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Defense lawyer advises conceding board judgment of corporate interests to appease activist challengers

 

For a news report of the views presented below, see

Note: The article below is a republished version of April 29, 2015, Martin Lipton of Wachtell Lipton Rosen & Katz posting in Columbia Law School CLS Blue Sky Blog: "Wachtell Lipton explains Some Lessons from DuPont-Trian".

 

Source: The Harvard Law School Forum on Corporate Governance and Financial Regulation, April 30, 2015 posting

Some Lessons from DuPont-Trian

Posted by Martin Lipton, on Thursday, April 30, 2015

Editor’s Note: Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton. Earlier posts by Mr. Lipton on hedge fund activism are available here, herehere, and here. Recent work from the Program on Corporate Governance about hedge fund activism includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here) and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

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 financial community.

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 agreement.

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.

 

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