In a January 5th FactSet Insight report, account executive Anthony Garcia discusses how publicly disclosing communications between the management of a targeted firm and activists can benefit the activists in a proxy vote for company directors. He highlights that the tactic of writing a public letter disclosing criticisms of management and outlining your vision for the business leads to a 3.4% higher rate of success in proxy fights (56.4% with public letter to 53.3% without public letter).
Activist solicitation liberalized in 1990s
Until two decades ago, the cost and strict regulations surrounding submitting proxy materials limited activist activities in advance of a campaign. However, in the early 1990s, the SEC changed the regulations and allowed activists to directly contact shareholders to publicly oppose management director nominees. The SEC also adopted rules that had led to allowing an activist to publicly threaten a proxy fight without without actually filing a proxy statement. The internet and the SEC’s policy of “access-equals-delivery” allows activists today to satisfy proxy filing requirements by sending an email notifying shareholders that the relevant solicitation proxy materials can be viewed online.
Details on activist letter tactic success rates
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One possible reason for greater activist public disclosure is the degree of confidence the activist has in campaign’s success given the slightly higher success rate. Of note, 101 of the 173 campaigns where SharkRepellent called the dissident the outright winner included public disclosures. Another possibility is using public disclosure to encourage the company to settle and avoid the cost of taking the proxy fight to a vote. Garcia notes that among the 443 proxy fights that settled before the vote, 298 included public disclosure of at least one letter to management.
Of course, public disclosure could also be a part of a strategy to gain publicity for either the activist or that particular campaign. For example, Starboard’s very public campaign against Darden included disclosing letters to management as well as a 300-page white paper criticizing the Darden management on everything from marketing efforts to how to cook pasta al dente.
Starboard and other well-known activists pretty much automatically make headlines on their campaigns and don’t need the extra publicity, but of note, 71% of proxy fight campaigns undertaken by SharkWatch 50 activists included the public disclosure of the letter to management, while only 55% of non-SharkWatch 50 activist campaigns publicly disclosed a letter.