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Outside Shareholders Dissent at Red Rock Resorts’ Annual Meeting

Outside shareholders of Red Rock Resorts demonstrated their dissatisfaction with the company’s directors at its July 6th meeting of stockholders, with the most opposition shown toward the independent directors.

Assuming all insiders voted their Class A and Class B shares in favor of management’s recommendation, then the total outside Class A shareholder vote “for” the directors was between 59% and 71%.[i] That means between 29% and 41% of outside shareholders did not vote “for” the company’s directors

Outside Class A Shareholder Support for Red Rock’s Directors

Director Outside Class A “For” Outside Class A “For” %
Frank J. Fertitta III 47,606,865 71%
Lorenzo Fertitta 46,912,406 70%
James E. Nave 40,389,581 60%
Robert E. Lewis 40,425,855 60%
Robert A. Cashell, Jr. 39,415,189 59%


Ernst & Young reports
that only 3.8% of Russell 3000 directors received less than 80% support from all shareholders (combined inside and outside) in 2017 (YTD, 5/31/2017). Therefore, a significant number of Red Rock’s outside shareholders expressed discontent with the entire board.

Alternatively, we can look directly at the “withhold” vote. Commenting on a 2012 study commissioned by the Investor Responsibility Research Center Institute, GMI’s Ratings director of research Kimberly Gladman said: “The average level of withheld votes in a director’s election is 5 percent; companies should be concerned when the level in an election exceeds 10 percent.”

To measure shareholder dissatisfaction this way at the recent Red Rock meeting, we reduce the super voting shares held by insiders to a one share, one vote standard. This adjusted votes figure more accurately reflects the desires of all equity holders, not just the Fertitta insiders. If all shareholders of Red Rock had equal voting rights and assuming no Class B shareholders withheld their votes, then the vote results show between 9% and 16% of shareholders withheld from the company’s directors.

Adjusted Votes Withheld from Red Rock’s Directors

Director Adjusted Votes Withheld Adjusted Votes Withheld %
Frank J. Fertitta III 10,593,246 9%
Lorenzo Fertitta 11,287,705 10%
James E. Nave 17,810,530 15%
Robert E. Lewis 17,774,256 15%
Robert A. Cashell, Jr. 18,784,922 16%

Red Rock’s closing share price on July 5th (the day before the annual meeting) was down 3.1% year-to-date compared with NASDAQ Composite Index’s gain of 13.3%. As of May 8th, Class A shareholders held 58.4% of the equity but only controlled 12.9% of the vote.[ii]

Read the letter and report we sent to Red Rock’s public investors, criticizing the company’s independent directors for anti-shareholder corporate governance measures and related-party transactions and encouraging investors to withhold votes from its independent directors.

ISS recommended withholding on all of the company’s directors, which we fully supported.

See table below for how we calculated inside, outside, and adjusted votes.

Inside and Outside Votes

Share Class Number of Shares Votes
Class A Shares Outstanding 67,778,152 67,778,152
Insider Class A Shares 516,326 516,326
Outside Class A Shares 67,261,826 67,261,826
Class B Shares Outstanding 48,327,396 456,799,632
Insider Class B Shares (1 vote per share) 2,941,592 2,941,592
Insider Class B Shares (10 votes per share) 45,385,804 453,858,040
Class A + B Outstanding 116,105,548 524,577,784
*Number of adjusted votes equals the number of Class A + B outstanding

[i] At the July 6th annual meeting, Richard Haskins, President of Red Rock Resorts, said as of record date (May 8, 2017) there were 67,778,152 Class A shares outstanding, 48,327,396 Class B shares outstanding, and 45,385,804 Class B shares with 10 votes per share. These figures were used to calculate the number of Class B shares with one vote per share, the voting power and equity of each class, and to estimate the number of insider and outsider “for” votes. The number of insider Class A shares comes from Red Rock’s DEFR14A, filed on May 26, 2017, p. 47.

[ii] See note i

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.

“Too-Big-To-Regulate”

We recently sent a letter to Nevada Governor Brian Sandoval  to provide the governor with “specific examples of problems related to the approval of the Station Casinos/Red Rock Resorts IPO by the Nevada Gaming Commission on January 21, 2016 in order to illustrate the challenges Nevada faces in regulating a ‘too-big-to-regulate’ significant owner of one of the major gaming companies in Las Vegas.”

The entire letter can be viewed here.

In the letter, we discuss the rushed nature of the approval of the IPO by the Gaming Control Board and Nevada Gaming Commission, Deutsche Bank’s accountability as the parent company and affiliate of a felon, federal regulators’ reactions to the bank’s misconduct, and the relationship between the bank and its designated director at Station Casinos, Mr. Robert A. Cashell, Jr. We also ask whether Nevada’s gaming regulators are too permissive toward “too-big-to-regulator” investors.

Our letter concludes with the following:

We cannot help but worry that Nevada gaming regulators appear unwilling to confront head-on the admittedly complex issues related to a “too-big-to-regulate” investor like Deutsche Bank, which is affiliated with a felon. We are fearful that this apparent unwillingness on the part of our state regulators might invite unwelcome scrutiny from federal officials, especially as federal regulators and investigators continue to work to hold Deutsche Bank accountable for its actions. Some might even begin to question whether Nevada is capable of upholding the “gold standard” of gaming industry regulation when our regulators continue to look the other way and refuse to ask hard questions about why the affiliate of a felon continues to own and profit from casinos in our state.

The entire letter can be viewed here.


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

Do You Want to Be a Second-Class Shareholder of Red Rock Resorts?

Read our report, “Do You Want to Be a Second-Class Shareholder of Red Rock Resorts?” 

Red Rock Resorts is proposing a corporate governance structure that will severely limit non-Fertitta shareholder influence.

  • Upon consummation of the IPO, Red Rock Resorts will have a dual-class ownership structure consisting of Class A and Class B shares voting as a single class. While the prospectus does not yet lay out the exact post-IPO numbers of LLC units, Class B shares, and Class A shares, the registration statement makes it abundantly clear that the Fertittas will control the company. Since the Fertittas, through affiliates, are currently the only owners of Station Holdco who own over 30% of the LLC Units, the “super voting stock” provision will only apply to them, assuming they maintain at least 10% of Class A shares after the IPO.
  • Studies show that dual-class structures can affect return for non-controlling shareholders, and a dual-class structure is rare in hospitality companies.
  • The newly formed Red Rock Resorts will include other anti-takeover provisions in addition to the dual-class structure and super voting stock described above.

Red Rock states its board will include three directors it considers independent: Dr. James E. Nave, D.V.M., Robert E. Lewis, and Robert A. Cashell, Jr.

  • Nave and Lewis were also part of the board of former Station Casinos Inc. when it allowed “excessive” equity compensation despite opposition from outside shareholders.
  • Mr. Cashell has served on the board of Station Casinos since 2011 when he was selected as German American Capital Corporation’s (GACC) at-will designee to own 38.58% of Station Voteco LLC, the pre-IPO sole voting member of Station Casinos LLC. Given Deutsche Bank’s multiple levels of transactions with Station Casinos – i.e. existing large LLC unit holder, lender, and IPO underwriter – we question Cashell’s independence and his ability to represent the interests of both a current and future LLC unit holder (as GACC is not selling all of its ownership interest) and new public investors who will hold the Class A shares.
  • Finally, Nave and Lewis comprised the special committee of the board of managers of Station Casinos LLC that recently negotiated the Fertitta Entertainment acquisition, in which Station Casinos will purchase the management company owned by the Fertitta family for $460 million. While it will pay a substantial amount of cash to the Fertittas and other top company executives, it is not clear what benefits Station Casinos LLC derives from the transaction.

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

Public Comments by UNITE HERE Culinary Local 226 at Nevada Gaming Commission Meeting on December 17, 2015

In October of this year, Station Casinos filed registration documents with the SEC to take the company public. These filings make it clear that Deutsche Bank will hold both voting and economic rights in Station Casinos following the offering. You will soon have to review and decide whether to approve the company’s application for a public offering.

We have previously communicated our concern that it is dangerous to allow a parent company of a felon to go unlicensed while profiting from Nevada casinos and have asked the Board and Commission to call Deutsche Bank forward for a suitability review. Now that Deutsche Bank is set to own voting rights, we believe this only furthers the need for a suitability review.

In May 2011, the Gaming Commission approved the restructuring of Station Casinos without requiring Deutsche Bank to go through licensing despite its 25% ownership. At the time, Robert Cashell, Jr. was appointed by Deutsche Bank to hold its voting interests in Station Casinos. The Board and Commission made it clear that Deutsche Bank could not interfere with the management or voting rights of its at-will designee, Mr. Cashell.

Station Casinos’ IPO filings appear to demonstrate possible direction from Deutsche Bank. The board of Station Casinos Corp., including Mr. Cashell, has agreed to set limitations on executive compensation based on Deutsche Bank ownership. Specifically, management salaries cannot exceed 105% in the second post-IPO year as long as Deutsche Bank owns at least 5% of Class A shares.

Now that Deutsche Bank is set to own voting rights in Station Casinos through its subsidiary and given the question as to whether the bank may have exercised control over its at-will designee and whether Mr. Cashell may have not acted independently, we believe this only underscores the need to call the bank forward for a suitability review. We believe this should be done even before you formally consider Station Casinos’ application for a public offering.

(For more details, see our Dec.23 letter to Nevada Gaming Commission on Deutsche Bank’s Ownership of voting rights and interference in the proposed Station Casinos IPO.)


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