Pass DRIP/DSPP Fees on to Shareholders? Not So Fast.

There has been a move of late by public companies to change the fee structure in their dividend reinvestment and direct stock purchase plans so that more fees are paid by plan participants, and less by companies themselves.  It seems like a good corporate cost abatement step on its face, but is it always a wise move?

The original dividend reinvestment/direct stock purchase plan model has already been changed, some would say corrupted, in that instead of the plan being a convenient way for “mom and pop” to accumulate shares in the company’s stock slowly and FREE of transaction charges, it now involves fees not much different from those of many discount brokers.  So, the argument to client companies today by some stock transfer agents is: since you have not done so already why not pass the fees for dividend reinvestment and additional voluntary cash investments in the plan onto plan participants (shareholders) ESPECIALLY SINCE, IF YOU DON’T, WE WILL BE OBLIGED TO RAISE YOUR STOCK TRANSFER SERVICE FEES NOW OR IN THE NEAR FUTURE.  It is this quid pro quo that gets our and others’ attention.  If a company simply passes more DRIP/DSPP fees onto participants because that is the industry trend, fine.  But if an activist investor or “company enemy” discovered that in return for a break in stock transfer fees the company was making a subset of its registered shareholder base pay for (subsidize) this break, you could potentially have a violation of the company’s fiduciary duty to treat ALL shareholders fairly.  Yes?  Timing is everything.  If the shift of DRIP/DSPP fees to plan participants happens well apart from a stock transfer contract negotiation, that should forestall any challenge.  But if it could be determined by an activist/enemy to have happened simultaneously, there’s the red flag.

Just something to think about when your transfer agent makes such a pitch, that seems like a “win-win.”  In such circumstances there is often a loser as well.  Potentially, a dangerous one.