Wider range of players
Means of engagement
Consequences for corporate company clients
There was a significant uptick in shareholder activism in 2013. While once thought of as solely for brave-hearted activist hedge funds, the activist shareholder space experienced a wide variety of developments. The types of player are becoming more diverse and the means of shareholder engagement range from more frequent letters from key shareholders to campaigns to derail transactions or threaten wide-scale appraisal, to full-on proxy battles and hostile takeovers.
One of the biggest trends in shareholder activism is the greater variety of players. Rather than being limited to a few well-known activists, more institutional investors are joining the fray – particularly pension funds, mutual funds and sovereign wealth funds. In addition to increasing investments in hedge funds known for activism, many institutional investors have increased support for activist campaigns. Even corporations themselves have started making waves, such as when Jos A Bank offered to purchase Men's Wearhouse earlier this year – an offer which Men's Wearhouse subsequently rejected. Men's Wearhouse then responded with a 'Pac-Man defence' and made a hostile bid for Jos A Bank, which is still in play (for further details see "Retail rivals launch competing merger proposals and defensive manoeuvres").
While the term 'shareholder activism' is often associated with heated proxy wars, there are many other ways that shareholders can effectively communicate concerns and suggestions to a company's management team. A common approach is sending a letter, which for significant investors, if filed pursuant to the securities rules, becomes publicly available to all shareholders and the market at large. Engaged Capital LLC, led by Glenn Welling, opted for this approach in a nine-page letter sent to Abercrombie & Fitch Co calling for a change in leadership and a sale to private equity investors. Since 2010 publicly filed letters to management from activist shareholders have increased by almost 18%.
Investors are also opting to share their concerns through a private dialogue of personal meetings, calls and private letters. While some investors air their concerns publicly from the outset, others may choose to go public only if management is not responsive to private overtures. The goal behind all of these communications is to engage in a dialogue with the company and persuade management to address investors' concerns.
The use of proxy solicitations and shareholder votes is another mechanism through which shareholder activists seek to effect change. For example, shareholder OTK Associates successfully gained control of the Morgans Hotel Group Co board after lengthy disputes over management and the direction of the company. Since that time, another shareholder, Kerrisdale Capital Management, has come out urging Morgans Hotel to sell itself. Yucaipa Cos then proposed an unsolicited offer to acquire the company. The activism of shareholders in Morgans Hotel is just one example of increased activity, particularly in the hospitality space.
Another hospitality industry target was Chatham Lodging Trust, which received a takeover bid from investor BlueMountain Capital Management LLC in November, though the Chatham Lodging Trust board ultimately rejected the bid.
Shareholder activism has been active in the transactional space as well, where shareholders have attempted to thwart a company's plan to sell. For example, in 2013 – in an attempt to stave off a proxy fight from a group of hedge funds led by well-known activist Carl Icahn – Hologic, Inc (maker of cancer screening tools) entered into an agreement giving the Icahn-lead group two board seats in exchange for an agreement by the group to not solicit any proxies or further increase their ownership in the company. Icahn used lawsuits, proxy solicitations and even Twitter in an attempt to overhaul Dell, Inc's board composition and stop its sale in a going-private transaction to private equity group Silver Lake. While eventually withdrawing his lawsuit (after an unsuccessful hearing in the Delaware Court of Chancery) and appraisal rights, Icahn was a factor in Dell's increase in the offered purchase price and agreement to allow for a special dividend to its shareholders.
Consequences for corporate company clients
Companies need to be on their guard in order to prepare for a possible activist campaign in connection with M&A transactions. Such preparation includes proactively engaging early with corporate governance solutions providers such as Institutional Shareholder Services to recommend the transaction. More aggressive strategies go as far as to force the target to adopt a 'poison pill' (thereby capping the toe-hold position that an activist investor can obtain and preventing activists from working together in groups") – such as was done when Apollo looked to purchase Great Wolf in 2012.
Regardless of a company's past level of experience with shareholder activism, the increased activity in the shareholder activist space demonstrates the importance of company preparedness for the possibility of shareholder involvement. This recent activity suggests that shareholder contests are no longer limited to the largest companies, and that anticipation and defence against unwelcome activism by a multitude of players may likely become a more commonplace aspect of a company's general corporate governance considerations.
For further information on this topic please contact Jeffrey R Katz, Jane D Goldstein or David Fine at Ropes & Gray LLP's Boston office by telephone (+1 617 951 7000), fax (+1 617 951 7050) or email ([email protected], [email protected] or [email protected]). Alternatively, contact Larissa R Smith at Ropes & Gray LLP's New York office by telephone (+1 212 596 9000), fax (+1 212 596 9090) or email ([email protected]). The Ropes & Gray website can be accessed at www.ropesgray.com.
