2016 U.S. Shareholder Activism Review and Analysis

Glen T. Schleyer is a partner Stephen M. Guynn is an associate at Sullivan & Cromwell LLP. This post is based on the Executive Summary of a Sullivan & Cromwell publication by Mr. Schleyer, Mr. Guynn, Korey R. Inglin, Tengteng Peng, and Chenjing Shen. 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.

Shareholder activism remains a major force in corporate decision-making in 2016 but is increasingly operating in an environment of robust, multi-faceted shareholder engagement, particularly at large companies. The time and effort that companies and institutional investors have spent developing a mutual understanding of each other’s concerns have narrowed the opportunities for activists at high-profile companies, and the returns of activist funds overall are down in 2016. The total number of activist campaigns has nevertheless remained high, due in large part to newer and often smaller activists targeting small and mid-size companies.

Large institutional investors have long been an important constituency in any activist campaign, and the influence of these institutions has continued to grow, as share ownership becomes increasingly concentrated and as they directly express their views and concerns, both through direct engagement with companies and by public pronouncements of their priorities, including their skepticism over the impact of “short-termism” that activism can engender.

The complete publication summarizes significant developments in proxy contests and other activist campaigns in 2016, as compared to the preceding years, including the following:

  • Index and Other Institutional Investors. Developments in the institutional investor space, including an increased concentration of ownership in a handful of large index funds and other institutions, as well as an increased focus by institutions on engagement and governance reform. The success of activist investors, and of companies in defending against activist campaigns, increasingly hinges on the receptivity of large institutional investors to their respective arguments.
  • Activist Investors. Trends in the assets under management and performance of activist hedge funds as compared to the hedge fund industry generally (which is facing its own challenges), as well as activist fund formation, all of which highlight the fundraising and performance challenges experienced by many activists funds in 2016. This includes a discussion of the most prolific activists and those most successful in obtaining board seats. A notable development in 2016 is an increase in the number of activist demands made by investors beyond those that have dominated the activism space in recent years.
  • Target Companies. Trends in activism targets by market cap and industry, including the decline in large companies as targets in the past two years. To a large extent, the willingness of activists to initiate campaigns at larger companies has helped to mitigate any stigma associated with being the target of an activist campaign, which can reduce the effectiveness of an activist’s threat to take its demands public.
  • Types and Objectives of Activist Campaigns. The frequency, objectives and outcomes of activist campaigns, including:
    • Frequency of different campaign types, including efforts to obtain board representation (via proxy contests or settlements)
    • Trends in the ultimate economic objectives of activist campaigns, including the greater focus on board-related governance issues in 2016 proxy contests, as compared to the traditional objectives of returning capital to shareholders or taking specified M&A actions
    • Tactics used in activist campaigns, including publicity campaigns and, less commonly, putting forth concurrent shareholder proposals
    • Actions taken by companies during activist campaigns, including substantive responses such as increased share repurchases (which have been less frequent in 2016), governance changes, and tactical actions (which are relatively rare at this point).
  • Proxy Contests. Proxy contests, including:
    • Frequency in 2016 as compared to prior years
    • How many went to a vote, were withdrawn, or were settled
    • The number of seats sought, and relative frequency of short slates versus control slates
    • Full or partial success rates of contests
    • Trends in proxy advisor firms’ recommendations
    • Governance, structural or management changes made after the conclusion of contests
  • Announced Settlements. Recent trends in settlement agreements, including an increase in the frequency and speed of settlements, which is consistent with concerns raised by institutional investors that some companies may be settling too quickly and without broad consultation. This section also highlights common terms of settlement agreements, such as minimum holding levels, director pre-resignation, duration and scope of standstills, voting agreements, information sharing and expense reimbursement.
  • Potential Impact of SEC Universal Proxy Proposal. The potential implications for shareholder activism of the SEC’s recent proposal to require universal proxy cards, including the extent to which the ability of dissidents to include management nominees on their cards may give them an advantage in waging a low-cost proxy battle at companies with a concentrated shareholder base.
  • Potential Impact of Proxy Access. The relationship between proxy access and proxy contests, including limitations on the viability of proxy access as an alternative to proxy contests. [1] To date only one activist, GAMCO Asset Management, Inc., has made a proxy access nomination, though the company has rejected the nomination as non-compliant with its proxy access bylaw.
  • Steps Companies Should Take. Certain steps that companies should consider to enhance preparedness for a potential activist situation, including:
    • Identifying possible activist arguments in light of the company’s particular circumstances, and preparing responses
    • Preparing the board of directors on possible activist approaches, shareholder engagement efforts and developments in activist strategies
    • Engaging with institutional investors to advance mutual understanding on governance and strategic issues
    • Reviewing corporate bylaws in light of continuously developing market practices

Notes on the Scope and Sources of Data Used in the Complete Publication.

The information in the complete publication on proxy contests and other activist campaigns is based on the database maintained by FactSet Research Systems, Inc. on SharkRepellent.net, using a data run on November 8, 2016, supplemented as necessary by our own review of public information and other third-party sources. In order to provide an analysis relevant to our U.S. public company clients, we have not included campaigns at companies with a market cap of under $100 million and have not included campaigns at non-U.S. companies. We have followed the SharkRepellent categorization of campaigns as “proxy fights” or “other stockholder campaigns,” but have not included those categorized merely as exempt solicitations or Schedule 13D filings with no public activism. We have not included the mere submission of Rule 14a-8 proposals as “campaigns,” though the section “Types and Objectives of Activist Campaigns” discusses the use of shareholder proposals that were brought in conjunction with the activist campaigns covered in this publication. We have also excluded from the “other stockholder campaigns” category strategic acquisition attempts that involve unsolicited offers by one business entity to acquire another, though we have included takeover attempts involving unsolicited offers by private equity funds and other investors.

Data in the complete publication regarding hedge fund assets under management, performance and formation is based on the most recent Hedge Fund Industry Report issued by Hedge Fund Research (HFR), unless otherwise indicated. Other data sources, including CamberView Partners, Proxy Pulse (a Broadridge and PricewaterhouseCoopers initiative) and Preqin, are identified as they arise.

The complete publication, including footnotes, is available here.


1For a comprehensive discussion of proxy access, as well as public company governance, compensation and disclosure more generally, see the Public Company Deskbook: Complying with Federal Governance and Disclosure Requirements (Practising Law Institute) by our partners Bob Buckholz, Marc Trevino and Glen Schleyer, available at 1-800-260-4754 (1-212-824-5700 outside the United States) or http://www.pli.edu.(go back)

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