2021 Trends in Shareholder Activism

Melissa Sawyer, Marc Treviño, and Lauren Boehmke are partners at Sullivan & Cromwell LLP. This post is based on their Sullivan & Cromwell memorandum.

A. ESG Activism Comes to the Forefront

Activism focused on ESG—environmental, social and governance criteria, with special emphasis on “E”—has gained significant prominence and momentum this past year. Engine No. 1’s successful proxy fight against ExxonMobil, arguably the most prominent campaign of the season, marked the first proxy contest to center on ESG theses as a primary campaign objective.

The emphasis that institutional investors place on ESG has clearly been an accelerant for activism. A small and newly formed investment firm, Engine No. 1, launched its campaign seeking four board seats in order to push ExxonMobil to reduce its carbon footprint and improve its climate-related disclosures—while holding only .02% of the company’s shares. Importantly, Engine No. 1 did not campaign for ESG solely for the sake of ESG. Engine No. 1 argued that ExxonMobil was underperforming and that its underperformance was due in large part to its inability to develop long-term strategies regarding renewable energy. To further ground its ESG strategies in economic analysis, Engine No. 1 recently created a “Total Value Framework” in conjunction with The Wharton School, which quantifies sustainability initiatives in tangible dollars and, in turn, long-term financial value.

Engine No. 1 won three board seats at ExxonMobil, and a fourth board seat turned over during the pendency of the campaign. Engine No. 1’s partnership with CalSTRS, the second largest pension fund in the United States, and support from the largest passive institutional investors, BlackRock, Vanguard and State Street (who collectively owned approximately 20% of ExxonMobil’s shares), proved critical to the success of the activist’s campaign.

The growing potential for ESG activism also is partly attributable to the current regulatory landscape in which policymakers have engaged in an unprecedented amount of ESG rulemaking. For example, the U.S. Department of Labor proposed a rule that would facilitate retirement plan fiduciaries’ ability to consider climate change and other ESG factors when they select investments and exercise shareholder rights. [1] In addition, new SEC rules on climate disclosure expected in early 2022 will likely require more specific, prescribed quantitative and qualitative information about climate risks and opportunities. [2] Meanwhile, BlackRock’s announcement that it intends to pass-through voting rights to certain of its underlying investors (see “Voting in Proxy Contests and the Continued Importance of Shareholder Engagement” below) may make it more likely that shares managed by BlackRock will be voted in favor of ESG-oriented campaigns.

Still, whether Engine No. 1’s success can be replicated by other activists is yet to be seen. Engine No. 1 spent 5% of its $250 million under management on the ExxonMobil campaign, and its campaign objectives require ExxonMobil to make significant changes over a long period of time, which is in sharp contrast to an activism thesis like M&A that has a shorter time horizon. However, the market may be willing to give issuers credit in the shorter-term for their longer-term ESG goals, which would provide ESG activists an opportunity to capture gains upon exit from their investments.

The “show of support” model is another approach activists and other investors with respected track records may use, subject to compliance with securities laws, to generate enthusiasm in their investments and align with a company on their views of the company’s future. For example, the day before General Motor’s investor day in October 2021, Engine No. 1 revealed its stake in GM alongside its white paper detailing the role that manufacturers such as GM will play in the automotive industry’s transformation towards sustainability. In contrast with its tense relations with ExxonMobil, Engine No. 1 touted its two-way conversations with GM as “very constructive and collaborative,” explaining that it revealed its stake in GM as a show of support for the company’s goals to go 100% electric by 2035. Having a healthy dialogue with a wide range of investors, including activists, may allow a company to avoid a future activist challenge.

Activists have not yet articulated a clear blueprint for the successful expansion of ESG activism into other industries. Oil, gas and energy companies are the most obvious targets of environmentally-focused activism campaigns. For example, Shell was attacked by an activist investor, Third Point, which argued the company should be split into multiple standalone companies, including separate oil and gas and renewables divisions. After oil and gas, the question becomes whether, how and on what time frame environmentally-focused activist strategies can be extended successfully. One potential target may be the banking industry in respect of banks’ financing of oil, gas and energy companies. For example, a new commission-free trading app called Iconik launched recently with the goal of crowdsourcing shareholder activism by allowing users to collectively vote their shares. One of Iconik’s first campaigns is directed at JPMorgan Chase, which has been the subject of calls to stop lending to fossil-fuel companies. [3]

B. Diversity in the Board Room

Diversity in the board room is another ESG theme that has come into sharper focus in shareholder discourse this past year. Prominent institutional investors such as BlackRock and State Street have reaffirmed this theme by continuing to adopt voting guidelines indicating that they will vote against companies that do not live up to their respective diversity standards. [4] U.S. governmental and self-regulatory bodies have also announced their own diversity initiatives. California’s AB 979, signed into law by Governor Newsom in September 2020 and effective as of January 1, 2022, requires publicly held companies headquartered in California to have board members that are female and/or from underrepresented communities. Similarly, Rule 5605(f) of the Nasdaq Stock Market, approved by the SEC this August, will phase in “comply or explain” diversity requirements for Nasdaq listed companies. The SEC has also indicated plans to publish proposed rules regarding human capital management disclosures and corporate board diversity.

Despite this focus on diversity by institutional investors and regulators, we have not yet seen significant evidence of activist focus on candidate diversity in their campaigns. Notably, the failed Legion Partners campaign against Genesco Inc. is one of the only 2021 campaigns that expressly underscored an activist nominee’s diversity and experience in ESG initiatives as part of its campaign. [5] In the absence of disclosure from the activists regarding the diversity characteristics of their candidates, it is difficult to assess whether activists’ board slates are becoming more diverse (and likewise difficult to assess the diversity characteristic of activists themselves).

Although lack of board room diversity may not likely be the sole basis for an activism campaign, in the future activists may nominate more diverse candidates and attempt to contrast the diversity of their candidates with the diversity characteristics (or lack thereof) of the issuer’s incumbent directors. In addition, we may observe activists preemptively criticizing boards that fall short of achieving various diversity targets.

C. “Short-Term” Strategies and SPACtivism

We continue to observe investors deploying short selling strategies targeted at individual issuers. This strategy has been used heavily against SPACs: the aggregate short position in SPACs was at $2.7 billion as of March 2021, more than triple the $765 million at the end of 2020. [6] Given sustained SPAC activity and the need for the significant number of SPACs that have IPO’d in the last year to find acquisition targets in the near term (as of September 2021, more than 400 SPACs in the U.S. were reported to be looking to de-SPAC [7]), we expect companies that went public via a de-SPAC transaction to become attractive targets for activists in a few years, particularly if the company’s actual performance does not meet the projections disclosed during the de-SPAC process. We may see activists targeting such companies use rhetoric similar to that used by short-sellers to challenge de-SPAC-ed companies, which largely focus on allegations that a company exaggerated its financial performance or prospects.

In addition, many de-SPAC-ed companies have gone public with corporate governance features that are not aligned with the governance policies of ISS, Glass Lewis and institutional investors. Data shows that the governance practices of these de-SPAC-ed companies are often less shareholder friendly as compared to those of other public companies. [8] For example, 69% maintain a classified board, 66% maintain director removals for cause only, 19% allow shareholders to call special meetings, and 80% require supermajority shareholder voting on certain issues (including over 60% requiring supermajority voting to amend bylaws). These practices, already criticized by ISS, Glass Lewis and institutional investors, may provide a line of criticism for activists as well.

D. M&A-Related Activism

Despite global M&A deal volume setting record highs in 2021, [9] public M&A activism has been lower on an absolute basis in 2021, with fewer companies in both the U.S. and abroad publicly receiving M&A-related demands than in 2020. [10] At the same time, such M&A activism has risen as a percentage of economic demands made by activists. [11] In large part, the activists’ public M&A objectives were targeted at opposing deals (although in some cases activists used “bumpitrage” tactics to improve price terms for targets). [12] As of August 2021, 16 companies have publicly faced opposition to M&A deals in the U.S., versus nine during the same period last year. [13] Meanwhile, activists advocating for U.S.-based issuers to engage in M&A in the same period fell from 49 in 2019, and 30 in 2020, to 19 in 2021. [14]

One recent example of M&A activism is Carl Icahn’s opposition to Southwest Gas Holdings Inc.’s $1.97 billion acquisition of Questar Pipelines. [15] In its letter to shareholders and the board, Icahn Enterprises argued Southwest Gas was overpaying for Questar Pipelines and asserted numerous governance related critiques of the board. [16] Southwest Gas adopted a short-term shareholder rights plan in response to Icahn’s intent to launch a proxy contest to replace the entire board, after which Icahn Enterprises launched an unsolicited tender offer for the company’s outstanding shares. [17] In response, Southwest Gas’s board of directors asked shareholders to reject the tender offer and named two new directors unrelated to Icahn. [18] On December 2, 2021, Icahn filed suit in the Delaware Chancery Court seeking a temporary restraining order to prevent Southwest Gas from selling stock below Icahn’s tender offer price and/or to investors friendly to Southwest Gas to purportedly prevent the company from interfering with Icahn’s proxy campaign. [19] At the time of this post, the campaign remains ongoing.

As reported last year, we also continue to observe a convergence of private equity and activism strategies. Activist investors continue to pursue traditional private equity strategies — as of August 2021, 10 companies have become targets of attempted takeovers by funds managed by activists, and activists continue to form their own SPACs. Elliott continues to be an example of an activist hedge fund embracing private equity strategies. The fund launched two SPACs in 2021 (Elliott Opportunity I and Elliott Opportunity II), completed a buyout of public company Cubic Corp. in partnership with private equity firm Veritas Capital in March 2021, and acquired Paper Source Inc. in May 2021 as part of Paper Source’s Chapter 11 process. Other activists have also engaged in M&A in 2021, including 40 North Management’s $4.6 billion takeover of W.R. Grace & Co. completed in September 2021 [20] and Carl Icahn’s tender offer for Southwest Gas discussed in the prior paragraph. [21] Some activists such as Elliott and Icahn have the resources, and in some cases the appetite, to acquire public companies. However, it is also possible that in some cases an activist may make a public, unsolicited takeover approach solely as a “stalking horse” tactic — which may be combined with a proxy contest — to put a company “in play” for other potential buyers as part of a broader M&A campaign objective.

E. Voting in Proxy Contests and the Continued Importance of Shareholder Engagement

As previously noted, Engine No. 1’s campaign served as a reminder that institutional investor support is critical to winning or losing a shareholder vote. Engine No. 1’s success can be contrasted with Starboard’s pursuit of three board seats at Box, Inc.’s 2021 annual meeting, which ended in defeat for Starboard — with Box receiving support from both KKR (which had recently invested $500 million in the company) and the company’s institutional investors such as Vanguard. Securing institutional investor support during an activism campaign can be significantly supported by building strong relationships through shareholder engagement on a clear day and potentially by bringing in “white squire” investors through private placement transactions.

However, the landscape of institutional investor voting may shift in the coming years. BlackRock recently announced that investors in certain of its index strategies (accounting for approximately 40% of the $4.8 trillion index equity assets managed by BlackRock) will be eligible to cast their own proxy votes starting in 2022. In 2019, Vanguard announced a similar, albeit more limited, decision to give back some of its voting power to the managers of Vanguard’s externally managed active equity funds (about 9% of Vanguard assets). Although much of BlackRock’s and Vanguard’s voting power will still remain in the hands of their investment stewardship teams, these shifts in voting policy could meaningfully impact the outcome of activist proxy contests. Currently, BlackRock tends to side with management in proxy contests — during the 2020-21 proxy season, BlackRock voted for one or more directors on an activist slate in only 15% of U.S. proxy contests. [22] If a sizeable portion of the shares owned by BlackRock vote differently from BlackRock in proxy contests, this change is likely to benefit activist slates and may provide proxy advisory firms with increased influence over voting results. In light of these changes, combined with the move to universal proxy cards for proxy contests occurring after August 31, 2022 (discussed in more detail below under “Other Developments Impacting Activism”), issuers will be required to work with their advisors to navigate a new set of best practices for institutional investor engagement and proxy contest voting.

As investors from seemingly disparate ends of the playing field share their strategies and even partner together, companies would be wise to stay up to date on the makeup of their shareholder base, regardless of investment strategy or theses. Issuers can use a stock watch service to monitor movement in the company’s stock, including potential broker dealer accumulations and increases in derivative activity, which can be signals of an impending campaign. Issuers can also monitor hits to the company’s website and the creation of websites using derivations of the company’s name, as activists sometimes create websites to host their campaign white papers, press releases and SEC filings.

F. Industry Spotlight: Regulated Utilities

During the last decade, publicly traded regulated utilities had been largely insulated from the scrutiny of activists. Although we have long said that no company is fully immune from activism, the combination of regulated returns and overlapping federal and state utility regulations (including regulations that require the approval of acquisitions of voting securities) have historically made activists more wary of targeting regulated utilities than companies in other industries. However, the rate of change in the utility industry has increased over the last several years, and more change is expected as a consequence of new technology and consumer driven demand for renewable energy and fuel choice, leading to additional activist interest in the industry. Elliott has been particularly active in this industry, most recently achieving a settlement with Duke Energy in November 2021. Icahn entered into a settlement with FirstEnergy Corp. in March 2021, for which Icahn sought approval from the Federal Energy Regulatory Commission before seating its two employee directors, and launched its campaign at Southwest Gas in October 2021.


1See U.S. Department of Labor, US Department of Labor Proposes Rule to Remove Barriers to Considering Environmental, Social, Governance Factors in Plan Management (Oct. 13, 2021).(go back)

2See SEC Chair Gary Gensler, Prepared Remarks Before the Principles for Responsible Investment ‘Climate and Global Financial Markets’ Webinar (Jul. 28, 2021).(go back)

3See The New York Times Dealbook, Crowdsourcing Shareholder Activism (Dec. 15, 2021).(go back)

4See BlackRock Investment Stewardship: Proxy Voting Guidelines for U.S. Securities (published Dec. 2021 and effective Jan. 2022); State Street Global Advisors, Proxy Voting and Engagement Guidelines (Mar. 2021).(go back)

5See Schedule 14A for Genesco Inc. filed by Legion Partner Holdings, LLC on June 7, 2021 with the SEC.(go back)

6See CNBC, Short sellers are betting more against SPACs (Mar. 16, 2021).(go back)

7See Bloomberg Law, Analysis: 400+ Trading U.S. SPACs Still Seeking Merger Targets (Sept. 15, 2021).(go back)

8Dealpointdata, generated as of December 2, 2021.(go back)

9See Reuters, Pandemic Recovery Fuels Deal Craze as Third-Quarter M&A Breaks All Records (Sept. 30, 2021).(go back)

10See Insightia, M&A Activism 2021 (Oct. 2021) at 4.(go back)

11Id.(go back)

12Id.(go back)

13Id. at 19.(go back)

14Id.(go back)

15See Dominion Energy, Dominion Energy Announces Agreement to Sell Questar Pipelines to Southwest Gas (Oct. 5, 2021).(go back)

16See Carl Icahn, Open Letter to Southwest Gas Board of Directors (Oct. 5, 2021).(go back)

17See Schedule to Tender Offer Statement for Southwest Gas Holdings, Inc. filed by Carl C. Icahn on October 27, 2021 with the SEC; Carl Icahn, Open Letter to Southwest Gas Board of Directors (Oct. 25, 2021).(go back)

18See Reuters, Southwest Gas Asks Shareholders to Reject Carl Icahn’s Tender Offer (Nov. 9, 2021).(go back)

19Icahn Partners LP. v. John P. Hester, et al., case number 2021-1031-KSJM (Del. Ch. Dec. 02, 2021).(go back)

20See Grace, Standard Industries Complete Acquisition of Grace (Sept. 22, 2021).(go back)

21See Schedule to Tender Offer Statement for Southwest Gas Holdings, Inc. filed by Carl C. Icahn on October 27, 2021 with the SEC.(go back)

22See Insightia, The Proxy Voting Annual Review 2021 (Sept. 2021) at 20.(go back)

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