Review and Analysis of 2019 U.S. Shareholder Activism
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Review and Analysis of 2019 U.S. Shareholder Activism November 06, 2019 Starboard, Ancora, Icahn and Elliott lead the way with the most publicly announced campaigns against U.S. issuers through August Board seats obtained per announced campaign remain at elevated levels, as activists on average obtained 0.7 board seats per 2019 campaign (a 35% increase from 2017) Despite the recent focus in shareholder discourse on “purpose” and maximizing value for all stakeholders, institutional investors appear to give activists a pass on ESP topics Active managers are increasingly adopting activist tactics, highlighted by Neuberger Berman’s proxy contest at Verint Systems Activists are focused on M&A in record numbers, either by agitating for sales or divestitures or by intervening to break up previously announced transactions www.sullcrom.com Almost 50% of issuers that added activist designees to their boards in 2017 or 2018 have since either sold themselves or engaged in a new york . washington, d.c. los angeles . palo alto meaningful divesture london . paris Activists continue to hone in on issuers without a permanent CEO or frankfurt . brussels with impending CEO retirements, evidenced by several prominent tokyo . hong kong . beijing 2019 campaigns melbourne . sydney Introduction Activism activity levels thus far in 2019 have remained largely consistent with prior years. Activists launched 205 new campaigns through the end of August and won 76 board seats, as compared to 203 new campaigns and 113 board seats through the end of August last year. Starboard has led the pack, launching 10 new campaigns, and many of the other leaders are also well-known activists: Icahn initiated four new campaigns during the same period followed by Elliott with three. Elliott, Icahn and Third Point led all funds with $3.4 billion, $2.8 billion and $1.5 billion in capital deployed in activist campaigns in the first half of 2019, respectively.1 REVIEW AND ANALYSIS OF 2019 U.S. SHAREHOLDER ACTIVISM — NOVEMBER 2019 INTRODUCTION continued 1 Although the well-known activists grab the headlines in number and volume of campaigns, new activists continue to enter the space at a steady clip. First-time activists accounted for 26% of announced campaigns in the first half of 2019, roughly in line with the prior two years when first-time activists accounted for 31% and 21% of announced campaigns, respectively.2 We have also observed active managers entering the activism arena—some even going so far as to launch proxy contests in certain instances. M&A has been a particular focus of activists so far this year, more than ever before, demonstrated by activists both calling for issuers to initiate a sale or divestiture process and opposing previously announced transactions. Nearly half of activism campaigns in the first half of 2019 have focused on M&A, up from prior years when M&A has consistently accounted for only roughly one-third of campaigns.3 It is also the case that, when an activist designee is added to a company’s board, the company will be more likely to engage in M&A going forward. This year, we conducted a proprietary review of companies that added activist designees in 2018 and 2017 and found that almost 50% of them were either sold or engaged in a meaningful divestiture following the addition.4 In addition, we continue to observe succession vacuums, which occur when companies lack a permanent CEO or their current CEO has an impending retirement, as a key factor correlating to an activist challenge. Further, activists are increasingly looking outside of the U.S. for potential targets— roughly 40% of capital deployed by activists in the first half of 2019 targeted European or Asian issuers.5 These developments are taking place against a backdrop of an intensified debate in the corporate governance world over the “purpose” of a corporation. A number of both institutional investors and business leaders have begun to emphasize the importance of all a corporation’s stakeholders and question how directors should consider these stakeholders in their decisionmaking. This debate raises the question of whether, and how successfully, activists will seek to implement these ideas, or at least introduce the terminology into their messaging, in order to win support from key shareholders in activism contests. Moreover, the approaching 2020 U.S. Presidential election is catalyzing more vocal criticism of share buy-backs and some candidates are cautioning corporations to be more “employee- friendly.” These concerns could constrain those activists who seek a 1 See Lazard’s Shareholder Advisory Group, Review of Shareholder Activism – H1 2019, available at https://www.lazard.com/media/451008/lazards-h1-2019-review- of-shareholder-activism.pdf. 2 See Id. 3 See Activist Insight, The Activist Investing Half-Year Review, available at www.activistinsight.com/resources/reports. 4 We studied 83 companies who added activist designees to their boards pursuant to publicly filed settlement agreements in 2018 and 2017 based on data from Shark Repellent. 5 See Lazard’s Shareholder Advisory Group, Review of Shareholder Activism – H1 2019. REVIEW AND ANALYSIS OF 2019 U.S. SHAREHOLDER ACTIVISM — NOVEMBER 2019 4 INTRODUCTION continued return of capital and cost-cutting measures or companies seeking to preempt or respond to these lines of attack. NOTES ON THE SCOPE AND SOURCES OF DATA USED IN THIS PUBLICATION The information in this publication in Section 2 (Activism Campaign Data) and Section 4 (Settlement Agreements) is based on the database maintained by FactSet Research Systems, Inc. on SharkRepellent.net, using a dataset run on August 31, 2019 supplemented by our review of public information and other third-party sources. This dataset only includes campaigns against U.S. companies, although other sections of the memo include global data. We have followed the SharkRepellent categorization of campaigns as “proxy fights” or “other stockholder campaigns” and have not included those categorized merely as exempt solicitations or Schedule 13D filings with no public activism. We also have excluded the mere submission of Rule 14a-8 proposals as “campaigns,” although the section “Types and Objectives of Activist Campaigns” discusses shareholder proposals brought in conjunction with the activist campaigns covered in this publication. We also have excluded from the “other stockholder campaigns” category strategic acquisition attempts that involve unsolicited offers by one business entity to acquire another, though we have included takeover attempts involving unsolicited offers by activist hedge funds. In addition, in our review of settlement agreements, where one activist launched campaigns against several affiliates we limited our discussion to one settlement agreement. Further, we have categorized activist campaigns based on the calendar year in which a campaign was launched, even if the campaign is completed (e.g., an activist gains a board seat) during the following calendar year. Data in Section II regarding hedge fund assets under management (AUM), performance and formation is based on the Q1 2019 and year-end 2018 Hedge Fund Industry Report issued by Hedge Fund Research (HFR), unless otherwise indicated. Other data sources are identified as they arise. Every activism situation is unique and none of the statistics and analysis presented in this publication should be construed as legal advice with respect to any particular issuer, activist or set of facts and circumstances. REVIEW AND ANALYSIS OF 2019 U.S. SHAREHOLDER ACTIVISM — NOVEMBER 2019 5 REVIEW AND ANALYSIS OF 2019 U.S. SHAREHOLDER ACTIVISM — NOVEMBER 2019 6 Table of Contents 1 TRENDS IN SHAREHOLDER ACTIVISM .........................................8 A. INTEGRATING “PURPOSE” AND ACTIVISM ................................8 B. ACTIVE MANAGERS TURNED ACTIVISTS .................................9 C. ACTIVISM AND M&A ................................................10 D. GLOBAL ACTIVISM ..................................................12 E. SUCCESSION VACUUMS AS A LEADING INDICATOR .......................13 2 ACTIVISM CAMPAIGN DATA ................................................14 A. ACTIVIST CAMPAIGNS ...............................................14 B. PROMINENT ACTIVISTS ..............................................15 C. ACTIVIST HEDGE FUND PERFORMANCE .................................17 D. TARGET COMPANIES ................................................18 3 DEVELOPMENTS IMPACTING VOTING IN PROXY CONTESTS ....................20 A. INSTITUTIONAL INVESTORS ..........................................20 B. UNIVERSAL BALLOTS ................................................21 C. PROXY ADVISORS ...................................................21 D. BLOCKCHAIN TECHNOLOGY ...........................................22 4 SETTLEMENT AGREEMENTS ................................................24 A. FREQUENCY AND SPEED OF SETTLEMENT AGREEMENTS ...................24 B. NOMINATION PROVISIONS AND MINIMUM SHAREHOLDING PROVISIONS .....26 C. COMMITTEE MEMBERSHIP ...........................................27 D. INFORMATION SHARING .............................................27 E. STANDSTILL PROVISIONS .............................................28 F. VOTING AGREEMENTS ...............................................31 G. EXPENSE REIMBURSEMENT ..........................................32 H. FUND INSIDERS APPOINTED BY SELECT ACTIVISTS ........................33 5 LITIGATION STRATEGIES ....................................................35 6 DEBT “ACTIVIST”