Anti-Activist Legislation: The Curious Case of the Brokaw Act

Alon Brav is Robert L. Dickens Professor of Finance at Duke University’s Fuqua School of Business. This post is based on a recent paper authored by Professor Brav; J.B. Heaton, Partner at Bartlit Beck Herman Palenchar & Scott LLP; and Jonathan Zandberg. 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) and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Most evidence to date supports the proposition that corporations benefit, on average, from the actions of hedge fund activists. Nevertheless, hedge fund activism is unpopular in many quarters, particularly among management and directors that become its targets, but also with similarly-minded opponents in academia and business. While hedge fund activism’s opponents generally acknowledge that activism is on average associated with stock price increases at target firms, they tend (notwithstanding evidence to the contrary) to characterize that average price increase as a short-run effect that merely reflects a higher probability of takeover or stock-popping restructuring events. In turn, they attribute little or no social or long-run value to hedge fund activism. Until recently, hedge fund activism’s opponents have done little to target legislation against hedge fund activists, focusing mainly on public debate and requests to the Securities and Exchange Commission—largely ignored to date—for changes in rules that would hinder activist investments. That may now be changing.

Our new paper explores a first attempt at federal anti-activist legislation, examining both its motivations and its specific legislative goals. On March 17, 2016, United States Senators Tammy Baldwin (D-WI) and Jeff Merkley (D-OR) introduced legislation—S. 2720, 114th Cong. (2016)—to “increase transparency and strengthen oversight of activist hedge funds.” Senators Bernie Sanders (I-VT) and Elizabeth Warren (D-MA) co-sponsored the proposed legislation.

The sponsoring Senators call their proposed legislation “The Brokaw Act.” The Brokaw Act, they say, “is named for a small Wisconsin town that went bankrupt after an out-of-state hedge fund closed a paper mill that had provided good jobs to the town for over 100 years. The activist hedge fund bought up the legendary Wausau Paper Company, forced out its executives and demanded short-term returns like buybacks at the expense of the company’s long-term future … What happened in Wisconsin is one example of a larger problem that demands action.”

But did “an out-of-state hedge fund close[] a paper mill that had provided good jobs to the town for over 100 years” after “forc[ing] out its executives”? A look at the timeline and the public announcements shows the answer to be no. Though engaged in some discussions with a hedge fund activist at the time of the Brokaw mill closure, Wausau’s existing board of directors and executives remained in full control of the company before and during the decision to close the Brokaw mill in December 2011, and had been considering closure of the Brokaw mill for months and possibly years. The mill closure occurred during a wide downtrend in the domestic paper industry, and, consistent with those wider industry trends, Wausau Paper Corp. had shuttered other mills long before a hedge fund activist arrived on the scene. Recognizing the tremendous misfortune of the lost jobs and the impact on the Brokaw community, it is inaccurate scapegoating to lay that outcome at the feet of a hedge fund activist.

When bad things happen, it is tempting to conclude that something must be done. But the loss of jobs in Brokaw, Wisconsin was not the work of hedge fund activists and nothing that happened there warrants anti-activist legislation. As we explore in the rest of the paper, the Brokaw Act targets hedge fund activists for conduct that is largely mythical rather than addressing the root cause of the loss in jobs in the paper industry that has been caused by changes in demand, competition, regulation, and other factors that have led to the decline of this once great industry.

The full paper is available for download here.

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