Interpreting the Statistics on US Proxy Fights

Activism & Engagement | Activism in the US

Duncan Herrington Managing Director and Head of the Activism Response and Contested Situations Team, Raymond James Interpreting the statistics on US proxy fights Activists targeting mid-sized companies tend to be smaller, younger funds that can be more aggressive with their approach and demands

A BAD MOVE Conflicts can become public sooner and quickly escalate to a proxy fight

Ethical Boardroom | Spring 2017 www.ethicalboardroom.com Activism in the US | Activism & Engagement

Go to the website of The Wall strategy (the most common activist established so they know what to do in Street Journal or any other major objective is to seek the breakup or sale of a those critical moments when an activist company) is much easier, given the greater situation first surfaces. Finally, they are financial news source, submit a universe of potential buyers for a smaller unsophisticated about activists and their search for ‘shareholder activism sized target. What are the consequences for tactics and agendas, or about the process campaign’ and there will be no small-cap firms? of a proxy fight and the strategies to win shortage of stories on recent First, an activist target of this size would one; moreover, their regular corporate high-profile public battles have a small fraction of the resources at its counsel may be, as well. disposal compared to its larger cap peers. As a result, in 63 per cent of the cases between a listed company and While bigger companies may have fully where an activist demanded seats on a one or more activist shareholders. staffed departments for finance, legal and company’s board last year, the activist After reading a handful of these articles investor and public relations that would was successful in having some or all of its some consistent themes begin to emerge. be needed to fight out several months of demands met. The vast majority of these via The target: a very large, even mega-cap a public activist campaign, for small cap settlement, as the cost and distraction of the company, probably a household name, companies those functions tend to be campaign, weighed against the uncertainty such as American Express, DuPont, eBay shared between just two or three people. of winning a proxy contest, often causes the or Walgreens. All of them are massive As a result, the time and attention required company to capitulate rather than to fight. companies with extensive resources at their from these staff, as well as management and In the cases that do go all the way to a disposal, including a multibillion dollar the board, will be exponentially greater. shareholder vote, more than 80 per cent of the war chest, fully-staffed investor and public Therefore, the distraction from day-to-day proxy fights were at companies with a market relations departments and an army of duties and the disruption to the business, cap of around $500million or below and in financial, legal and other advisors with will be much greater, too. Additionally, a these cases roughly one third of the time the which to go into battle. And on the dissident small cap target would lack the financial activist was successful in winning the vote. side: a well-known activist hedge fund resources a larger firm would have to hire In terms of top sectors targeted, last managing tens of billions of dollars, with experienced advisors who would have the year more than half of activist targets were many years of experience and dozens of tactical and analytical expertise often either technology companies (30 per cent) campaigns under its belt. It’s likely a name required to win a proxy fight. or financial companies (23 per cent). heard regularly on the financial news, such Second, an activist target of this size However, the industry breakdown can vary as ValueAct, Trian, Carl Icahn and JANA. would usually fall below the radar of the quite a bit year to year. Look at the 13D But how accurate then is this narrative, largest investment banks and top-tier law filings (made by investors who acquire often described in the media, compared to firms, where most of the activism advisor more than five per cent of a company’s a ‘typical’ activist campaign? To find out, common stock) that were filed in the first we looked at the numbers from last year’s The typical activist two months of this year versus last year, proxy season and the results are strikingly for example. The number of financial different. Looking at the median data target is not only companies targeted is about half of last from SharkRepellent on all instances in small and lacks the year, due in part to the higher valuations the US where an activist submitted board resources to defend many financial companies have enjoyed nominations publicly for a shareholder vote since the US presidential election this past scheduled for calendar year 2016, one can itself in a public battle, November, making them less viable M&A see that activist targets are normally a but also has a targets, while the number of energy, retail small fraction of the size of the mega-cap and industrial companies targeted has targets more commonly covered in the management team and increased substantially. Therefore, very news. Moreover, the activists themselves board uninformed about few if any sectors are completely immune. are not just much smaller than the likes of Carl Icahn; they also often have little or shareholder activism and Profile of an activist no previous activism experience. unprepared to respond The median size of activist funds that To explain this trend, we need to look launched proxy fights last year is also smaller in more detail at the actual numbers and teams reside. These teams work with a than one might expect: at approximately the ramifications with respect to the client company well in advance of an $270million, the assets under management attributes of both the target company and activist approach to educate the are much less than the many billions the activist and what that may mean for the management team and board about activist managed by the big names mentioned at development and outcome of a campaign. tactics and how to be prepared for a the beginning of this article. The statistics possible attack. on proxy fights that went all the way to a Profile of an activist target The upshot is that the typical activist shareholder vote suggest that the dissident The median market cap for activist target target is not only small and lacks the commonly has very little experience as an companies last year was actually about resources to defend itself in a public battle, activist as well. Looking at the median $270million, or less than one per cent of but also has a management team and board numbers, the typical dissident in these fights the size of the household names mentioned that may be uninformed about shareholder has employed activism publicly as a strategy above. More than 80 per cent of activist activism and unprepared to respond to it. for well under two years, has only a couple targets have a market cap below $1billion. They don’t know where they might be previous campaigns under its belt and no This is for good reasons, too: there are a susceptible to an attack and how they might previous proxy fight experience. Less than much greater number of potential targets preempt it. They don’t engage with their 40 per cent of proxy fights in 2016 were in this market cap range, the cost to build long-term shareholders to proactively learn launched by activists that are members of the a significant position in the stock is much their perspectives and build their support. SharkWatch50, SharkRepellent’s selection lower and the ability to employ an M&A They don’t have a response team or protocol of the most significant activist investors.

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The involvement of a small and contests), demonstrating the additional As a result, in the majority of fights the inexperienced activist can have important burden an activist faces to win the shareholder activist will be successful in forcing change implications in terms of what tactics to expect support to take control of the board. in the boardroom and in some cases even and how a campaign might develop. Younger As mentioned above, in the majority of taking control of the board. More often than funds can often be much more cases, board seats were not, these conflicts can arise unexpectedly aggressive and less nuanced in won by an activist via and bring about transformative change within their approach and demands. If Given how settlement rather than a a company, whether positive or negative, they have recently raised funds unexpectedly shareholder vote. Looking within just a few months. to be used for activism, these an approach just at the fights that did In this environment, it is critical for activists will be under some go the distance, there are management teams and boards at small-cap pressure to achieve a public from an activist some important differences. companies, regardless of sector or ‘win’ early on, to establish a can occur and As would be expected, performance, to think ahead of time about track record, gain credibility campaigns that went to a the possibility of an activist approach. There with the market and prove how quickly vote tended to last longer, are a number of key elements to this strategy. themselves to their investors. a conflict can typically just under six First, companies should have in place This means the activist might months. Although the an activism response plan and team, including be less willing to approach escalate, the median number of board members of both senior management and the a target constructively and most effective seats sought was still three, board, as well as an external ‘go-to’ advisor in private and try to work practice is management was more likely team experienced in these matters. These together with management to in a vote scenario to keep advisors can often tell a company in advance bring about positive change to be prepared the activists from winning where it might be more vulnerable to criticism at the company. Encounters well in advance any seats, as the median by an activist and can work with the company with a younger activist fund number of seats won was to mitigate those vulnerabilities. thus often become public of a campaign zero. However, that was not Secondly, companies should regularly sooner and may be more likely being launched the case for board control seek feedback from their various shareholder to develop into a proxy fight. contests. In those cases the constituencies to be aware of their views on dissident was more likely than not to gain potential issues and how they can be resolved. Proxy fight outcomes in 2016 board seats and in 43 per cent of the majority Given how unexpectedly an approach from an So how successful were activists last year in contests the activist was actually successful activist can occur and winning board seats? Again, looking at the in taking control of the board. In all votes how quickly a conflict median numbers, activists who ran proxy fights for board control, the target’s market cap can escalate, the most last year typically sought three board seats was under $500million and in the majority effective practice and were successful in getting one. In only of cases the dissident had no prior known is to be prepared 20 per cent of proxy fights was the activist able experience with activism. well in advance of to get all seats sought. The typical length of last a campaign being year’s proxy fights from public announcement Conclusions launched. to outcome (whether withdrawal by the The key takeaway when looking at the Source: Shark activist, shareholder vote, or settlement) statistics from last year is that in most Repellent was just over three and a half months. activism campaigns both the target and Campaigns where the activists sought a activist are actually much smaller than the majority of the seats on board represented examples we read about in the financial 35 per cent of last year’s proxy fights. As might news and usually have little, if any, prior be expected, these campaigns were typically experience with activism. A younger, less for a larger number of seats (five) and activists experienced activist is prone to agitate were most often successful in getting two. more aggressively and be more likely to Interestingly, in these contests for board escalate the matter publicly to a proxy control the activist was successful in getting fight, while the target is likely to be all seats sought only 11 per cent of the time unsophisticated about activism (almost half the success rate for minority and unprepared to respond to it.

CHECK MATE Smaller companies are often less prepared for greater levels of activism than larger firms