Hedge Fund Activism

a. The Activism Landscape

Recent years have consistently seen elevated levels of activity by activist hedge funds, both in the U.S. and abroad. Such funds often seek the adoption of corporate policies that would increase short-term stock prices, such as increasing share buybacks, selling or spinning off one or more businesses of a company or selling the entire company. There has been a resurgence of activism activity after the temporary drop during the Covid-19 pandemic; 2023 saw a 9% increase in global activism campaigns compared to 2022, which itself saw a 38% year-on-year increase in the number of campaigns launched in 2021. Approximately 17% of S&P 500 companies have a known activist holding more than 1% of their outstanding shares. Activists’ assets under management (“AUM”) have grown substantially in recent years, with the 50 most significant activists ending 2023 with approximately $156 billion in equity assets. Matters of business strategy, operational improvement, capital allocation and structure, CEO succession, M&A, options for monetizing corporate assets, stock buybacks and other economic decisions have also become the subject of shareholder referenda and pressure, with operational matters attracting particular attention amid the ongoing economic uncertainty. Hedge fund activists have also pushed for governance changes as they court proxy advisory services and governance-oriented investors, particularly as they seek board representation, often through one or a few board seats or, in certain cases, control of the board. Activists have also increasingly targeted top management for removal and replacement by activist-sponsored candidates. In addition, activists have worked to block proposed M&A transactions, mostly on the target side but sometimes also on the acquiror side, with the goal of either sweetening or scuttling the transaction.

The number of public campaigns in 2023 continued the return to the pace of activism activity before the pandemic. Companies with a market capitalization in excess of $500 million at the time of the campaign announcement were targeted by activists via approximately 252 campaigns, a 7% increase in the number of campaigns compared to the number of campaigns in 2022. Of the 92 proxy fights launched in the United States in 2023, activists scored wins in only 19 fights, with many (25%) contests resulting in an announced settlement, consistent with trends over recent years.

While the usual players maintained their outsized role, a significant proportion of 2023 campaigns were led by new or occasional activists. Notable examples include Politan Capital’s campaign at Masimo, Anson’s campaigns at Twilio and Globestar, HG Vora’s campaign at PENN Entertainment and Ryan Cohen’s campaign at Nordstrom, although, it is worth noting that some of these “new” activists have long histories of agitating behind the scenes. As demonstrated time and again, no company is too large, too small, too new or too successful to be immune from activism. Activists are increasingly working together—or “swarming”—marquee mega-cap companies, including to push an M&A thesis, as reflected by BlueBell Capital, Artisan and Inclusive Capital Partners’s collective push for a breakup of Bayer. Activists are also persisting year-over-year—as evidenced by Nelson Peltz’s successive campaigns against Disney in 2023 and 2024—with activists returning more prepared and potentially more successful.

The number of campaigns launched against European companies with a market capitalization in excess of $500 million also increased in 2023 to 69, compared to 60 in 2022. UK companies were the targets for 41% of all activist campaigns in Europe, continuing a recent upward trend in UK activism activity driven by leading large-cap activists. In Asia, activist activity increased substantially in 2023 to 44 campaigns, exceeding the prior record of 33 in 2020. Consistent with prior years, Japanese companies continue to be the primary target of activism activity in Asia (approximately 47% of total campaigns in Asia in 2023).[1]

ESG Issues. ESG issues continued to draw the attention of activists in 2023. Notably, in November 2023, the Strategic Organizing Center (“SOC”), a labor organizing group affiliated with the Service Employees International Union, the Communications Workers of America and the United Farm Workers of America, nominated three director candidates to the board of directors of Starbucks with the goal of addressing labor issues relating to freedom of association and other human capital matters. The overall number of ESG-related shareholder proposals submitted in 2023 continued to increase, notwithstanding declines in overall shareholder support for such environmental and social proposals. The “anti-ESG” backlash continued throughout 2023 in the form of public letters, congressional subpoenas and litigation; nevertheless, shareholder support for “anti-ESG” proposals continues to be muted.

SEC Developments: Universal Proxy. The 2023 proxy season brought to life the SEC’s new universal proxy rules, which took effect on September 1, 2022. The rules require, among other things, that the company and dissidents list the names of all director candidates on their proxy cards, regardless of whether the candidates were nominated by the board or the dissident. During the 2023 proxy season, there were fewer campaigns that went to a vote as compared to the prior year, with settlements up slightly over the previous year. Although the universal proxy rules did not bring about a groundswell in the number of activist campaigns, or otherwise materially change the success rate of activist campaigns, the threat of activism campaigns continues to be a relevant factor for boards contemplating acquisitions or on the receiving end of unsolicited M&A.

SEC Developments: Beneficial Ownership. In October 2023, the SEC adopted longawaited amendments to Regulation 13D-G. The new rules, which took effect on February 5, 2024, modernize the beneficial ownership reporting requirements by shortening the 13D filing deadline from 10 calendar days to five business days. The SEC also established that amendments for material changes, previously required to be filed promptly after the date on which such change occurs, must now be filed within two business days. The SEC also clarified 13D disclosure requirements with respect to derivatives holdings, and it provided guidance regarding when an investor’s use of certain cash-settled derivative securities may confer beneficial ownership. While the new rules could have gone further to fully alert investors to potential changes in corporate control (and in some cases notably did not go as far as the original proposed rulemaking), they are an important step forward for market transparency and help address some of the deficiencies of the prior rules, particularly in settings involving hostile M&A or where activists have M&A plans or proposals. These amendments (while still well short of the updating reforms for which many, including our firm, have been advocating) represent the most significant reforms to beneficial ownership reporting requirements since the rules were adopted in 1968 and will increase the timeliness and quality of information that all market participants will have.

Delaware Developments: Advance Notice Bylaws. As a response to the potential influx of activist or stockholder director nominations due to the universal proxy rules discussed above, some companies have amended their bylaws to include robust advance notice provisions that require, among other things, detailed disclosure about both the nominated candidate and the nominating party. The disclosures are often intended to assess the nominator’s and nominee’s pecuniary interests and any other arrangements that could affect the nominee’s judgment as a director, but the extent of the required disclosures can also risk being overly broad or restrictive. For example, as discussed in greater detail in Section VI.C, Masimo Corporation’s advance notice bylaw amendments that required a nominating shareholder to disclose, among other things, the identity of an activist nominator’s limited partners was withdrawn after they were challenged. Nevertheless, advance notice bylaws were the basis for the rejection of a number of stockholder nominations in 2023, a number of which resulted in litigation.[2] Courts have generally enforced reasonable advance notice bylaw provisions and board rejections of flawed stockholder nominations, and the advance notice bylaw provisions which have been struck down by Delaware courts to date have generally gone further than the more “market standard” advance notice bylaw amendments many companies have in place. However, the Delaware courts have on occasion enjoined certain advanced notice bylaws, such as in late 2023, when the Court of Chancery found in Kellner v. AIM ImmunoTech Inc. that several of the company’s advance notice provisions were “overbroad, unworkable, and ripe for subjective interpretation by the Board,”[3] threatening board entrenchment—but the court nevertheless upheld the company’s rejection of the nomination. The bylaw provisions criticized by the court included, among others, (1) a requirement to disclose arrangements, agreements or understandings related to a nomination—an otherwise proper requirement—whose reach swept too broadly, particularly with the inclusion of “acting in concert” verbiage; (2) a requirement to disclose all known supporters of a nomination; and (3) an “indecipherable” and sprawling ownership disclosure requirement.[4]

b. M&A Activism

A large portion of shareholder activism is oriented wholly or partially towards M&A, a trend which continued into 2023 with over 40% of all activist campaigns featuring an M&Arelated thesis. There are three types of M&A activism, each accounting for about a third of M&A activism campaigns in 2023: first, campaigns to sell the entire target company; second, campaigns aimed at breaking up a target company or having the target company divest a non-core business line; and, third, campaigns that attempt to scuttle or improve an existing deal. “Sell the company” campaigns were a key driver (slightly ahead of the other two last year), reflecting an increasing push by activists for companies to explore or pursue transformative M&A as an alternative to perceived “stalled” or “failed” stand-alone strategies. Activists also commonly pushed for breakups or divestitures in portfolio-based campaigns. In addition, some activists launched (often unsuccessful) campaigns after a transaction was announced to scuttle or sweeten an announced deal. Among the notable M&A-focused campaigns in 2023 was Trillium Capital’s push for Getty Images to pursue a sale of the Company and Twilio’s defense against multiple activists pushing for either a sale of the whole company or divestitures to break up the company.

c. Tactics

Activists have also become more sophisticated in their methods. Recent campaigns have seen activists: hire investment bankers and other seasoned advisors to draft “white papers”; aggressively use social media and other public relations techniques; secretly consult with traditional long-only investment managers, institutional shareholders, sell-side research analysts, journalists and former (or even current) employees of target companies; nominate director candidates with executive and industry expertise; invoking statutory rights (such as those under Section 220 of the DGCL) to obtain a company’s nonpublic “books and records” for use in a proxy fight or aid in challenges to M&A activity; deploy precatory shareholder proposals; and be willing to exploit vulnerabilities by using special meeting rights and acting by written consent. Special economic arrangements among hedge funds continue to appear from time to time, as have socalled “golden-leash” arrangements between activists and their director nominees, whereby the activist agrees to pay a director nominee for the nominee’s service on, or candidacy for, the board. Many companies have developed measures to reveal these arrangements through carefully drafted bylaw provisions that address undisclosed voting commitments and compensation arrangements between activist funds and their director nominees.

Link to the full memo.