A recent report from the UCLA Law School’s Lowell Milken Institute for Business Law and Policy offers expert perspectives on a number of current business topics, including activist hedge fund Starboard Value’s successful campaign to replace the board at Darden Restaurants. Steve Wolosky, partner and chair of the activist and equity investment practice at the law firm Olshan, Frome & Wolosky, pens a section of the report titled “Lessons Learned from Darden”. Of note, Wolosky was a part of Starboard’s legal team on the campaign.
Back in October of last year, hedge fund Starboard Value won a landmark victory when its shareholder activist campaign led to the ouster of the entire board of directors of major public restauranteur Darden Restaurants, Inc., who operates Olive Garden, Longhorn Steakhouse and a number of other restaurant chains.
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Background on Darden campaign
After a long and contentious proxy battle leading up to Darden’s 2014 annual meeting, shareholders elected to remove all twelve of Darden’s incumbent directors and replace them with Starboard’s entire slate of director candidates. The hows and wherefores of this unusual situation are complex, but it can be summed up as shareholders tiring of underperformance and a clear case of management arrogance.
Wolosky argues that given the growing importance of shareholder activism in corporate America, Starboard’s success with Darden offers valuable insights for both activist investors and targeted firms.
Darden campaign was “perfect storm” for Starboard Value
Wolosky says the it turned out that the Darden campaign was the “perfect storm”. He offers his take on the rare confluence of events that led to an entire BoD being swept out below.
“In fact, Darden represented the perfect storm. It is not every day that a board of directors of a Fortune 500 company is completely removed and replaced with a dissident’s slate of director candidates while being advised by the nation’s leading financial and legal advisors. But it is also not every day that a board of directors ignores the will of its shareholders by entering into an important transaction prior to holding a shareholder requested special meeting to first discuss the transaction. Importantly, Starboard ran a sophisticated, thorough and aggressive campaign, including the publication of a 294-page detailed investor presentation, which was developed alongside leading consultants and advisors hired by Starboard.”
Activists are developing more sophisticated materials and documentation
Another factor to consider is the effectiveness Starboard’s presentation to shareholders. Starboard’s numerous slick, professional white papers and presentations in the Darden campaign are an excellent example of how activists today are increasingly sophisticated in the development of their campaign materials.
According to Wolosky, Starboard’s almost 300-page presentation was “extremely sophisticated and thoroughly focused on the long-term strategies and goals to turnaround Darden, including, among others (i) a thorough analysis of companywide margin improvement opportunities, (ii) a detailed turnaround plan for Darden’s largest brand, Olive Garden, (iii) a real estate valuation and potential spin-off of the specialty restaurant group, (iv) franchising opportunities and (v) a 100-day plan which outlined the immediate actions to be taken if Starboard’s nominees were elected to the Board.”
He goes on to say that activists’ research on target firms is often outstripping the information that company directors know about their own firm. Activists are also increasingly well funded, and are therefore able to undertake expensive, sophisticated research. For example, including analyst and consultant research and surveys and interviews with ex top execs adds a great deal of value and professionalism to the materials for an activist campaign.
21st century shareholder activists shifting to longer-term perspective
Wolosky also asserts that short-sighted corporate raiders are no longer the mainstream today, and says activists are paying more attention to long-term value creation by coming up with strategies and goals designed to support the future growth of the target. He continues to argue that activists are increasingly focused on research and development, general and administrative expenses, margins and capital expenditures, and adopting and developing new products or services, all of which require a commitment for the long haul.
Digging deeper, there are really three reasons for the shift towards long-term shareholder value creation:
- First, activists as a group are much larger and more well funded. The capital invested in activist hedge funds has skyrocketed from a mere $12 billion to more than $100 billion in the 10 years. This cash provides the activist teams with the resources to run more high-end, give-no-quarter campaigns against even the largest companies.
- Second, activist hedge funds are taking their cases directly to the BoDs of target firms, which means significant trading restrictions that are applicable to insiders of public companies also now apply to them. These restrictions typically prevent the funds from quick exits and demonstrate their commitment to making long-term changes in the best interests of the business.
- Third, as discussed above, activists are preparing detailed white papers and presentations that typically lay out multi-year plans, meaning they plan to stick around until these profit targets are reached.
See full PDF below.