Activism In Context: Where We’ve Been, Where We’re Going

Arthur B. Crozier is Chairman and Gabrielle Wolf is a Director at Innisfree M&A, Inc. This post is based on their Innisfree memorandum. 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); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Activism In Context: Where We’ve Been, Where We’re Going [1]

Depressed Activism in H1 2020 Comes Rearing Back in Q4

COVID depressed activism campaigns in H1 of 2020 to the lowest level since 2014, as many activists recognized that proxy contests would distract issuers from focusing on the urgent task of adapting their businesses to a volatile market and changing world. Activists were also surely wary of appearing to take advantage of unanticipated market dislocation, due to concerns that such efforts would not be favorably viewed by institutional investors in particular, whose votes are crucial to winning proxy contests. That said, as the pandemic and resulting lockdown lasted longer than first anticipated and businesses successfully adapted, activists arose from hibernation and launched 30 new campaigns in Q4 2020. [2] According to Lazard, the number of U.S.-based activist campaigns in Q4 2020 represented a 200% increase from Q3 2020 campaign numbers and 34% of all 2020 campaigns. Of particular interest, one-fifth of the dramatic Q4 uptick was focused on targets with a market capitalization of at least $25B, [3] including Comcast, Disney, Public Storage, Intel and ExxonMobil.

Despite its slowdown in 2020, several developments, particularly in the last half of 2020, are likely to continue and to define the state of activism in 2021.

Number of Dissident Directors Seated in 2020 Surpasses Prior Years, Control Slates on the Rise

Activist pressure resulted in the seating of 131 directors in 2020, notwithstanding the downturn in activism campaigns. While 82% of these new directors were seated through settlements, a level in line with prior years, the total number of dissident directors was boosted to the highest level since 2014 by Starboard’s majority slate win at GCP Advanced Technologies (8 dissident directors elected to a 10-member Board) and Mack Cali’s eleventh-hour settlement with Bow Street Capital placing 8 dissident directors on a 9-member Board. Xerox had also nominated a control slate as part of its attempted takeover of HP, but later withdrew its offer and its nominations. Starboard’s recent nomination of eight candidates for Corteva’s 12-member Board indicates that control slates are likely to be a more frequent tactic than in prior years.

M&A-Focused Campaigns Will Likely Continue To be Prime Activist Focus in 2021, But Underlying Theses May Change

M&A focused campaigns were down slightly in 2020, but still represented the most frequent activist target, although there were significant shifts in the frequency of the underlying theses, compared to prior years. Sell the company campaigns were 19% of all M&A activism campaigns in 2020, down from 34% in 2019, likely because H1 2020’s volatile markets were inhospitable for M&A. [4] Break-up/divestiture campaigns increased to 42% in 2020, compared to 33% in 2019. [5] Bumpitrage, or activist campaigns to reject or improve announced deals, increased slightly from 32% in 2019 to 39% in 2020.

Activism in 2021, in turn, will be strongly affected by strength of equity markets, cash-saturated balance sheets, low interest rates and the resulting expected strong M&A rebound. Companies struggling with pandemic-related slips may face sell the company campaigns as a result, increasing the number of those campaigns compared to 2020. Similarly, we expect bumpitrage, or activist campaigns to reject or improve announced deals, to continue representing a substantial portion of M&A activism campaigns in 2021, especially as small cap companies with depressed stock prices are acquired on the cheap by peers whose stock prices rebounded following better crisis management.

PE firms will likely continue taking on activist roles [6] or teaming with activists in pursuing M&A focused campaigns, such as Cannae’s recent effort in tandem with Senator to force the sale of CoreLogic.

E&S Concerns Likely to Assume Greater Importance in Activist Campaigns

Developments in 2020 portend the growing primacy of E&S theses in activism campaigns. To the extent E&S concerns were featured in recent activism campaigns, they were typically woven into the activist’s messaging as window dressing to draw support from index funds and were not central to the activist’s platform. The common (mis)conception was that as economic animals, activists would only pay lip service to “fundamentally non-economic” E&S concerns. Investors, however, have come to recognize that E&S is inherently tied to long-term shareholder value. Indeed, two of the most popular E&S disclosure frameworks, TCFD and SASB, are formulated to help investors understand how an issuer’s E&S practices affect its financial condition and operating performance.

While E&S activism is in its nascent phase, it is primed to become a major driver of activism. As permanent shareholders who cannot “vote with their feet”, index funds already subscribe to the long-term focus that underlies E&S principles. The launch of new E&S activist funds, including Engine No. 1, Impactive Capital and Inclusive Capital Partners, is evidence that activists recognize the financially-material risks and opportunities related to sustainability dependencies. Engine No. 1’s nomination of four directors to the Board of ExxonMobil is premised on the argument that Exxon risks terminal decline if it continues to ignore the shift in consumer demands for cleaner energy. Traditional activist fund The Children’s Investment Fund (TCI) is working alongside As You Sow, the non-profit shareholder advocacy group focused on environmental and social corporate responsibility, to encourage 100 companies in the S&P 500 to adopt a “Say on Climate” proposal whereby shareholders are given the opportunity to vote on an issuer’s emission reduction plans. [7] Union Pacific, Monster Beverage, Charter Communications and Alphabet received Rule 14a-8 proposals on the topic. [8] Though it is unclear whether the three major index funds will support E&S activist slates in proxy contests, initial indications are positive. [9] BlackRock, Vanguard and State Street are demanding more fulsome E&S disclosures from their portfolio companies; the E&S activist campaigns seek to improve underlying E&S behaviors at many of the same blue-chip issuers. Such enhanced disclosures could provide fodder for E&S focused activists.

That said, it remains to be seen whether issuers will skate by in 2021 by more clearly communicating their sustainability performance data or whether investors will truly push them to improve their sustainability performance, including by setting and executing on science-based carbon emissions reduction targets.

Laggards who Failed to Manage COVID Crisis are Likely Targets

The dramatic rise in activist campaigns in Q4 2020 and numerous nomination submissions in YTD 2021 indicate that activist activity will not subside in 2021. Companies that did not successfully adjust to the new and highly competitive COVID economy, effectively manage their remote workforce, digitize their business connectivity, and reposition their businesses to changing consumer behavior will be ripe targets. [10] Activists have already taken aim at companies that lagged peers in adjusting their business models to the pandemic realities. Third Point targeted Disney by demonstrating that Disney+ did not take advantage of the increase in viewership caused by the pandemic, especially as compared to Netflix. Similarly, Third Point pushed Intel to replace its CEO after criticizing Intel for, among other things, falling behind Advanced Micro Devices, which took advantage of the pandemic-related increase in online gambling. In general, 2021 activist campaigns will likely have a lessened hurdle to clear when soliciting for votes: in light of the impacts of COVID, it will be easier to demonstrate that change is warranted at companies that have lagged their peers. Instead, activists and incumbent Boards will have to convince institutional investors that their respective slate will oversee and successfully execute on the necessary transformations in the coming years.

Fasten your seatbelts. 2021 will be a wild ride. [11]

Endnotes

1“I have great respect for the past. If you don’t know where you’ve come from, you don’t know where you’re going”. Maya Angelou(go back)

2Information from Lazard’s 2020 Review of Shareholder Activism.(go back)

3Information from Lazard’s 2020 Review of Shareholder Activism.(go back)

4Information from Activist Insight database; Lazard’s 2020 Review of Shareholder Activism.(go back)

5Information from Activist Insight database; Lazard’s 2020 Review of Shareholder Activism.(go back)

6PE firms are also using activism tactics in non-M&A situations, e.g., KKR at Dave & Busters, New Mountain at Virtusa.(go back)

7According to the Wall Street Journal, TCI is ready to launch proxy contests to force adoption of a “Say on Climate” vote if targeted companies do not voluntarily do so following engagement.(go back)

8In response to pressure from TCI and As You Sow, Unilever, Royal Dutch Shell and Moody’s each announced it will implement a “Say on Climate” vote at its 2021 annual meeting and plans to seek advisory votes every one to three years on any changes to its net-zero plan.(go back)

9Though very different than electing an activist nominee, BlackRock voted to support a “Say on Climate” proposal at Spanish airport operator Aena SA in 2020.(go back)

10Indeed, a key element in Trian’s platform in its 2017 proxy contest at Procter & Gamble was the push to recognize consumer demands for sustainable products and packaging.(go back)

11Cf. “Fasten your seatbelts. It’s going to be a bumpy night. Margo Channing, All About Eve, (1950)(go back)

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