The Activist Investor Blog
The One Thing an Activist Investor Must Do
Well: Engage Other Investors
March 18, 2014
Above anything else, an activist investor should
engage other investors early and often. Surprisingly few investors do
this at all, and even fewer do so early in the process, even before
engaging a portfolio company BoD and management.
You may have some brilliant and innovative strategic ideas
for a portfolio company, founded on thorough, detailed, and rigorous
research and analysis. You could have a perfect director candidates. You
might insist you’re the owner, and the balance sheet needs considerable
Companies don’t care what you think.
say they care, and
act like they care, but they really don’t. They take your call or
your meeting. But, you’re only one shareholder.
If they did care, far more would have investor-friendly
bylaws and policies.
Instead, companies pile on
poison pills and
sue individual investors. They
blow off shareholder ideas for strategy and operations. They
hoard cash when shareholders plead for greater than money market
Executives don’t respond to brilliant ideas or outraged
owners. They respond to real (or perceived) threats.
You might own a considerable block of shares, but even
with 5-10% or more, you’re not really a threat.
Your having more votes than they do is a threat. If the company
sees (or thinks) that enough shareholders want a given change, they
Very few investors can alone advocate successfully for
change at a company. A small number have the credibility to propose a
strategy, director candidate, or balance sheet structure that management
knows will resonate with other investors. So, ValueAct can
gain a BoD seat at Microsoft seemingly only by its reputation, size of
its investment, and force of its arguments. Yet, don’t underestimate the
extent to which even it needed to consult with other investors beforehand.
Everyone else needs to build a case with other investors.
Once you have engaged others, only then can you say with confidence to the
BoD and management that many others support your view about strategy and
That’s a credible threat.
Why Engage Early?
We can think of two reasons:
credible threat means that the company knows (or thinks) other investors
will support you. If the BoD calls other investors to test this, you want
to have called these other investors first.
can test your case for the company on the only people who really matter,
other investors. You can then refine your ideas based on their early
So, engage early means dialogue with other investors
before dialogue with the company.
How to Engage
First, identify the other investors. We like
J3 Information Services Group (free with a registration). Many other
sources do this (Bloomberg, Capital IQ). Start with the top ten, which
conveniently allows for an
exempt solicitation if it comes to that.
Next, figure out each investors’ PM for the name. This
takes some sleuthing, on investor websites, LinkedIn, and other sources.
Sometimes we just call the main number and ask for the PM that follows the
name. For the largest investors (big mutual and hedge funds), you might
need to work through the proxy department.
For each PM, ask three questions:
1.What do you think of the
company these days?
2.What different strategy
and tactics would you propose?
3.How, if at all, should
governance and the BoD change?
Then, listen carefully to the answers.
If other PMs agree with your perspective, you can
represent to the company that your plan will likely win support from other
investors. If they don’t, then you need to revise your plan, or even move
This discussion is perfectly legal. Law and SEC
regulations allow investors to
talk to each other. But, you can’t:
as a group, for companies with a poison pill, within the often broad
definition of “act” in the shareholder rights plan document; which
typically does not include mere discussions among shareholders.
efforts with other shareholders to the extent your combined shareholdings
exceed 5%, at least without filing a Form 13D.
for the investor’s vote, which constitutes proxy soliciting.
Practically, “acting as a group” or “coordinating efforts”
includes agreeing on specific plans for a company or sharing the costs
(attorneys, proxy solicitors) for an activist project.
A fourth or fifth question helps engage other investors
even more, as it approaches the border between lawful business discussions
and more regulated coordinated efforts.
4.How would you improve our
plan? which divisions to sell? how much cash to return?
5.What BoD nominees would
This last question makes sense only for situations that
could escalate to a contested BoD election. Then, if another investor
suggests their PM or another employee, you likely cross over into acting
as a group, with implications for triggering a poison pill or Form 13D
disclosure. If the investor suggests someone independent, you have more
latitude for recruiting that person. Either way, an investor that provides
a BoD nominee is that much more likely to support your effort.
Not Proxy Solicitation
Some investors might leave this chore to their proxy
solicitor. They should not:
discussion with other investors takes place as review of the portfolio
company, PM-to-PM, rather than as a request for the investor’s vote.
other investors should take place early in the process, long before you
retain any needed proxy solicitor.
with other investors does not, and cannot, entail soliciting their proxy
for a shareholder meeting, or in other words asking for their vote for
Proxy solicitors have a proper place - after you determine
that you indeed need to solicit proxies.
The Purpose of Engaging
You don’t necessarily want other investors to join you in
a group. While you might welcome any offer to share costs and vote as a
block, you don’t engage other investors early for this reason. Few
shareholders will join a group based on a call or meeting with you, and
you don’t need them to do that, anyway.
And, if it comes to that, you do want them to vote for
your BoD nominees and your shareholder resolutions. But, it doesn’t come
to that all that often. You probably don’t want it to come to that - you
probably want to avoid even needing to take your case or nominees to a
You absolutely want other investors to say to the company,
if and when management calls, that they agree with and support your ideas.
Thus, you want to represent to the company, confidently, that other
investors agree with you, and will likely support you in any vote.
In this way, executives know (or think) that enough other
investors agree with your plan for the company. This becomes the real (or
perceived) threat that motivates action.
Why the emphasis on real
or perceived? Because few companies can or will ascertain the exact
level of support from all investors. Sometimes, no one knows that until a
real shareholder vote. If they perceive, though, that enough investors do
agree with you, then risk-averse BoDs and executives would rather settle
with you, or risk losing their privileged positions.
Typically, risk-averse company leaders trouble us. In most situations,
though, an activist investor can turn risk-aversion to their advantage,
through early, effective engagement with other investors.
2008-2014 Michael R. Levin - all rights reserved.