DuPont’s Victory in the Proxy Fight with Trian

Francis J. Aquila is a partner at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication by Mr. Aquila, H. Rodgin Cohen, Melissa Sawyer, and Lauren S. Boehmke. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

On May 13, 2015, E. I. du Pont de Nemours and Company, a major chemical company with a market cap of approximately $68 billion, defeated a proxy campaign run by Trian Fund Management, L.P., the activist fund led by Nelson Peltz that owns approximately 2.7% of DuPont. Trian was seeking four seats on DuPont’s board of directors. DuPont announced this morning that all 12 of its incumbent directors were reelected at DuPont’s annual meeting of shareholders. Although the two most influential proxy advisory firms, Institutional Shareholder Services Inc. and Glass Lewis & Co., both supported Trian’s slate of director nominees, DuPont’s three largest institutional shareholders, The Vanguard Group, Blackrock, Inc. and State Street Corporation, all voted in favor of DuPont’s slate.

DuPont’s victory shows that boards and management teams who present a clear case that their business strategy will create superior value over a near- to medium-term time horizon can prevail over activist investors and over the proxy advisory firms’ tendency to recommend in favor of at least some of an activist’s nominees. As at DuPont, this can sometimes be accomplished through better articulation of the projected long-term effects of a company’s existing strategy.

DuPont’s win reinforces that activists, even those as influential as Peltz, will face challenges if they target companies with strong boards and management teams that have outperformed the market. DuPont’s victory may encourage outperforming large-cap companies to fight for a complete victory in activist situations rather than agreeing to settle with the activist. However, in order to take that approach and ultimately be successful, the company must have proactive and consistent engagement with its institutional shareholders, who increasingly make voting decisions in proxy contests independently from the proxy advisory firms and who are demonstrating a willingness to support companies that take investor engagement seriously and have proven responsive to shareholder concerns. It is also important to note that DuPont has an unusually large retail shareholder base, accounting for approximately 33% of its shares, and that retail investors have historically been supportive of management in proxy contests.

While the lessons from the DuPont/Trian proxy contest are indeed significant, it is always important to avoid generalizations since all proxy contests involve idiosyncratic factors and investors vote on a case-by-case basis.

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