Some Lessons from
Posted by Martin Lipton, on Thursday,
April 30, 2015
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.
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
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.
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.
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.
some cases even winning a drawn out proxy battle can be more damaging
to a corporation than a reasonable settlement with acceptable board
Harvard Law School Forum
on Corporate Governance and Financial Regulation
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