The ISS Report on the DuPont-Trian proxy contest calls attention to a
number of important insights into ISS policies and practices and those
of many of its institutional investor clients. Concomitantly, these
policies illustrate the realities of the sharp increase in activist
activity and the steps corporations can, and should, take to deal with
the activist phenomena.
ISS and major institutional investors will be responsive to and
support well-presented attacks on business strategy and operations by
activist hedge funds on generally well managed major corporations,
even those with an outstanding CEO and board of directors.
Trian Fund Management and its founder, Nelson Peltz, have clearly
established credibility and acceptability. So too other well regarded
funds like ValueAct. They have become respected members of the
An activist who attempts to work behind the scenes with a corporation
to advise and achieve changes will have more credibility than one who
surfaces with an attack.
In most cases a corporation will be well advised to meet with the
activist and discuss the activist’s criticisms and proposals, which
are frequently presented in the form of a well-researched whitepaper.
If the activist’s recommendations are not unreasonable, careful
consideration should be given to adopting some or all, thereby
avoiding a public dispute. In situations where the activist seeks
board representation to pursue its objectives, depending on the
circumstances it may be the best course of action to consider agreeing
to board representation on condition of an appropriate standstill
Major institutional investors like BlackRock and Vanguard want direct
contact with the independent directors of corporations. Waiting to
establish investor-director contact until under an activist attack is
too late. Meaningful director evaluation has also become a key
objective of institutional investors and a corporation is well advised
to have it and talk to its investors about it. Regular board renewal
and refreshment can be important evidence that meaningful director
evaluation is occurring. In the DuPont situation, ISS did not accept
DuPont’s argument that the addition of two “super star” directors to
its board, after the attack started, obviated any reason to add Mr.
Peltz and one of his nominees.
If a corporation disputes an activist’s counter whitepaper it needs to
make a compelling case; failure to do so will result in ISS following
its policy of generally supporting a dissident short slate. ISS’s
question, “Have the dissidents made a compelling case that change is
warranted?” becomes “Has the corporation made a compelling case that
change is not warranted?” Note the not so subtle shift of the burden.
Finally, in some cases even winning a drawn out proxy battle can be
more damaging to a corporation than a reasonable settlement with
acceptable board representation.
The preceding post comes to us from Wachtell, Lipton, Rosen & Katz.
It is based on their recent memo that was published on April 28, 2015.
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