V1DIS
Corporate Board MemberWest Coast Boardroom Summit
& Peer Exchange
Topic Breakout:Preparing for Shareholder Activism
March 5, 2014
William P. FiskeSenior Managing DirectorGeorgeson Inc.
Kenton J. KingPartnerSkadden, Arps, Slate Meagher & Flom LLP
Topic Breakout: Preparing for Shareholder Activism
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AGENDA
Shareholder Activism• Trends and Drivers• What Makes an Activist a Target?
M&A Activism• “Bumpitrage”• Spin-offs and Break-ups
Governance Activism• Director Elections• Shareholder Proposals
Responding to Activism• Advance Preparation• Investor Engagement and Dialogue
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Shareholder ActivismRECENT TRENDS
Increasing frequency of overall activism against companies• Many situations “settle” before a proxy fight• Activists do not always seek board seats
Larger-cap companies increasingly being targeted
Sympathetic media attention on activists
More sophisticated approach by activists • Detailed economic theses• Hiring experienced financial, legal and proxy advisors• Nominating highly qualified director candidates• Willing to lay groundwork early – well in advance of a contest – including reaching
out to shareholders for public support early in the process
Emergence of new, next -generation activist funds o Keith Meister – Corvex Managemento Jeffrey Eberwein – Lone Star Value Fundso Scott Ferguson – Sachem Head Capital Managemento Richard “Mick” McGuire – Marcato Capital Management
Traditional long-term institutional investors increasingly willing to support an activist if dissatisfied
• Some are even encouraging activists to initiate campaigns in their portfolio companies
Shareholder Activism
In fights that “go the distance,” dissidents are winning more frequently
2010 2011 2012 20130%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
35%44% 46%
60%
65%56% 54%
40%
Dissident (or split) Victory Mgmt Victory
Fights That Went The Distance
Source: Sharkrepellent.net
Shareholder Activism
ACTIVISM DRIVERS
Often M&A driven
• Restructurings – sale of all/parts of companies and spin-offs
Increasingly focused on perceived financial weaknesses/vulnerabilities in companies
• Operational underperformance vs peers
• Recapitalization – leveraging up and buying back shares
• Underperforming CEO/management teams
Emphasis on governance weaknesses
• Board composition
• Executive compensation
• Corporate governance structures that are deemed to not be in the best interests of shareholders
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Each situation requires specific analysis and an understanding of the temperament, tactics and capabilities of the relevant activist or bidder – all activists are not the same
Notable Activist Campaigns
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Carl Icahn
1/22/2014 8/13/2013 3/6/2013 2/14/2013 1/25/2013 10/31/2012 5/25/2012
GreenlightCapital
10/17/2011 5/26/2011 3/31/2011
ElliottManagement
5/16/2013 1/28/2013 11/26/2012 11/23/2012 5/14/2012
JANAPartners
9/71/2013 4/29/2013 4/11/2012 8/14/2012
Marcato
2/8/2013 11/28/2012 4/5/2012
PershingSquare
7/31/2013 5/16//2013 12/19/2012 7/12/2012 10/28/2011 10/8/2010
Corvex
12/3/2013 12/19/2012 11/28/2012 4/5/2012
StarboardValue
4/29/2013 1/22/2013 11/26/2012 11/1/2012 9/17/2012
Third Point
5/14/2013 10/2/2012 9/8/2011
Trian
8/15/2013 3/22/2013 11/7/2012 6/18/2012 5/9/2012
ValueAct
4/22/2013 3/12/2013 11/28/2012 7/6/2012
.
Types of Activism
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Investment Thesis
Goal Select Recent Examples
M&A
Operational
CapitalStructure
Potential M&A Target
Sale ofCompany
UnderperformingCompanies
Change in Management /Board / Structure
Change in Operations /Business Strategy
Businesses withDivestible or Non-Core Assets
Divestitures / Break-Up
Balance SheetCapacity / Cash-RichSituations
Return Cash toStockholders
• Carl Icahn / Oshkosh Corp.• Carl Icahn / CVR Energy• Elliott / BMC Software• Carl Icahn / Clorox• Elliott / Actelion• Carl Icahn / Mentor Graphics• Carl Icahn / Genzyme
• Carl Icahn / Biogen Idec• Trian / Family Dollar• Ramius / Luby’s• Elliott / Compuware• Value Act / Gardner Denver
• Pershing Square / Procter & Gamble
• Third Point / Yahoo!• Pershing Square / Canadian
Pacific• Carl Icahn / Forest Labs
• Ramius / CPI• Starboard / Regis
Corporation• Carl Icahn / Genzyme• Carl Icahn / Nuance
• Clinton Group / Stillwater• Starboard / Progress
Software• Elliott / Iron Mountain
• Trian / Heinz• Ramius / Zoran• Starboard / AOL• Carl Icahn / Oshkosh Corp.
• JANA / McGraw Hill• Relational / L-3• JANA / El Paso• ValueAct / Sara Lee• Pershing Square / Fortune
Brands• Relational / ITT
• Carl Icahn / Motorola• Ramius / SeaChange• Pershing Square / Target• Third Point / Sony• Barington Capital / Darden
Restaurants • Carl Icahn / eBay
• Elliott / Iron Mountain• Relational + JANA / Charles
River Labs• Carl Icahn / Transocean• Relational / Home Depot
• Carl Icahn / JANA / SAC / Time Warner
• Carl Icahn / Apple
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What Makes a Company a Target?The following might make a company more susceptible to being the target of a shareholder activist campaign:
Financial Vulnerabilities
• A P/E ratio that is lower than industry peers
• Capital allocation
• Poor stock performance relative to peers
• Underperformance of specific business segments
• Overcapitalized (i.e., excess cash on the balance sheet) or underleveraged companies
• Non-core businesses or assets that can be divested
• Parts are worth more than the whole
• Pursuing significant capital investment plans
Governance Vulnerabilities
• Perceived management/board “chaos”; long-tenured board
• A board that lacks either independence or certain competencies (e.g., no directors with significant experience in the company's industry, the lack of an independent chairperson, a board with significantly higher average length of service than peers)
• Corporate governance concerns / governance that favors management and the board (e.g., supermajority voting to amend bylaws, classified board membership, restrictions against shareholders calling special meetings or acting by written consent)
• Executive and/or director compensation significantly higher than peers, or pay-for-performance disconnect
M&A Activism
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Increasing trend of activist attacks on announced deals
More than 2/3 of activist attacks in 2013 were successful in raising the deal price or terminating the transaction
• “Bumpitrage”
Successful Activist Campaigns – 2013 • MetroPCS / T-Mobile• Plains Exploration / Freeport-McMoRan• Sprint / Softbank / DISH• Clearwire / Sprint / DISH• Dell / Silver Lake• Outdoor Channell / InterMedia / Kroenke• American Realty / Realty Income• Energy Solutions / Energy Capital• American Greetings / Weiss Family• Atlantic Coast Financial / Bond Street
M&A Activism
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Increasing trend of activists seeking to break companies apart
Major theme – Push to split up companies and divest businesses that don’t fit or are under-performing
2013 was very busy in this context
2014 – Already there are at least five companies being targeted• Dow Chemical – Dan Loeb pressuring to split into two companies• eBay – Carl Icahn pressuring company to spin-off PayPal unit
Even when companies are in the process of shrinking, activists pushing for more• Darden (2013)
o Barington Capital Group pressured to shed both Red Lobster and Olive Garden
o Starboard Value not happy after Darden announced plans to spin off Red Lobster, pressuring to shed Long Horn Steakhouse
Arguments activists use FOR break-ups:• Executives perform better in a more narrowly focused company• Empire building for the glory and prestige is not shareholder value driven
Counter arguments companies use AGAINST break-ups:• Significant cost savings in a bigger, broader revenue stream• Customer benefits• Creates less volatile earnings
Governance Activism
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Not just a nuisance.
Frequently portends more difficult situations – increases vulnerability.
Board elections that have significant level of against/withhold votes.• May signal a lack of support• Public vote-no campaign
What causes low support for director re-elections?• Perceived lack of board responsiveness to majority backed SHPs• Poor attendance• Poison pill adoption without shareholder approval• Failure to act on past director concerns• Service on too many boards• Non-independents on key committees
Specific governance provisions of note• Classified board• Majority vs plurality voting in director elections• Combined vs split roles of CEO and Chairman (lead director duties)• Shareholder right to call special meetings / act by written consent• Proxy access?
Governance Activism
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THE PROXY ADVISORY FIRMS – ISS AND GLASS LEWIS
Election of Directors - ISS issued negative recommendations for approximately 10% of directors in 2013 in uncontested circumstances
At Russell 3,000 companies, regarding board elections:• 44 directors failed to receive majority support in 2013 through June 30, 2013• 46 directors failed to receive majority support in 2012• 45 directors failed to receive majority support in 2011
Board composition and independence increasingly a focus• Tenure: Greater focus on director tenure, refreshment and succession planning
o ISS Quick Score recently adopted director tenure as a weighted factor• Director skill sets and industry experience• Gender
o “Thirty Percent Coalition” – has organized institutional investors / money managers representing >$1 trillion in assets to co-sign letters to 168 companies to increase gender diversity on their boards
Trend of Shareholder Proposals (for S&P 1500 Companies)
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2011 2012 20130
5
10
15
20
25
30
35
40
45
50
70.00%
72.00%
74.00%
76.00%
78.00%
80.00%
82.00%
84.00%
33 44 24
77%
81%
79%
# of Proposals
Average % Support of Votes Cast
Repeal Classified Board
2011 2012 20130
5
10
15
20
25
30
35
30%
32%
34%
36%
38%
40%
42%
44%
29 14 11
40% 41%
44%
# of Proposals
Average % Support of Votes Cast
Shareholder Right to Call Special Meeting
2011 2012 20130
2
4
6
8
10
12
14
16
18
60%
62%
64%
66%
68%
70%
72%
74%
13 14 16
62%
69%
72%
# of Proposals Average % Support of Votes Cast
Eliminate Supermajority Vote Requirements
2011 2012 20130
5
10
15
20
25
30
35
36%
38%
40%
42%
44%
46%
48%
50%
32 20 27
48%
45%
40%
# of Proposals Average % Support of Votes Cast
Shareholder Right to Act by Written Consent
Trend of Shareholder Proposals (for S&P 1500 Companies)
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2011 2012 20130
5
10
15
20
25
30
35
50%
52%
54%
56%
58%
60%
62%
64%
30 28 22
57%
61%59%
# of Proposals
Average % Support of Votes Cast
Majority Vote Standard for Director Election
2012 20130
2
4
6
8
10
12
14
30%
32%
34%
36%
38%
40%
42%
44%
6 13
42%
32%
# of Proposals
Average % Support of Votes Cast
Adopt Proxy Access
2011 2012 20130
10
20
30
40
50
60
70
25.00%
27.00%
29.00%
31.00%
33.00%
35.00%
37.00%
39.00%
22 46 58
32%
36%
32%
# of Proposals Average % Support of Votes Cast
Independent Board Chairman
2011 2012 20130
5
10
15
20
25
30
35
40
15%
17%
19%
21%
23%
25%
27%
29%
7 27 36
23.8%24.5%
23.6%
# of Proposals Average % Support of Votes Cast
Stock Retention/Holding Period
Responding to Activism
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OVERVIEW
Assemble team early (counsel, investment bank, PR firm, proxy solicitor)
Engage early and often• Critical for company to clearly communicate strategic plan early to shareholders
o Imperative to do this before an activist surfaceso Include corporate governance contacts in addition to IR contacts
If activist approaches, may request a meeting with management• TAKE THE MEETING
o Sets the record of engagemento Opportunity to learn more about who you are dealing with and what their
agenda iso Do more listening than talking
As things play out…• Company should take the “high road” in responding to attacks• Must maintain consistent messaging• Not every argument requires a rebuttal
Board involvement• Lead director and chairs of governance/finance/nomination have special roles
Everything should be looked at through the lens of “What will win or lose votes?”
Assembling your Team
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Internal Team
Assign responsibility among Company’s top executives and the Board to facilitate rapid action in response to activists
Preliminary list of internal team members:
• Chairman of the Board & Chief Executive Officer
• President
• Chief Financial Officer
• Senior Vice President and General Counsel
• Vice President, Investor Relations and Public Affairs
External Team
Assemble a group of advisors and other specialists who may be needed in the event an activist surfaces
Keep external team members fully briefed on corporate developments to reduce learning time involved in any situation where prompt action might be required
Preliminary list of external team members:
• Corporate Counsel
• Investment Banker
• Public Relations Firm
• Proxy Solicitor
Shareholder Analysis, Vote Projections and Engagement
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Shareholder Composition Analysis• Stock watch services can track ownership shifts and accumulations• Consider influence of ISS and GL in broad terms
Vote Projections and Voting Scenarios• Predict the outcome of situations such as shareholder proposals, and contests
for control• Provides a blue print for the actual solicitation• Helps to provide risk assessment and aids in board decision making• In a proxy contest, must be constantly updated
Shareholder Engagement • Corporate governance engagement outside of the proxy season is increasingly
used and expected• Corporate governance contacts are frequently different contacts than the IR
contact• Index funds actively manage their voting policies and are willing to engage• Build relationships prior to an activist threat• Communicating proactively shows confidence, transparency and a willingness
to understand investor views.o Compensation (Say-on-Pay)o Review last year’s annual meeting resulto Understand why an investor may have voted against a proposalo Understand views on vulnerabilities regarding your corporate governance
structure
Identify and Address Potential Vulnerabilities
Conduct “vulnerability” test
• Review company’s structural provisions to assess vulnerability
• Conduct “economic vulnerability” testo Analyze company as an activist would – if there are ways to increase
value in short-term, company is vulnerable – allowing the company to anticipate and evaluate possible actions the activist might propose
• Develop strong strategic and business planso Company should review all alternatives to increase long- and short-
term shareholder value
• Proactively communicate company’s strategy to investorso Commitment to build shareholder value through strategic and
business plans and specific initiativeso Communicate directly with largest shareholderso Build and maintain relationships with investors, including the
governance teams who influence the vote
Preparedness Actions Can Build Value and Avoid Activist Threat Altogether
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Credibility is about establishing a public record BEFORE an activist surfaces
• Strong strategic plan should be in place
• Communicate that plan and accomplishments to shareholders frequently
Responding publicly to an activist and how such a response is viewed
• A company is more persuasive when it has already considered proposed action, and can describe its reasons for rejecting it in favor of company’s strategic plan
Waiting to take action after an activist surfaces will put the company at disadvantage
• Enables activist to claim credit for seeking to increase shareholder value while making company look reactive
• Conventional response – “just say no” to activist, using legal protections, such as rights plan, staggered board, litigation – is not likely to work today
Shareholder Activism – Key Takeaways
Recognize that no company is immune from the possibility of shareholder activism
Identify and address potential vulnerabilities – both financial and corporate governance-related
Stay in touch with investors frequently throughout the year for better engagement – including corporate governance contacts
Questions?
William P. Fiske Kenton J. [email protected] [email protected]
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