by Cydney Posner
According to data collected by Reuters, companies are settling with hedge fund activists “at the fastest pace since the financial crisis. The average number of days it takes companies to reach a settlement with activists threatening a proxy contest from the time of disclosure is 56, according to media and research firm Activist Insight, down from 83 days in 2010 – the furthest back the firm’s data on the subject goes.” (Some commentators observed, however, that the data does not take into account the long discussions and negotiations that may go on in many cases prior to public disclosure by the hedge fund activist of its stake in the company.)
Reuters contends that the fast pace of these settlements “shows how dissident shareholders are reshaping the way chief executives manage their businesses and their boardrooms. Backed by powerful institutional investors, activists are moving from outside agitators to influential insiders.” The article suggests that an approach by a hedge fund activist often triggers a self-examination by the company as to whether there are actions the company can take to boost share price and deter the activist from engaging in a disruptive proxy contest. These actions often include measures advocated by hedge fund activists, such as stock buybacks, disposing of business units or other restructuring efforts.
Previously, management could look to institutional holders for support in proxy fights against hedge fund activists. But in the last couple of years, that trend has reversed to some extent as more institutional holders began throwing in their lot with activist investors. (See this News Brief ) Although, as discussed below, there has been some pushback from institutional investors, Reuters cites Proxy Insight data showing that, with regard to three well-known institutional investors, the percentage of dissident proxy cards that they “have voted to support – meaning they supported at least one dissident board candidate – has increased every year since 2011.”
But while some institutions support hedge fund activists in their efforts, others “worry that companies are bowing to activists’ demands too easily, to the detriment of their long-term shareholders’ interests.” Earlier this year, the CEO of BlackRock sent a letter, as reported in this DealBook column, to 500 of the largest U.S. companies, advising them that they may have gone too far in trying to curry favor of investors by returning so much capital though dividends and stock buybacks to goose short-term stock prices. (See this PubCo post.) And, interestingly, Scott Stringer, New York City Comptroller (who runs the NYC employees’ pension fund and was the person behind 75 shareholder proposals for proxy access this past proxy season) characterized the trend toward quicker settlement with hedge fund activists as “disturbing”: “Boards have become quick on the trigger to grant seats to activist investors just to avoid a proxy fight….”[C]ompanies run the risk of prioritizing short-term expediency at the expense of long-term value,” when shareholders are not allowed their say on these issues.
Why are companies under attack apparently settling so swiftly? Among the reasons cited by Reuters, companies want to avoid disruption and uncertainty in their businesses. In addition, costs associated with a proxy fight can be substantial: research cited in a recent academic study showed that the average cost of a proxy fight for both sides is around $10.7 million. Moreover, the article reports, the odds are not especially favorable to companies battling activists. According to data from research firm FactSet, cited in the article, in proxy fights at U.S. corporations, “the dissident shareholders’ success rate rose to 73.1 percent last year, compared to less than half in 2012.” Even if the company ultimately wins the proxy fight, a nasty battle could inflict lasting damage. And, Reuters suggests, in some cases, companies may even find the activists’ suggestions to be reasonable or may not view “giving one or two seats to an activist as particularly dilutive to their board.”