David Einhorn, founder of the hedge fund
Martin Lipton, one of the nation’s top corporate
lawyers, was dismayed.
Having watched David Einhorn, the activist investor,
go to battle with Apple in the last two weeks to push it to distribute some
of its $137 billion cash hoard to shareholders, Mr. Lipton had seen enough.
Mr. Einhorn, he thought, had gone too far.
A longtime counselor to the Fortune 500 as one of
the founding partners of Wachtell, Lipton, Rosen & Katz, he sat down and
wrote a scathing memo to his clients on his view that “shareholder
democracy” has run amok.
“The activist-hedge-fund attack on Apple — in which
one of the most successful, long-term-visionary companies of all time is
being told by a money manager that Apple is doing things all wrong and
should focus on short-term return of cash — is a clarion call for effective
action to deal with the misuse of shareholder power,” he wrote. The memo was
entitled, “Bite the Apple; Poison the Apple; Paralyze the Company; Wreck the
Mr. Lipton said that long-term shareholders in
public companies are being undermined “by a gaggle of activist hedge funds
who troll through S.E.C. filings looking for opportunities to demand a
change in a company’s strategy or portfolio that will create a short-term
profit without regard to the impact on the company’s long-term prospects.”
While “shareholder democracy” may be a good sound
bite, Mr. Lipton has a point worth considering.
Martin Lipton, founding partner of Wachtell,
Lipton, Rosen and Katz.
It increasingly appears that the rise of
“shareholder democracy” is leading, in some cases, to a perverse game in
which so-called activist investors take to the media to pump or dump stocks
in hopes of creating a fleeting rise or fall in a company’s stock price. The
battle over Apple is just one minor example.
Carl Icahn’s investment in
Herbalife, betting against William Ackman’s accusation that the company
is a “pyramid scheme,” is another.
That’s not to say that shareholder democracy is a
bad thing. Shareholders have successfully and properly brought pressure to
bear on underperforming companies, pushed out entrenched directors and, in
some cases, pressed for operational changes to address health and the
At a time when investors are calling for managements
and directors to think more about the long term, this latest breed of
activism is also multiplying. But are these activists interested in the long
According to Leo E. Strine Jr., the chief judge of
the Delaware Court of Chancery, the answer is usually obvious: no.
“Many activist investors hold their stock for a very
short period of time and may have the potential to reap profits based on
short-term trading strategies that arbitrage corporate policies,” he wrote
in a widely circulated essay for the
American Bar Association. Near the beginning of his essay he asked: “Why
should we expect corporations to chart a sound long-term course of economic
growth, if the so-called investors who determine the fate of their managers
do not themselves act or think with the long term in mind?”
The academic literature provides a mixed and
inconclusive assessment of the true effect of activism on shareholder value
over the long-term.
In fairness, it must be said that not all activist
investors are created equal and not all of their investments should be
considered in the same way.
Nelson Peltz, once called a corporate raider, fought his way onto the
Heinz in 2006. He is still on the board and approved the sale of the
Berkshire Hathaway and 3G Capital just weeks ago.
Daniel Loeb, the founder of Third Point Management,
similarly fought his way onto the board of
Yahoo after exposing its former chief executive, Scott Thomson, for
lying on his résumé. He is now a board member and helped recruit Marissa
Mayer to be chief executive. Whether he likes it or not, Mr. Loeb is a
long-term shareholder in Yahoo. Just weeks ago, however, he announced that
he had made an investment in Herbalife that his peer, Mr. Ackman, is betting
against. Part of Mr. Loeb’s bet was simply a short-term gamble; he has since
sold some of his investment, taking profits off the table.
Similarly, Mr. Ackman has made some long-term bets —
he held his short position in MBIA for years and is now a long-term investor
and director of J. C. Penney — but he has also made a series of short-term
investments as well.
As for Mr. Einhorn’s fight with Apple, it is hard to
argue he is a short-term investor in the company; his firm, Greenlight
Capital, has held a stake for the past three years. But the measures he is
pressing the company to pursue — creating a “iPref” or preferred share that
pays a dividend to shareholders in perpetuity — feel a lot like financial
engineering to create some quick value for investors.
In a news release announcing his proposal, which
would have Apple create $50 billion in perpetual preferred stock, Mr.
Einhorn said that amount of the new shares “would unlock about $30 billion,
or $32 per share in value. Greenlight believes that Apple has the capacity
to ultimately distribute several hundred billion dollars of preferred, which
would unlock hundreds of dollars of value per share.” He continued,
“Greenlight believes additional value may be realized when Apple’s
price-to-earnings multiple expands, as the market appreciates a more
shareholder-friendly capital allocation policy.”
In truth, Mr. Einhorn’s proposal is a lot more
long-term thinking than just pressing Apple to distribute a special one-time
dividend or pursue a series of stock buybacks; his proposal requires
shareholders to remain so as to reap the dividends the special “iPrefs”
would throw off. But make no mistake, Mr. Einhorn is also hoping that
Apple’s common shares will jump in price if Apple takes up his proposal.
Mr. Einhorn declined to comment for this column.
I’ve had my own run-ins with Mr. Lipton. In 2008,
before the financial crisis, I wrote a column questioning Mr. Lipton’s
various efforts “to stiff-arm the people who actually own the company.” At
the time, he wrote a memo arguing that the “limits on executive
compensation, splitting the role of chairman and C.E.O. and efforts to
impose shareholder referendums on matters that have been the province of
boards should be resisted.”
As the inventor of the anti-takeover maneuver called
the “poison pill” and as one who has made a career trying to protect boards
from agitators, Mr. Lipton was talking his own book. I wrote, “Mr. Lipton’s
advice isn’t just wrongheaded. It’s dangerous.”
But nearly five years later, with the perspective of
the financial crisis, Mr. Lipton’s underlying worry that certain
shareholders will abuse the powers of democracy is not unfounded. The
question, as is often the case, is whether the influence of a few interested
in the short term overwhelms the best interests of the many in the long
version of this article appeared in print on 02/26/2013, on page B1 of the
New York edition with the headline: ‘Shareholder Democracy’ Can Mask Abuses.
This Forum program is open, free of charge,
to anyone concerned with investor interests in the
development of marketplace standards for expanded access to
information for securities valuation and shareholder voting
decisions. As stated
in the posted
Conditions of Participation, the
Forum's purpose is to provide decision-makers with access to
information and a free exchange of views on the issues
presented in the program's Forum
participant is expected to make independent use of
information obtained through the Forum, subject to the
privacy rights of other participants. It is a Forum
rule that participants will not be identified or quoted
without their explicit permission.
This Forum program was initiated to address
issues and objectives defined by participants in the 2010 "E-Meetings"
program relevant to broad public interests in marketplace
practices, rather than investor decisions relating to only a
single company. The Forum may therefore invite program
support of several companies that can provide both expertise
and examples of leadership relating to the issues being
The information provided to
Forum participants is intended for their private reference,
and permission has not been granted for the republishing of
any copyrighted material. The material presented on this web
site is the responsibility of
Gary Lutin, as chairman of the Shareholder Forum.
is a trademark owned by The Shareholder Forum, Inc., for the
programs conducted since 1999 to support investor access to
decision-making information. It should be noted that we have
no responsibility for the services that Broadridge Financial
Solutions, Inc., introduced for review in the Forum's
2010 "E-Meetings" program and has since been offering
with the “Shareholder Forum” name, and we have asked
Broadridge to use a different name that does not suggest our
support or endorsement.