As passive investing via funds that track market indices continues to grow, the terrain where investors are fighting battles over governance reform is now expanding beyond contested stockholder meetings and into debates over the criteria for eligibility of issuers for inclusion in these indices. Indeed, in this era of index fund investing, a company focused on the future trading price of its shares should be much more concerned about gaining entry into and maintaining eligibility for indices than whether there will be a withhold vote recommendation on the members of its governance committee. If this direction continues to gain traction, we could end up with a market dominated by passive strategy investing where the current importance of familiarity with the hot button governance concerns of proxy advisory firms and institutional investors becomes subsidiary to understanding how to navigate new, governance-related eligibility requirements of major equity indices. Continue Reading Index Eligibility as Governance Battlefield: Why the System is Not Broken and We Can Live With Dual Class Issuers
Quick settlements with activist hedge funds to recompose boards and adjust strategic plans have resulted in hundreds of new directors and changes to stand-alone plans in the S&P 500 over the last two years. The arguably outsized influence of these activists, which often own less than 5% of their targets’ public floats, led one of the leading hosts of index funds, State Street, to issue publicly a position paper earlier this year in opposition to this “quick settlement” trend. Underlying State Street’s concern is the view that incumbent directors frequently settle to avoid the painful scrutiny and distraction of proxy contests while failing to take into account the sentiments of their companies’ broader shareholder bases. The views of State Street and the other major index funds matter not only because these “passive”-strategy funds regularly control up to 40% of the public floats of listed companies, but also because that figure is likely to continue to rise steeply, along with similar increases in the interest of these funds in (as well as the number of personnel at these funds scrutinizing) governance, board composition and processes, and strategic shifts at publicly traded companies. As a result, targets of activist campaigns are increasingly struggling with balancing the benefits of a quick and comprehensive settlement with activist hedge funds against the desirability of assuring that there is broad shareholder support, especially among long-term institutional holders, for making concessions to the activists. Continue Reading Balancing Concessions to Activists Against Responsiveness to the Broader Shareholder Base: Lessons from a Recent Settlement with an Activist
In a case of first impression, GAMCO Asset Management (“GAMCO”) recently nominated a director to the board of National Fuel Gas Company (“NFG”) pursuant to NFG’s recently adopted proxy access bylaw. As far as we know, this is the first time any shareholder has nominated a director using proxy access. Continue Reading Proxy Access in Action: Is This What Everyone Wanted?
A settlement on July 12, 2016 by the DOJ with ValueAct for violations of the HSR Act’s notification requirements and an interpretation of the Exchange Act’s beneficial ownership reporting rules posted by the SEC staff on July 14, 2016 combine to provide new guidance that will have an immediate impact on shareholder activism and engagement. Continue Reading New Guidance on the Impact of SEC Beneficial Ownership Reporting and HSR Act Notification Regimes on Shareholder Activism and Engagement
The filing by the DOJ of a complaint in federal court on April 4, 2016 against ValueAct — claiming that ValueAct’s purchase of shares of two public companies violated the HSR Act’s notification and waiting period requirements and seeking $19 million in civil penalties (based on the $16,000 per day penalty provisions of the HSR Act) – has the potential to have an immediate impact on the tactics used by brand name “activist hedge funds,” such as ValueAct, to accumulate shares without prior notice to either the issuers in question or the market generally. Continue Reading What the ValueAct Complaint Means for Activism Tactics and the SEC’s Beneficial Ownership Reporting Regime
In February 2016, Blackrock CEO Laurence Fink issued his annual letter to the CEOs of S&P 500 companies. In addition to repeating themes from prior years (the value of long-termism and the need for more thoughtfulness before allocating capital to buybacks and special dividends), this year’s letter had one notable omission and four of areas of specific emphasis that merit the attention of boards and managements. Continue Reading What the 2016 Blackrock Letter Means for Shareholder Engagement and Disclosure Practices
After several years that seemed defined by turmoil and uncertainty, 2015 delivered some unexpected and much-needed clarity for corporate directors on issues such as proxy access, compensation disclosure, investor expectations regarding board composition, certain director and financial advisor conflicts of interest, and audit committee processes and related disclosure. The past year also saw corporations adopting a less alarmist and more measured approach toward potential shareholder activism. The task of the director, however, will remain a challenging one in 2016. Much of the welcome guidance received during 2015 remains to be implemented, shareholders and regulators will continue to actively and closely monitor boards, and new complexities will undoubtedly arise. This memorandum discusses issues that we believe will require the attention of boards of directors and management in 2016.
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The FTC has settled an enforcement action against Third Point Funds and their management company related to their acquisition of stock in Yahoo! Inc.
Based on the FTC’s press release, the funds had acquired shares in Yahoo! that exceeded the requirements for pre-acquisition filings under the Hart-Scott-Rodino Act. (Filing is currently required prior to acquiring more than $76.3m worth of shares. Notice of the planned acquisition must be given to the target company prior to filing, potentially providing a very early notification to the target of the acquisition of its shares by an activist.) To avoid this filing requirement, the Third Point funds relied on the “investment only” exception, which permits investors to acquire up to 10% of an issuer’s stock without observing the HSR Act’s notice and waiting period requirements – so long as the investor’s intent is passive. Continue Reading Third Point Settles FTC Enforcement Action – Will HSR Serve as Early Notice of Activist Stakebuilding?
In Pontiac Gen. Employees Retirement Syst. v. Ballantine (Healthways) , the plaintiffs alleged that Healthways’ directors had breached their fiduciary duties by entering into a credit agreement with a “dead-hand proxy put” – that is, a provision that provides for an event of default under the credit agreement if the majority of directors on the board are replaced without the consent of the directors in office on the date of the credit agreement (or the consent of successors approved by such directors), without any room for existing directors to approve new directors if they were nominated in connection with a proxy contest. The complaint also alleged that, as lender, SunTrust should be liable for aiding and abetting such a breach of fiduciary duty. Continue Reading Recent Developments on “Proxy Puts”
A well-prepared and well-advised board should be able to navigate the risks and opportunities presented by hedge fund activism. Here is an overview of why boards need to pay attention, what they are up against, and how to prepare and respond.
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