Anatomy Of A Proxy Fight
by Rachel Posner
Proxy season 2014 has seen activist investors
pushing hard on issues like strategy, stock
buybacks, board qualifications, and executive
pay. While boards and managers are doing
more to engage the activists (including offers of board seats), the classic proxy fight,
pitting the company against “barbarians at
the gate,” continues in corporate America.
What are the elements that make up these
boardroom battles? What can smart companies learn from past successes and failures?
Carl Icahn of Icahn Enterprises, Dan Loeb of Third
Point, Nelson Peltz of Trian Partners and David
Einhorn of Greenlight Capital: These legendary
shareholder activists, among others, are seen either as predators or as rescuers forcing necessary
corporate change, depending on your perspective.
They represent the rising influence of activism and
reinforce the need for boards to prepare for a potential proxy fight from shareholders who may not
have name recognition, but can still leave turmoil
and disruption in their wake.
Activist Insight reported that in January 2014 alone,
31 companies were targeted by activist investors in
regulatory filings, suggesting that the 2013 total of
237 proxy fights is already being eclipsed. Highprofile fights like that of Pershing Square Capital
and Herbalife, Men’s Wearhouse and JoS. A. Bank
have dominated the news, with activist campaigns so
far in 2014 crossing several industries, particularly
technology, healthcare and retail.
Activism is fueled in part by huge stashes of cash,
including $1.5 trillion on the balance sheets of
non-financial firms, according to Moody’s Investor
Services. Excess cash and low borrowing costs favor
activist demands for stock buybacks, dividends and
sales of cash-generating assets. Even Apple, perhaps
the most powerful brand in the world, became a target because of its $160 billion in cash. (In February
2014, CarI Icahn dropped his push for $50 billion
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in stock buybacks by the company.)
Activists are also benefitting from increasing investor skepticism towards boards and management.
Because of that mistrust, activists find more willing
listeners for their arguments. Even the Securities
and Exchange Commission added credibility last
December when Chair Mary Jo White referred to
the “widespread acceptance of many of the policy
changes that so-called activists are seeking to effect.”
Increasing pressure to improve shareholder returns
in today’s short investment windows is widening
the playing field, and these days it is not just hedge
funds taking on activist roles. Money is flowing
into activist funds from institutional investors like
corporate and state pension funds and endowment
funds, sources that years ago would never have
considered aligning themselves in any way with
activists. Against this backdrop, activists have tried
to shed their image as bullies by moderating their
tactics and becoming more constructive, intent on
reinventing themselves as shareholder advocates as
opposed to the corporate raiders of old.
No one expects any lessening of activist initiatives against susceptible corporate targets.
All components working together contribute to
more activity, driving assets managed by activist
hedge funds to a new high of $93 billion in 2013,
up from $65.5 billion in 2012, according to Hedge
Fund Research. They also reported that activist funds
returned about 18 percent to investors in 2013 compared to the industry-wide average of nine percent.
The debate continues though. Do activists protect
shareholder interests and increase the value of the
world’s great corporations? Or, as claimed by opponents, are companies impacted by activists too
Rachel Posner is executive vice president, corporate advisory
and chief marketing officer with American Stock Transfer &
Trust Co. [www.phoenixadvisorsast.com]
PROXY FIGHT
often left with greater debt and damaged credit ratings? The conflict will continue, but even so, no one
expects any lessening of activist initiatives against
susceptible targets.
Dissident hedge fund shareholders have obtained
board seats either by winning proxy contests or
by successfully negotiating board nominees with
companies anxious to avoid a fight. Institutional
Shareholder Services (ISS) estimates that activists
won board seats in 68 percent of proxy fights in 2013.
American Stock Transfer & Trust (AST) found
that in 2013, removal of a CEO or board member
was a more common activist objective than stock
buybacks, dividends and spinoffs. In addition, The
Wall Street Journal reported that, in the first two
months of 2014, activist investors were granted
one or more board seats at 16 U.S. companies, the
most since 2009, when 22 campaigns at 21 distinct
companies resulted in board seats.
Boards are vulnerable when they lack the expertise required to advise the company as it moves to
new markets, fail to recognize major problems, or
are unwilling to challenge management. All boards
should be constantly assessing their performance and
the strength of the company’s governance provisions.
Activists also look for companies with missed
guidance or corporate governance issues. A
CEO crisis or a CEO-board conflict can also
signal weakness to activists.
Certain characteristics put a company at risk of an
activist attack by individual funds or “wolf packs”
of hedge funds that band together to increase their
influence. As noted, factors include assets prime for
spinoff and strong cash balances. Activists also look
for companies with missed guidance or corporate
governance issues and challengeable accounting
practices. A CEO crisis or a CEO-board conflict also
signals weakness to activists. Companies in these
situations need strategic plans to protect themselves.
Once activists home in on their targets, they push
for the actions they expect will boost the value of the
stock. They accumulate stock to build their influence,
often in combination with over-the-counter options
that stay under the radar because they are not traded
in the open market. They sometimes use vehicles
like broker-dealer swaps to defer filing requirements,
convertibles or other debt structures. They have
many ways to acquire significant positions before
firms recognize they are being aggressively targeted.
The best defense is a good offense, and whether
or not an activist attack is imminent, all companies
need preemptive strategies for protection. Monitoring
trading volumes and changes to your shareholder base
are the first steps in identifying potential activists.
Due diligence to research a real or potential threat
and learning about the activist’s track record with
other companies are also basic preparation.
Once a firm is targeted, communications take
on a whole new level of importance. In an activist
situation, the slightest error, spoken or written, can
and will be used to full negative effect. There are no
shortcuts to developing a communications strategy
that includes messages for shareholders and the
media that are tightly adhered to in all communications. Spokespeople need to be prepared for tough
questions. Regular team meetings will be needed
to gauge progress and address unexpected events.
Activists will reach out to solicit information
from directors and establish lines of communication
with dissatisfied investors. They use every channel
of communication available, far beyond the reach
of traditional letters, phone calls and meetings.
Today, activists wage their battles over Twitter and
Facebook, making the Internet and social media
strategic components of any company’s investor
relations strategies.
In addition to its proxy statement and fight letters,
activists and targets typically try to sway shareholder
sentiment and win votes by issuing press releases,
conducting media interviews and making presentations to investors. Target companies will ask shareholders to speak out in favor of their campaign and
meet with a proxy advisor and large shareholders. A
company should have a general communication plan
for proxy fights even before a specific fight begins.
While communication with shareholders is a priority at all times, it takes on greater significance when
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Rachel Posner
The Proxy Countdown
A Typical Battle Plan
45 to 40 days before the stockholder meeting: Filing of
definitive proxy materials, issuing a press release with
first fight letter; mailing the “stop, look, listen” letter.
38 to 32 days: Mailing the second fight letter, issuing
a press release.
31 to 24 days: Mailing the third fight letter, issuing a
press release.
21 to 14 days: ISS meetings; Glass-Lewis outreach;
issuing a press release with the fourth fight letter.
14 to 7 days: ISS, Glass-Lewis decisions; both parties
issuing press releases when decisions are made.
10 to 7 days: Mailing the fifth fight letter, issuing a
press release.
5 to 2 days: Issuing open stockholder letters as press
releases, as appropriate.
Day 0: Stockholder meeting.
a company is under attack. A proxy contest cannot
be won if shareholders already feel that management
or the board has a record of being unresponsive.
Well-informed shareholders who find management
accessible and open are more likely to support the
company in bad times as well as good.
Activists will reach out to other shareholders
for support, and begin to recruit director
candidates to serve on their board slate.
Activists take a series of preliminary steps in advance of a proxy contest. Shareholders who cross
the five percent ownership threshold are required to
file a Schedule 13D and discuss their current intentions with respect to the company. As the contest
progresses, they are required to amend the 13D
filing, providing a play-by-play of their activities.
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Activists will privately or publicly advocate for
change at the company through letters to the board
of directors, requests for meetings with management, distribution of press releases and interviews
with the media. Activists will also reach out to other
shareholders to gain and gauge support, helped by
the wide range of communications channels making
interaction easier than ever.
Next, they begin to recruit director candidates to
serve on their board slate for the target company. The
focus today is more on independent director candidates than employees or shareholder representatives.
Once a proxy solicitation begins, almost all investor relations and employee communications will be
viewed as solicitation activities and require appropriate filings with the SEC. The timeline for a typical proxy fight is 45 days, with the steps diligently
executed through guidance from legal counsel and
investor relations advisors. The steps run from the
official start of the proxy fight through to the stockholder meeting (see box at left).
Throughout the IR and public relations campaign,
the company typically plans one-on-one meetings
with major stockholders and briefings with reporters
around tightly constructed messages. A telephone
campaign to major stockholders can also be effective.
Managing a proxy fight. All proxy fights
are intense and difficult, but the process is eased
somewhat when boards and executives have a clear
understanding of the governance rules, and the steps
and behaviors that contribute to the best possible
outcome.
Proxy fights take strategy, planning and discipline.
The following guidelines can help companies successfully navigate a proxy fight:
Know your company’s weak spots. Firms that
constantly assess their current or potential vulnerabilities have a better chance to address problems
before activists swoop in. When potential weaknesses are identified and strategic plans are in place,
shareholders gain more confidence in boards and
management teams to work successfully through
challenges.
Identify and reinforce your core messages.
Shareholders focus on company performance, so
PROXY FIGHT
boards and management need to reinforce clear proof
points of the firm’s success (strategy, operations and
finances) to help stave off activists’ attacks.
Communicate. Soliciting feedback and showing
respect for issues raised by investors can boost their
level of support for the company in a proxy fight.
Regular communication can help you determine
whether shareholders are willing to go on the record
on the company’s behalf. By the time a dissident’s
intentions are clear, it may be too late to win shareholder support if communication has not been open
and ongoing before the attack.
Engage. A record of shareholder engagement
shows dissidents that the company welcomes opportunities for dialogue rather than opposing any
ideas that challenge the status quo. Companies that
engage with dissidents are better informed about
their positions and, by extension, better armed to
protect their firms.
Stay focused on the facts. Target companies do
best when they rely on facts to undermine the dissident’s position. Counterattacks, hostility and rhetoric
suggest that the company is resorting to noise rather
than logic to make its case. Stick to well-built, factbased arguments to defuse the dissident’s claims.
Stress board independence. Dissidents have
made independent boards a battle cry in many proxy
fights. It is wise to bring independent directors to
investor and ISS meetings. It is important to show
both strong management and a strong board.
Any crack in messaging gives dissidents an
opening to claim that the company is poorly
managed.
Speak with one voice. To keep internal and
advisory teams on the same page, focus on tight
team coordination under a strong leader. Insist on
confidentiality (act quickly on breaches), and provide
frequent updates to keep all team members aware
of developments. Any crack in messaging gives
dissidents an opening to claim that the company is
poorly managed. Select spokespeople and provide
media training as necessary.
Know when—and when not—to respond to
activists’ claims. Carefully choose when and how
to respond, since reacting to any charge gives it
credence even when it is unwarranted. Selective,
decisive responses capture more positive attention
than a flurry of reactions to every statement an activist throws out.
Think ahead. Activists will move quickly to
escalate the fight. Be ready. Prepare press releases,
legal filings and fight presentations for rapid response
when you need it. Anticipate next steps, the surprises
you could face, the best and worst case scenarios
during the process. Prepare for every move in the
proxy fight and solidify messaging every step of the
way.
Be flexible. Adjust your approach based on
shareholder feedback and unexpected moves by the
dissident. Accept that you might plan for everything
except the one thing that actually happens. In that
case, the best defense is smart, dedicated decision
makers and spokespeople who can think on their
feet and problem solve in tight timeframes.
Proxy battles are often lost not on merits, but
on a failure of strategy and communication.
Mismanaging a proxy fight. You can also
mismanage a proxy fight. These battles can be lost
not on merits, but on a failure of strategy and communications. Companies that fare badly in a proxy
fight often make the following mistakes:
Taking on non-critical commitments. New initiatives like acquisitions or equity financing drain
resources and deflect focus at a time when the firm
needs to be single-minded about defending the business and running it successfully. Communicating
plans for new initiatives shows foresight and strategy,
but if at all possible, implementation needs to wait
until the proxy battle is resolved.
Changing policies that appear to disadvantage
the dissident. In-your-face actions harden dissidents’
resolve. Actions that disadvantage the dissident may
make the company’s decisions seem vindictive.
Companies should stick to policies they believe in.
THE CORPORATE BOARD JULY/AUGUST 2014 9
Rachel Posner
Resorting to personal attacks. Striking back at
an activist who makes an unsubstantiated charge
could be temporarily satisfying, but damaging in
the long run. It can lose votes from investors who
expect discipline from corporate leaders. Calm, reasoned arguments backed up by facts resonate more
powerfully with shareholders than personal attacks
that reflect insecurity.
Refusing to interact with the dissident. Openness projects confidence. Entrenchment signifies the
opposite.
Assuming shareholders or the media will see
through dissidents’ unfounded arguments. Too often
the side with the best-crafted messaging and broadest
reach to influencers wins out regardless of the validity of the arguments. Ideally, the positive case for
the company was built and communicated publicly
long before an activist showed up. Barring that, the
company needs a campaign of focused outreach and
clear, consistent messaging that counters criticism
with facts.
Allowing management to dominate a board.
Investors want competent management and a board
that is independent and fully engaged. A CEO who
appears to control the board is a potential warning
sign to investors and an open invitation to an activist. A divided board is another factor that dissidents
use to splinter a company’s defenses, so companies
starting late to build healthy board-management
relationships are at a disadvantage in a proxy fight.
Diffused, complicated messaging. The argument
for the company needs to be clear, crisp and credible.
Broad, complex messaging typically means that the
arguments have not been reduced to their essence.
Trying to dissuade the dissident with actions
inconsistent with the long-term objectives of the
company. The best defense is a strong case for the
company’s direction and strategy. Changing course
shows a lack of commitment to the company’s plans
and is unlikely to deter the dissident anyway.
Thinking that inflexibility is a sign of strength
against a dissident shareholder. Openness allows
for the possibility that a dissident might suggest
positive change without threatening the structure
or overall strategy of the company. A compromise,
such as agreeing to appoint an independent board
member acceptable to both sides, could set the stage
for cooperation on other issues.
Jumping too quickly to discount a negative
recommendation from a proxy advisory firm. Proxy
solicitation firms offer their best advice based on
knowledge and experience on guiding firms through
proxy battles. Ultimate actions and decisions are
yours, but will be better informed by guidance from
your outside advisors.
Proxy wars are in full swing, and even as activists
sharpen their campaigns, corporations too are getting
better at protecting their firms with resources and
strategies that make them more resistant to attack.
Companies understand that the best way to avoid
shareholder activism is to be a thriving, successful
entity (and even then they are not exempt), and to
communicate effectively with shareholders. In any
case, it never hurts to be prepared in the event an
activist comes to call.
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10 JULY/AUGUST 2014 THE CORPORATE BOARD