Shareholder Activism Who, What, When, And How? by PWC
Who are today’s activists and what do they want?
“Activism” represents a range of activities by one or more of a publicly traded corporation’s shareholders that are intended to result in some change in the corporation. The activities fall along a spectrum based on the significance of the desired change and the assertiveness of the investors’ activities. On the more aggressive end of the spectrum is hedge fund activism that seeks a significant change to the company’s strategy, financial structure, management, or board. On the other end of the spectrum are one-on-one engagements between shareholders and companies triggered by Dodd-Frank’s “say on pay” advisory vote.
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The purpose of this publication is to provide an overview of activism along this spectrum: who the activists are, what they want, when they are likely to approach a company, the tactics most likely to be used, how different types of activism along the spectrum cumulate, and ways that companies can both prepare for and respond to each type of activism.
At the most assertive end of the spectrum is hedge fund activism, when an investor, usually a hedge fund or other investor aligned with a hedge fund, seeks to effect a significant change in the company’s strategy.
Some of these activists have been engaged in this type of activity for decades (e.g., Carl Icahn, Nelson Peltz). In the 1980s, these activists frequently sought the breakup of the company—hence their frequent characterization as “corporate raiders.” These activists generally used their own money to obtain a large block of the company’s shares and engage in a proxy contest for control of the board.
In the 1990s, new funds entered this market niche (e.g., Ralph Whitworth’s Relational Investors, Robert Monks’ LENS Fund, John Paulson’s Paulson & Co., and Andrew Shapiro’s Lawndale Capital). These new funds raised money from other investors and used minority board representation (i.e., one or two board seats, rather than a board majority) to influence corporate strategy. While a company breakup was still one of the potential changes sought by these activists, many also sought new executive management, operational efficiencies, or financial restructuring.
During the past decade, the number of activist hedge funds across the globe has dramatically increased, with total assets under management now exceeding $100 billion.2 Since 2003 (and through May 2014), 275 new activist hedge funds were launched.3
The goals of today’s activist hedge funds are broad, including all of those historically sought, as well as changes that fall within the category of “capital allocation strategy” (e.g., return of large amounts of reserved cash to investors through stock buybacks or dividends, revisions to the company’s acquisition strategy).
The tactics of these newest activists are also evolving. Many are spending time talking to the company in an effort to negotiate consensus around specific changes intended to unlock value, before pursuing a proxy contest or other more “public” (e.g., media campaign) activities. They may also spend pre-announcement time talking to some of the company’s other shareholders to gauge receptivity to their contemplated changes. Lastly, these activists (along with the companies responding to them) are grappling with the potential impact of high-frequency traders on the identity of the shareholder base that is eligible to vote on proxy matters.
Moving down the activism spectrum are “vote no” campaigns where an investor (or coalition of investors) urges shareholders to withhold their votes from one or more of the board-nominated director candidates.
These campaigns are rarely successful in forcing an involuntary ouster of a director, because at most companies this would require support from a majority of outstanding shares—not just a majority of the votes cast at the meeting, which is a much lower threshold. But, particularly when the challenged director is not the company’s CEO/chair, a “vote no” campaign can influence the candidate to voluntarily withdraw from the election. If the level of “negative” vote was relatively significant, a director may be replaced during his/her subsequent term.6
These campaigns are usually sponsored by public or labor pension funds.
Keep Calm And Stay Prepared: An Introduction To Shareholder Activism
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