can the Company disclose to back up the claim that the recruitment of diverse candidates is active and ongoing?

NOTE 1:

COMPANY DIRECTOR YEAR JOINED
Full House Resorts Inc. 1 Kathleen M. Marshall 2007
Golden Entertainment Inc. 2 Ann N. Dozier 2019
Monarch Casino & Resort Inc. 3 Yvette Landau 2010
Las Vegas Sands Corp. 4 Micheline Chau 2014
5 Nora M. Jordan 2021
6 Yibling Mao 2021
Caesars Entertainment Inc. 7 Bonnie Biumi 2020
8 Jan Jones Blackhurst 2019
9 Sandra Douglass Morgan 2021
Boyd Gaming Corp. 10 Marianne Boyd Johnson 1990
11 Christine J. Spadafor 2009
12 Veronica Wilson 2003
MGM Resorts International 13 Mary Chris Jammet 2014
14 Alexis M. Herman 2002
15 Rose McKinney-James 2005
16 Jan Swartz 2018
Wynn Resorts Ltd. 17 Betsy S. Atkins 2018
18 Patricia Mulroy 2015
19 Margaret J. “Dee Dee” Myers 2018
20 Winifred “Wendy” Webb 2018

Red Rock Resorts Public Shareholders Vote for Change

Submitted by the New York State Common Retirement Fund and co-filed by SEIU Pension Plans Master Trust, Proposal 4 at Red Rock Resorts’ most recent annual meeting asked the board of directors to take steps to eliminate the company’s dual-class share structure. We argued that there were good reasons to support the proposal. Now, despite the proposal’s defeat, we assess that approximately 87% of the publically-held (non-insider) shares that were voted were cast in favor of it.

From the April 22 proxy filing, we estimate that the company’s named executive officers and directors, including controlling owners Frank and Lorenzo Fertitta, had approximately 464.4 million votes thanks to the fact that each of the approximately 45.4 million B shares owned by the Fertittas was entitled to 10 votes. Assuming all the insiders voted against Proposal 4, approximately 6.7 million votes controlled by public holders were cast against the proposal, while more than 43.7 million votes were cast for it. (See the official tally here.) This means that 86.7% of the publically-held shares that were voted were cast in support of the proposal to change and improve the company’s corporate governance.

Proposal 4 Voting Results by Publically-Held Shares

Votes Percentages
FOR 43,758,349 86.7%
AGAINST 7,309,136 13.3%

This is the second time in three years public shareholders of Red Rock Resorts have voted to support a shareholder proposal to improve corporate governance. In 2019, CalPERS submitted a proposal to adopt majority voting for director elections (“Red Rock’s All-White, All-Male Board Draws Calpers’ Attention”, Bloomberg, 6/5/2019). We calculate that CalPERS’ proposal was supported by approximately 83.3% of the publically-held shares that were voted. Nevertheless, the company has not changed its plurality voting standard for director elections.

While Red Rock Resorts traces its history to the founding of Bingo Palace (which later became Palace Station), it cannot hold on to an anachronistic view of itself as a family business and continue to deny public investors a fair say in corporate governance. Red Rock Resorts can do better, and public shareholders of Red Rock Resorts deserve better. It should listen to public shareholders and adopt majority voting for directors and take steps to eliminate the dual-class share structure.

Three Reasons to Eliminate Red Rock’s Dual-class Voting Structure

Lagging Performance

Since Red Rock Resorts went public 5 years ago, its Class A share price has underperformed its peers and the market.

As of 5/26/21, RRR’s Class A shares have gained 116.61% over a 5-year period. Over the same timeframe, the share prices of other regional gaming operators Golden Entertainment, Inc. (GDEN), Boyd Gaming Corp. (BYD), Monarch Casino & Resort, Inc. (MCRI), and Penn National Gaming, Inc. (PENN) share prices went up 231.16%, 243.55%, 241.32%, and 463.43%, respectively. The NASDAQ also went up 180.27.91% over the same period.

Doing away with the dual-class share structure would be a good first step toward maximizing the value of Class A shares of Red Rock Resorts. In the words of a recent Wall Street analyst report: “RRR’s dual-class share structure is suboptimal for most investors and has historically been an impediment to valuation optimization.” (1)

An Entrenched Board

Two years ago, CalPERS raised the issue of board diversity with Red Rock. See Red Rock’s All-White, All-Male Board Draws Calpers’ Attention (Bloomberg, June 2019). At the time, Red Rock said “because the casino business requires an extensive licensing process for board members,” it is “difficult to find qualified candidates.”

Two years later, Red Rock continues to nominate the same five white men to its board and again blames the gaming licensing process for making it difficult to find diverse candidates in this year’s proxy. The company, however, fails to mention that other public-traded Nevada gaming companies have all somehow managed to seat women on their boards.

Doing away with the dual-class share structure is a smart step toward reforming an entrenched, all-white, all-male board at Red Rock Resorts.

Greater Transparency

Family office investments and share pledging by Red Rock’s controlling insiders raise questions about potential conflicts of interest.

Red Rock’s chairman and vice-chair, Frank and Lorenzo Fertitta, have dual roles at Fertitta Capital, their family office founded in 2017 that has overlapping business interests with Red Rock in gaming, sports, betting, leisure, wellness, and food and beverage.

In 2019, Fertitta Capital led a $17.5 million funding round for a sports betting media company, The Action Network.  It remains unclear if Red Rock’s board vetted the deal and whether the family firm receives opportunities owed to shareholders and now competes with Red Rock.

Also, Frank and Lorenzo Fertitta pledged six million or 13% of Class B shares in Red Rock in September 2018 for a margin loan worth up to an estimated $155 million from UBS AG, a bank that was a lender to Red Rock but stopped doing so. The loan pledges appear no longer to be in effect.

To date, Red Rock has not made any disclosures about Fertitta Capital, nor has it explained why UBS started lending to company insiders and stopped lending to the company.

Doing away with the dual-class share structure is a smart step toward transparency and fully protecting Red Rock from potential conflicts of interest.

(1) J.P. Morgan, “Red Rock Resorts: Takeaways from Investor Meetings. Story Still Has Legs. Reaffirm Overweight. PT to $48 (+$1),” North America Equity Research, p. 6 (May 14, 2021).

Why did UBS start lending to Fertittas and stop lending to Red Rock? [updated 4.28.21]

Note: On 3/10/21, we published the following update: “Since publishing this article on February 8, 2021, we discovered the financing statement for the UBS loan to the Fertittas was terminated on March 23, 2020. Notwithstanding, the pledge and margin loan were still identified as in effect in Red Rock’s April 22, 2020 Form DEF 14A.” Now we can report that there is no pledge and margin loan identified as in effect in Red Rock’s April 22, 2021 Form DEF 14A. We have updated the report to reflect this new information. 4/28/2021.

The controlling owners of Red Rock Resorts Inc. (NASDAQ: RRR), Frank Fertitta III and Lorenzo Fertitta, pledged six million or 13% of Class B Red Rock shares to UBS AG in September 2018 for a margin loan worth up to an estimated $155 million.

In February 2019, Red Rock disclosed the termination of a $50 million UBS commitment that had been identified as in effect in its Form 10-Q for the quarter ending September 30, 2017.  In February 2020, it disclosed the termination of an $18.5 million commitment that had been identified as in effect in an amended credit agreement dated February 8, 2019.

On March 23, 2020, the financing statement for the UBS loan to the Fertittas was terminated. But the pledge and the margin loan were identified as in effect in Red Rock’s April 22, 2020 Form DEF 14A. No pledge and margin loan are identified as in effect in Red Rock’s April 22, 2021 Form DEF 14A.

Why did UBS end up by lending to the Fertittas personally but not to the public-traded company they controlled? And what caused the Fertittas to take on the margin loan in the first place? Why did UBS terminate the financing statement for the margin loan on March 23, 2020?

[See our letter to the SEC and Nasdaq requesting a closer look at pledged shares at Red Rock here.]

Red Rock has not explained what prompted the changed relationship with UBS. And why the Fertittas secured liquidity through a margin loan is also of potential interest to public shareholders given the Fertitta’s control of Red Rock.

On one hand there appears to be cash, lots of it. The Fertittas reportedly cleared $870 million each in the 2016 sale of the Ultimate Fighting Championship, and in August 2020 spent $74 million to purchase five million Red Rock shares (see here, here, here, here and here).

On the other hand, they have borrowed money—$64 million from a related party to buy Red Rock shares in August 2019—and, between one or the other of them, they have acquired a number of luxury assets:  two superyachts, a support yacht, and a penthouse near Manhattan’s Central Park.

Two Fertitta yachts have been delivered since 2018, with a third delivered in 2021: the 285-foot Lonian ($160 million estimated); the 217-foot Hodor support yacht ($55 million estimated); and the 308-foot Viva ($175 million estimated).

Two helicopters share the initials of Frank and Lorenzo Fertitta and the Las Vegas area code (N702FF, N702LF) and are owned by entities that share the superyacht names (Viva Eagle LLC, Lonian Raven LLC).

Hodor Holdings Limited is named as a secured party in an August 2017 financing statement related to the construction of an “equipped submersible” by Seamagine Hydroscape Corporation. Hodor Holdings, Ltd.’s address is identified as the same Las Vegas address as Fertittas Enterprises, Inc.

UBS promotes its securities-backed loans as useful for purchasing yachts, among other things.  But as it stands, Red Rock investors have no basis to know what the loan proceeds were used for.

Red Rock’s securities pledging policy, a summary of which was first disclosed in April 2020, does not appear to cap pledging even though it requires certain insiders to “pre-clear” transactions in company securities.

Moreover, it is not clear which persons would review and approve such “pre-clearances.” And Red Rock has not disclosed whether the 2018 margin loan transaction was subject to the current policy.

Investors are in the dark about the details of pledged shares at Red Rock. They deserve sufficient information to decide whether such pledges benefit the company.

Withhold the Vote 2018: Failure to Sunset Perpetual Dual-Class Stock

We encourage Red Rock Resorts shareholders to withhold authority to vote on their proxy card for the company’s board of directors – Frank J. Fertitta III, Lorenzo J. Fertitta, Robert A. Cashell, Jr., Robert E. Lewis, and James E. Nave, D.V.M. – at the upcoming annual stockholders meeting on June 14.

The many problems arising from the company’s perpetual dual-class stock make it necessary for outside shareholders to withhold their votes, especially after the company has made no attempt to address the significant shareholder discontent expressed at last year’s annual meeting.

Perpetual dual-class shares trade at a significant discount, risk index exclusion, and are opposed by major shareholder advocacy groups.

Read our report, Withhold the Vote 2018: Failure to Sunset Perpetual Dual-Class Stock

Selected Results: 2017 Corporate Governance Survey of Red Rock Shareholders

Following shareholder discontent at Red Rock’s annual meeting this July, in which 9% to 16% of equity holders withheld from the directors, we decided to survey Red Rock investors about their corporate governance issues. The survey this year measured shareholder sentiment toward Red Rock’s takeover defenses and features of its board of directors. We believe these topics are particularly important following another year of strong M&A activity in the gaming industry.

Despite the dissatisfaction expressed by shareholders and the negative voting recommendations from Institutional Shareholder Services for Red Rock’s entire board of directors surrounding the 2017 annual meeting, the company has not announced plans to remove, sunset, or put to a vote its takeover defenses. Nor has the company done anything to resolve its problematic board structure, which ISS gave its highest governance risk rating of 10 (as of June 19, 2017).[i]

The results of our survey reveal shareholder respondents expressed consensus for a hybrid format for the annual general meeting, took issue with the dual-class capital structure and other takeover defenses, and shared their preference for a more diverse board, an independent board chair, and their doubt regarding shareholder representation on the board.

See the selected results of the corporate governance survey below:

supervoting

preferred-stock tra supermajority written-consent special-meetings agms board-diversity independent-chair shareholder-representation

Notes

[i] Institutional Shareholder Services, “Proxy Alert: Red Rock Resorts, Inc.,” June 19, 2017, original publication date June 16, 2017, p. 1.

Law Firms Announce Investigations into Red Rock Resorts

Six law firms have announced investigations into Red Rock Resorts following the company’s annual meeting in July, when shareholders showed their dissatisfaction with the company’s directors.

1. Harwood Feffer LP
“Our investigation concerns whether the Company board of directors has breached its fiduciary duties to shareholders, grossly mismanaged the Company, and/or committed abuses of control in connection with potential self-dealing and related party transactions.”
Read the press release: http://www.prnewswire.com/news-releases/harwood-feffer-llp-announces-investigation-of-red-rock-resorts-inc-300489300.html

2. Andrew & Springer LLC
“Andrews & Springer LLC, a boutique securities class action law firm focused on representing shareholders nationwide, is investigating potential securities violation claims and breach of fiduciary duty claims against Red Rock Resorts, Inc.”
Read the press release: http://www.businesswire.com/news/home/20170717005016/en/

3. Levi & Korsinsky, LLP
“Levi & Korsinsky announces it has commenced an investigation of Red Rock Resorts, Inc. (NASDAQ:RRR) concerning possible breaches of fiduciary duty.”
Read the press release: http://www.businesswire.com/news/home/20170717006253/en/

4. Glancy Prongay & Murray LLP
“The investigation concerns whether the Company board of directors has breached its fiduciary duties to shareholders, grossly mismanaged the Company, and/or committed abuses of control in connection with potential self-dealing and related party transactions, including allegedly overpaying for Red Rock real estate.”
Read 1st press release: http://www.businesswire.com/news/home/20170718006073/en/
Read 2nd press release: http://www.businesswire.com/news/home/20170822006124/en/

5. Lifshitz & Miller LLP
“Lifshitz & Miller announces investigation on behalf of RRR investors concerning whether RRR’s board breached its fiduciary duties and engaged in self-dealing transactions, including allegedly overpaying for RRR real estate.”
Read the press release: http://www.prnewswire.com/news-releases/lifshitz–miller-llp-announces-investigation-of-blue-apron-holdings-inc-irobot-corporation-monogram-residential-trust-inc-quadrant-4-system-corporation-red-rock-resorts-inc-west-marine-inc-and-zto-express-cayman-in-300492913.html

6. Kahn Swick & Foti, LLC
“KSF’s investigation is focusing on whether Red Rock Resorts’ officers and/or directors breached their fiduciary duties to the Company’s shareholders or otherwise violated state or federal laws.”
Read 1st press release: http://www.businesswire.com/news/home/20170728005837/en/
Read 2nd press release: http://www.businesswire.com/news/home/20170811005623/en/

Why It Is Necessary to Withhold Your Vote

In a new report we argue that it is necessary for Red Rock Resorts’ shareholders to withhold votes from the company’s three independent directors – James E. Nave, D.V.M., Robert E. Lewis, and Robert A. Cashell, Jr. – on their proxies for the company’s July 6, 2017 annual stockholders meeting.

Read our report encouraging shareholders to withhold votes on Red Rock’s independent directors.

We fully support ISS’ recommendation to withhold votes on all of Red Rock’s directors.

These long-serving directors have failed to advocate for the sunsetting of the company’s myriad of poor corporate governance features since its IPO last year, and they have not acted to prevent the enrichment of company insiders and related parties. We believe it is essential to send an unambiguous message to management that investors expect a higher standard of corporate governance at a publicly-traded company, especially now that outside shareholders own a majority of the economic interest in the company.

In taking the company public, Red Rock’s board of directors implemented several antitakeover measures, including a dual-class ownership structure with 10:1 super voting stock for insiders.

Red Rock’s three independent directors are the sole members of its Nominating and Corporate Governance Committee, which is responsible for monitoring the company’s governance matters. Furthermore, Red Rock’s independent directors have a history of approving transactions that are not in the best interest of the company or its outside shareholders.

For these reasons, we encourage Red Rock’s Class A shareholders to withhold their votes from the elections from Directors Nave, Lewis, and Cashell at the company’s upcoming annual meeting of stockholders.

Red Rock Corrects Violation of Securities Law in Proxy Statement

On June 8, 2017, we sent a letter to the SEC regarding Red Rock Resorts proxy statement filed on May 1, 2017 and its amended proxy statement filed on May 26, 2017. We noticed that Red Rock did not provide shareholders with the ability to withhold votes on its director elections even though the company uses a plurality voting system.

Under 17 C.F.R. § 240.14a-4(b)(2), a proxy that provides for the election of directors must provide means for security holders to withhold authority to vote for each nominee.  The proxy may do so by providing: (1) a box indicating that authority to vote is withheld; (2) an instruction that indicates a vote may be withheld by striking out the name of any nominee; (3) a blank space in which the voter may enter the names of nominees for whom votes are withheld; or (4) any similar means, provided that clear instructions are provided about how to withhold authority.

By not providing shareholders with the ability to withhold votes, the company was effectively preventing investors from registering their dissatisfaction with director nominees.

On June 16, 2017, Red Rock filed an amended proxy statement that corrected the voting options by providing shareholders with the ability to withhold their authority to vote.

Red Rock Resorts is a Second-Class Gaming IPO

Download our unauthorized roadshow presentation and presentation notes here.

Investors who buy Red Rock’s second-class shares on offer will gain a minority (33%) stake in the once-bankrupt Las Vegas casino and tavern operator, Station Casinos. The terms of the offering beg questions about company insiders’ confidence in its long-term prospects.

Prospective investors should ask management the following questions:

Should new shareholders expect significant dilution soon after the IPO thanks to Deutsche Bank’s expected exit? After the IPO, Deutsche Bank owns 16.2-18% of the company after selling very few shares in the current offering. The German lender, which is also an underwriter of this IPO, has been selling off its non-core assets at a loss, including a Las Vegas Strip resort and a New Jersey port operator as it continues to deal with its capital and regulatory challenges. Will it sell off its large Station Casinos/Red Rock stake immediately after the 180-day lock-up period, which may even be waived by Deutsche Bank and J.P. Morgan as underwriters?

Why is Red Rock paying $460 million in cash to insiders to internalize management with the Fertitta Entertainment acquisition? Red Rock’s prospectus does not present any specific potential benefits of this proposed transaction, yet the price represents (1) 20% of the $2.3-billion IPO valuation of Station Casinos’ equity at the mid-point of its offering price range; (2) 8.7x TTM management fees instead of the 1x TTM management fees for a potential termination of the Fertitta Entertainment management agreements covering at least 13 of 19 casinos; and (3) 31x our estimate of Fertitta Entertainment’s 2015 pro forma EBITDA of about $14.8 million. Even though it did not complete a $300-million dividend recapitalization last spring, Station Casinos has paid out over $477 million to its existing owners from 2013 through April 2016, before consummating this pricy acquisition.

How confident is management in Red Rock’s growth prospects? The Las Vegas locals market, which made up over 90% of Red Rock’s total EBITDA in 2015, has been contracting in terms of total amount wagered and number of slot units, and gaming revenue at the company’s Las Vegas operations grew at an annual compounded rate of only 1.4% from 2012 to 2015. The company has even listed hard-to-come-by potential casino sites in Nevada for sale. As for its tribal business, the company has not signed any new tribal gaming development or management agreements since 2004. Its two current contracts are due to expire in 2018 and 2020, with only one more project in development.

If the Fertitta family is cashing out, why should investors buy Red Rock’s second-class shares with uncertain prospects for dividends? The Fertitta family’s Class B Red Rock shares with 10:1 voting power make the Class A Red Rock shares second-class shares in more ways than one. Furthermore, a lopsided tax receivable agreement without a hard cap on future payments to pre-IPO owners will lead to uncertainty about Red Rock’s future free cash flow and its ability to pay dividends to Red Rock’s second-class shareholders.

It is alarming that potential investors in Red Rock’s second-class IPO are being asked to buy out an insider management company at a high, $460-million valuation, instead of paying down company debt or funding new growth initiatives. Data on the ground in Las Vegas show tepid growth in Red Rock’s core business, underscoring the contrast between an IPO that strengthens a gaming company’s finances and one that drains funds to buy a related-party management company, like Red Rock.


See more of our analysis of the Red Rock Resorts/Station Casinos IPO: