proxy season is turning out to be more hostile than ever, as companies fight
back against hedge fund activists.
typically have their annual meetings in the late spring, like the blooming
of tulips, and they attract hordes of shareholder activists looking for
profits. The activists will often try to elect directors, making proxy
season not a reminder of the warming spring but a clarion call for the
barbarians at the gate.
the activists won a series of stunning victories at Darden Restaurants,
Sotheby’s and the real estate investment trust now known as Equity
Commonwealth, among others. In each case, the companies refused to bow to
the activist agenda, preferring instead to try to prevent the activists from
electing directors. Each company lost after spending millions of dollars,
wasting both money and their boards’ reputations.
STEVEN DAVIDOFF SOLOMON
losses actually came as no surprise. In 2014, activists had a 73
percent success rate in electing directors, according to FactSet’s
corporate governance database, SharkRepellent. Given the odds, many,
including me, predicted that this year’s proxy season would be all
about settling as companies sought to avoid these types of bloody
losses. This would be the year that shareholder activists dominated
completely as companies ran for cover.
companies are fighting back. According to the proxy-advisory firm
Institutional Shareholder Services and data from SharkRepellent, about 32
out of 78 contests will go to a vote in the second quarter of 2015 alone.
This compares with 33 out of 92 contests for all of 2014. Well-known names
like Tempur Sealy International, DuPont,
MGM Resorts, Macerich and Shutterfly
are all fighting proxy contests and refusing to settle with activists.
explains the surprising, fighting turn?
part it is the unique circumstances of each company.
investment firm H Partners Management, which says it is the largest
shareholder of Tempur Sealy, is seeking the ouster of the company’s chief
executive, Mark A. Sarvary, which leaves no room for compromise.
the board offered to settle with
Nelson Peltz’s hedge fund, Trian
Partners, by offering a board seat to one of its candidates. But Trian,
which owns 2.7 percent of DuPont, has refused these overtures because it did
not include a spot for Mr. Peltz himself. Instead, Trian has preferred to
accuse DuPont, which has performed reasonably well, of a laundry list of
lapses, including overspending, bad corporate governance and poor
negotiating skills in selling assets. This is a fight that should have long
been over, except it took a detour into the personal.
often plays a big role in these battles, pushing parties to contest rather
than settle. The fight at
Wynn Resorts is not a traditional
shareholder activist battle but an internecine one between
Stephen A. Wynn, the chief executive,
and his former wife, Elaine, who is seeking to remain on the board. The
messy battle involves a divorce decree and the sale of shares, and it has
devolved into nasty accusations of incompetence and sexism.
toward fighting rather than fleeing extends to the exotic, with activists
singling out REITs in particular this proxy season. The investment firm Land
and Buildings has taken aim at Macerich and the
Associated Estates Realty Corporation.
Macerich is notable because it adopted a “just say no” defense to a hostile
takeover bid by Simon Property, refusing to negotiate with the company,
which later withdrew its offer. That Macerich is now the target of an
activist is no surprise and should be a cautionary tale to any company that
simply refuses to entertain a hostile bid.
shareholder governance that is all too common in REITs is also drawing
non-hedge-fund activists in.
Unite Here, a labor union that also
seems to like shareholder activism, is taking aim at Hospitality Properties
Trust and Ashford Hospitality Trust, seeking to elect directors to improve
their corporate governance. The REITs, true to form, are resisting.
What is also
noteworthy about the 30 or so contests that Institutional Shareholder
Services pegs as the most hostile is that with the exception of Trian, none
of the biggest shareholder hedge fund activists — like Greenlight, Pershing
Square, Elliot, Jana or Third Point — are involved. Even the Wile E. Coyote
of shareholder activism,
Carl C. Icahn, is absent.
For the most
part this is because companies settled quickly in the face of attacks by
these giants. Pershing Square took aim at Zoetis at the end of last year,
but the company settled almost immediately. Mr. Icahn settled with Gannett
and Manitowoc soon after he announced his positions in those companies.
Greenlight has mostly been shorting companies; Third Point is digesting
Sotheby’s and focusing on Japan; and Jana has focused on campaigns to
maximize shareholder value at Qualcomm and Hertz without proxy campaigns.
Elliot has been silent, also perhaps focusing on its current investments.
newer or lesser-known funds are leading the activist charge. For example, a
hedge fund coalition led by Harry J. Wilson, a member of the government task
force that administered
General Motors’ bailout, sought a stock
buyback from the automaker, which capitulated quickly. Sarissa Capital
Management, a three-year-old fund, is conducting a proxy contest at Ariad
Pharmaceuticals, which makes cancer drugs. Meanwhile, Land and Buildings,
which is six years old, is taking on MGM International in addition to the
may be fighting back precisely because these hedge funds are relative
newcomers, thinking they have a better chance against lesser-known funds
without the experience or reputation of the biggest ones. The urge to fight
may also be because of a change in mood.
Some of the
big institutional investors are starting to question the shareholder
activism boom. Laurence D. Fink, chief executive of
BlackRock, the world’s biggest asset
manager, with $4 trillion, recently issued a well-publicized letter that
criticized some of the strategies pushed by hedge funds, like share buybacks
and dividends, as a “short-termist phenomenon.”
T. Rowe Price, which has $750 billion
under management, has also criticized shareholder activists’ strategies.
They carry a big voice.
been at least one notable corporate victory so far. Biglari Holdings, the
restaurant company, fought off a proxy battle from Groveland Capital, which
held only 0.2 percent of the company. While the chief executive, Sardar
Biglari, holds about 19 percent, giving the company a head start, its
victory is all the more remarkable because the company is a symbol of bad
governance. It paid Mr. Biglari $34.4 million last year, prompting
recommendations against the management slate from I.S.S. and Glass Lewis,
the other big proxy adviser.
landscape of shareholder activism perhaps signals a transition. With more
players and money pursuing it, companies seem to be adopting a more nuanced
strategy that takes into account the fact that not all activists are alike.
Activism this year has also mostly been a midcap affair, with hedge funds
taking aim at only three companies with market values of more than $10
billion — G.M., DuPont and Macerich. The bulk has focused on companies worth
$2 billion or less.
who are a bit weary of the knee-jerk response of companies to buy back
shares or pay dividends at the first sight of a shareholder activist, this
may be a welcome development. To be sure, sometimes the goals of activists
are worthwhile, but Mr. Fink may be right that companies are rushing too
fast to embrace short-term payouts at the expense of long-term value.
whether the hostility of spring becomes perennial remains to be seen. It
will depend on how this year’s contests turn out and whether companies find
that fighting the shareholder activists is worth it. Take a seat at the
Davidoff Solomon, a professor of law at the University of California,
Berkeley, is the author of “Gods at War: Shotgun Takeovers, Government by
Deal and the Private Equity Implosion.” Email: firstname.lastname@example.org |
version of this article appears in print on April 22, 2015, on page B5 of
the New York edition with the headline: After Defeats at the Hands of
Activists, the Boardroom Strikes Back.
The New York Times Company