A few weeks ago, we published an article highlighting concerns over the implementation of the proposed rulemaking, which would impose a policy that would require outside shareholders to disclose any acquisitions in a company totalling more than 5%. In essence, we featured various possible consequences that could emerge, and included managerial concerns in terms of performance, as well as the reduction in the number of outside shareholders that would be able to participate in blockholder purchases.
The rulemaking was proposed, citing cases of activist investor acquisitions that threaten to take over the full control of company boardrooms through exploitation of certain “loopholes”. However, according to Lucian Bebchuk, the exercise should not be viewed as an attempt to technically close the so called loopholes, but rather, something that raises considerable policy issues. The author claims that considerable weight should be given to the empirical evidence that proves that outside blockholders improve a company’s value and performance.
Additionally, the SEC should ensure that the rules governing the balance of power between incumbents and the outside shareholders should not be biased towards the former, both geographically and chronologically. Bebchuk says that this scenario would tighten SEC rules, further affecting the outsiders adversely.
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Outside blockholders are not bad for a company’s performance, actually, according to statistics, activist investors have influenced several companies in a positive way, whenever they acquired a big stake. A good example is the case of Chesapeake Energy Corporation (NYSE:CHK), where Dan Loeb’s big stake was revealed in the most recent form 13F filing.
Following this acquisition, Chesapeake, which was faced with various challenges went on to overhaul its board. It is not stated whether Loeb spearheaded the overhaul. Additionally, another activist investor, Carl Icahn had also acquired 7.6% stake in the company, as featured in our May article. According to the latest 13F filing, Icahn holds approximately 8.9% of Chesapeake stock.
Activist investors have been involved in several board changes, something that companies view as a threat to management. However, in most cases as we have already observed, the change has resulted in positive gains for the companies. Bill Ackman’s biggest stake, another activist investor, is in the Canadian Pacific Railway Limited (TSE:CP) (NYSE:CP), which accounts for 25% of his assets under management, and The Procter & Gamble Company (NYSE:PG) is yet another asset in his portfolio.
We noted in one of our articles, some of the companies that have been in battle with activist hedge funds, and The Procter & Gamble Company (NYSE:PG), along with Navistar International Corp (NYSE:NAV) were part of the long list. Carl Icahn holds nearly 15% in Navistar. The biggest question would be, since the afore mentioned battle with activist hedge funds, have the companies improved? I do agree that a majority of them have resulted in board changes, but the final product in most cases, has been good, even judging by the most recent performance of these companies, as compared to times leading to the battles.
Ingersoll-Rand PLC (NYSE:IR) could be heading for the same kind of battle, as renowned activist investor, Nelson Peltz, through his hedge fund company, Trian Fund management, bought 7.5 million additional shares in the company, to give Peltz a huge stake in the board. He will definitely be pushing for changes to improve the performance of the company, as he seeks value for his investment.
If the SEC goes on to implement the proposed William’s act, companies would most certainly miss that external pressure that ensures management is up and running, for the best performance of the company in general. The activist investors, may push for change in companies with an effort to ensure that they get value for their money, but the benefits also trickle down to the other stakeholders of the company, including employees, shareholders, customers, and the management.
Therefore, implementing policies that will discourage the influence of outside shareholders, will most likely derail the performance of companies, as corporate governance rules and regulations could be largely abused by the insiders. The issue of losing control of the company to activist outside investors can be dealt with, by ensuring compliance with corporate governance policies, as well as dedicated performance by management, which essentially is one of the goals in any organization.