September 14, 2014 3:02 pm
US companies devise tactics to limit
By Stephen Foley
US companies are devising new tactics to limit the advance of
activist investors, as hedge funds
wage an increasing number of campaigns to unseat entire corporate boards.
The number of occasions on which activists have put forward a full slate of
new board members has more than doubled in the past two years, reflecting
the growing confidence and
financial firepower of this sector
of the hedge fund industry.
In response, companies are appealing directly to shareholders to cap
activists’ influence to a minority of board seats, in what corporate
governance lawyers describe as a “cat and mouse game” between the two sides.
Darden Restaurants, which owns the
US chain Olive Garden, is the latest in a string of companies to concede a
minority of seats to an activist and argue that handing full control of the
board to a hedge fund would hurt shareholders’ interests.
“Companies are using a new tactic in the face of the risk of majority-slate
contests,” said David Rosewater, partner at Schulte Roth & Zabel, which
“It is a cat-and-mouse game. When they gift seats to the activist, it gives
companies an argument that it doesn’t represent the same kind of mandate for
Darden has put up only eight nominees for 12 board seats at next month’s
annual meeting, leaving four free for nominees from Starboard Value, the
activist fund run by Jeff Smith, which is running 12 candidates.
Darden is locked in a
battle with Starboard over how it is
running Olive Garden and other chains. Darden warned last week of “the risks
and destabilisation that would result from full board turnover and giving
control to a single shareholder’s nominees”.
Assailed by activists, many companies are entering settlement talks and
agreeing to give them board seats, as
Hertz did last week with corporate
Darden’s plan to leave seats vacant even though a settlement cannot be
reached comes on the heels of similar concessions at
Cliffs Natural Resources, an iron
ore miner, and
Bob Evans Farms, a restaurant chain.
In both cases, activists were attempting to take a majority of board seats.
In the US, where shareholders are handed two competing voting cards and
allowed to vote on only one, the aim is to encourage them to use the
management ballot, even if they would like activists to receive some board
representation. That maximises the chances of management keeping control.
At Bob Evans Farms, the manoeuvre kept Sandell Asset Management to a
minority of the seats, but at Cliffs, Casablanca Capital did win control and
replaced the chief executive.
According to global data from research group Activist Insight, there have
been 21 contests in the past two years in which activist hedge funds have
proposed nominees to completely replace a corporate board. All but two are
US companies. That compares with eight contests globally in the two years
© The Financial Times Ltd 2014