Activism Grows But Also Slows by Activist Insight

A rise in the number of companies targeted hides a drop in activity by primary focus activist funds.

Note: Activism Monthly Premium, the flagship publication from Activist Insight, has been rebranded Activist Insight Monthly as of July 1, 2016. The publication remains the only magazine dedicated to shareholder activism.

Shareholder activism continued to grow in the first six months of 2016, despite signs that a core group of activists were less busy than in prior years.

A total of 463 companies worldwide were subjected to public demands by shareholders in the period to June 30, 2016, according to data published in Activist Insight Monthly: Half-Year Review 2016, produced in association with Olshan Frome Wolosky. That compares to 405 in the same period last year, and 637 for the whole of 2015.

Most regions showed growth

Growth was notable in a number of markets, including:

  • Europe (inc. UK), up 44% to 56 companies,
  • Asia, up 78% to 32 companies,
  • USA, up 10% to 306 companies,
  • Australia, up 11% to 30 companies.

However, the number of companies declined slightly in Canada, where 30 companies were subjected to demands by shareholders in H1 2016, compared to 36 in H1 2015.

Dedicated activists less busy

Notable among the data was a slowdown in demands by funds dedicated to activist investing. Primary focus activists – which dedicate almost their entire funds to activism – subjected 75 companies worldwide to public demands in the first half of 2016, against 81 in the same period last year. That was the first decline in activity since Activist Insight’s records begin, in 2010.

Primary Focus
H1 2013 H1 2014 H1 2015 H1 2016 Growth rate

over last year

Europe (incl. UK) 17 14 11 11 0%
Asia 1 5 4 7 75%
Other 0 0 3 3 0%
US 50 53 59 47 -20%
Australia 1 2 3 4 33%
Canada 3 2 1 3 200%
 

Total

72 76 81 75 -7%

Proxy fights

According to Activist Insight data, 20 US proxy contests have gone to a vote this year, along with five situations where definitive proxies were filed but settlements were reached before the shareholder meeting. In 13 of those 25 situations, the activists won at least one board seat.

One activist, VIEX Capital, won two full proxy contests.

The total number of board seats in situations where a definitive proxy was filed (i.e. excluding early settlements) was 30 out of 98 sought.

Activists Counter Board Inertia

Olshan Frome Wolosky Partners Steve Wolosky and Andrew Freedman share their perspectives on the state of shareholder activism, the 2016 Proxy Season and trends to watch out for.

History has shown that entrenched boards of struggling companies, when left to their own devices, display a remarkable deference to the CEOs whom they are tasked to oversee and an inability to hold poorly performing management accountable. Actively engaged investors are the external counterweight to this inertia, compelling boards to focus on the serious issues that are too often casually dismissed.

We keep hearing that public companies are acting and thinking like activist investors. But thinking like an activist requires more than just adopting the low-hanging fruit of governance changes like proxy access and majority voting. It requires honest self-assessment to tackle the tough issues that are likely to be raised by an activist, such as best-in-class performance, board reconstitution and executive compensation. We’ve yet to see any company truly be their own activist in this sense.

Indeed, it would be hard to say that Depomed was thinking like an activist when it sought to further suppress shareholder rights under the guise of a Delaware reincorporation or that Ashford Hospitality Prime was acting like an activist when it disenfranchised shareholders over immaterial nomination technicalities and implemented a massive termination fee “proxy penalty” to entrench itself without any legitimate business reason.

Today’s activist investors are undertaking exhaustive research, presenting incredibly well thought out, detailed white papers and assembling world-class teams of advisors and director candidates. While we are seeing some companies and their advisors co-operate with activists upfront to avoid an escalation, there are far too many still that are digging in and pushing back, or engaging in appearance only.

Over the past decade, our practice alone has had a hand in changing out close to 1,000 public company board members (79 so far in 2016). This much-needed board refreshment is resulting in more-engaged fiduciaries unafraid to ask the tough questions or spark the lively, robust debate that has been absent for far too long in many boardrooms.

Some naysayers like Moody’s claimed activism would decline in 2016, but that hasn’t been the case. The number of campaigns we have advised on has risen more than 20% from our 2015 numbers. While it may not live up to 2014 and 2015 in terms of the big names and huge marketcaps, the 2016 proxy season has certainly been no slouch.

Growth in 2016 was again fueled by first-time activists and ‘reluctavists’, who escalate their involvement with management when all else fails. Harvest Capital Strategies won two of the three seats up for grabs at Green Dot, with only eleventh-hour maneuvering protecting CEO Steve Streit. Other successful activists this year include VIEX Capital—winner of two proxy contests—and Engine Capital, which entered into three settlement agreements. Later in this issue you will read about how the CEO and Chairman of Shutterfly were both out within a year of Marathon Partners’ proxy contest in June 2015.

2016 is also notable as the year when Starboard’s direct involvement at Darden ceased. Since the Starboard-led board takeover in October 2014, the new board has overseen a dramatic operational turnaround, and Darden’s share price is up by around 50%. There is perhaps no better example of an activist success story.

Shareholder activism is succeeding for the most part in creating stronger, more sustainable and focused companies, better governance and, ultimately, increased long-term value for shareholders.

Activism – The year so far

A specter looms over activist investors, as volatile markets, global uncertainty and reduced funding clash with cheap and easy debt, continuing M&A and a secular acceptance of the greater role demanded by shareholders.

Against that backdrop, little has changed outwardly. The number of companies publicly subjected to activist demands rose again in the first half of 2016, climbing 17% worldwide to 473. In the US, growth was slower, from 278 companies in the first half of 2015, to 306 companies year-to-date. In parts of Europe and Asia, the growth was much faster; the UK matching its 2012 peak and Continental Europe surpassing last year’s high. Countries such as Japan and Singapore have seen surges of activity, even while the likes of Hong Kong and South Korea fell back slightly. Activism is here to stay.

“Of all activist demands worldwide in the first half of 2016, 13% related to M&A, compared to 19% in the whole of 2015.”

Activism Mixed signals

That is hardly the full story, however. Primary focus activists—those that dedicate almost all of their portfolio to companies in need of shaking-up—were much less busy in the first half of 2016. Worldwide, those funds subjected 75 companies to public demands in the first half of 2016, against 81 in the first half of last year, a decline of 7%. In

1, 2  - View Full Page