Tag Archives: hedge fund activists

SEC committee discusses multi-class common with unequal voting rights

by Cydney Posner

An interesting topic of discussion at a meeting last week of the SEC’s Investor Advisory Committee was “unequal voting rights of common stock” — the trend over the last decade (plus) for a small number of IPO companies, particularly tech companies, to offer low-vote or, more recently, no-vote common shares to the public. (Of course, the concept of dual class common with unequal voting rights is not novel at all.  Many companies, particularly some that are family run, have in decades past had a class of common shares with 10:1 voting rights, not to mention the highly respected Berkshire Hathaway with a class holding voting rights of 10,000:1.)  The debate centered around whether these measures are a legitimate effort to protect companies from the pressures of short-termism exerted by hedge fund activists or are a mechanism that causes shareholders to cede power without providing accountability.  Of course, the answer depends on where you sit. Continue reading

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SEC approves Nasdaq proposal for golden leash disclosure

by Cydney Posner

As discussed in this PubCo post and this PubCo post, in March, Nasdaq resubmitted to the SEC a proposal requiring listed companies to disclose third-party compensation of directors in connection with their candidacy for or service on company boards.  These “golden leash” arrangements are most common in connection with board nominations (either through negotiation or proxy contest) by hedge fund activists.  The SEC has just approved the proposal, as amended on June 30, on an accelerated basis. It will become effective on August 1, 2016. Continue reading

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Will institutional holders begin to follow the activist playbook on their own initiative?

by Cydney Posner

To date, for the most part, when it comes to shareholder activism, the heavy lifting has been done by hedge fund activists. Now, as discussed in this NYT DealBook column, institutional shareholders may be stepping out on their own. Continue reading

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Senate bill introduced to reform 13D reporting by closing “loophole” exploited by activist hedge funds

by Cydney Posner

Soon after the Wausau Paper Company was targeted by a hedge fund activist in 2011, Wausau’s paper mill in Brokaw, Wisconsin was shuttered by the embattled company. The mill had been established at the end of the 19th century and, since its founding, had provided employment for 450 people and largely built and sustained the surrounding village. As described by The Boston Globe in this compelling story, the hedge fund activist’s persistent criticism of the company regarding the mill and other assets, especially his disparagement of the CEO’s “troubling” efforts “to prioritize growth” in lieu of returning capital to the stockholders in the form of  — surprise —  a substantial stock buyback and dividend hike, undermined efforts to rescue and refocus the mill. The closing of the mill in 2012 devastated the residents of Brokaw, as well as the village itself, which is facing dissolution.

The struggle over Wausau may be representative of a larger controversy over whether hedge fund activism has pressured companies to return capital to shareholders in the form of buybacks and dividends at the expense of funding R&D, plant, equipment and other internal investments, thus curtailing innovation and long-term value creation to the detriment of shareholders and the U.S. economy. (See this PubCo post.) To address this issue — to “help ensure that no other small towns in America will fall victim to activist hedge funds” —Senators Tammy Baldwin and Jeff Merkley have introduced the “Brokaw Act.” The bill,  S.2720, is co-sponsored by Senators Bernie Sanders and Elizabeth Warren.  According to the press release, the bill is designed to enhance transparency, protect companies from “wolf packs” (by shortening the 13D filing period and expanding the definitions of “beneficial ownership” and “person”), end secret net short positions (by requiring more disclosure of derivatives), and address the larger problem of short-termism.  Continue reading

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Nasdaq resubmits proposal for disclosure of “golden leash” arrangements

by Cydney Posner

On March 15, Nasdaq resubmitted its “golden leash” disclosure proposal to the SEC. As discussed in this Pubco post, the proposal, which originally was rejected on technical grounds, relates to third-party compensation of directors in connection with their candidacy for or service on company boards.  These “golden leash” arrangements are most common in connection with board nominations (either through negotiation or proxy contest) by hedge fund activists.  The resubmission, which indicates that the proposed rule would be effective on June 30, 2016, adds some gloss to the initial filing. Continue reading

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Are companies now quicker to settle with hedge fund activists?

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.) Continue reading

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WSJ reports SEC Enforcement looking at failures to disclose alliances among hedge fund activists

by Cydney Posner

The WSJ reports  that the SEC is investigating whether some hedge fund activists formed 13D “groups” but failed to make appropriate disclosure of their alliances. Under Rule 13d-5, when two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities, all of those persons together form a “group,” and are deemed to beneficially own all of securities owned by persons in the group.  If the group together owns 5% or more of a company’s shares, all of the persons in the group may be required to make filings with the SEC. According to the WSJ report, SEC Enforcement has opened multiple investigations, sending requests for information to a number of hedge funds. The issue is whether, in targeting companies, they coordinated their efforts, or “acted in concert,” to target companies in a way that led to the formation of “groups,” but failed to make appropriate filings.

There has been a lot of focus recently on Schedule 13D filings, particularly the purported exploitation by some hedge fund activists of the 10-day window before a filing is required.  As discussed in this post, several watchdog groups sent a letter to the chairs and ranking members of the Senate Committee on Banking, Housing and Urban Affairs and House Committee on Financial Services urging Congress to shrink the reporting window from ten days to one, adopt a “cooling-off period” of two business days after filing of the initial Schedule 13D (during which acquirers would be prohibited from acquiring additional shares) and “modernize”  the definition of “beneficial ownership” to preclude the use of stealth techniques and derivative instruments to acquire control and evade the reporting requirements.

Just speculating, of course, but could it be that Enforcement is looking into the use of one kind of “stealth technique” to evade the required filing altogether: the practice of “conscious parallelism” among members of a  “wolf pack”?  As discussed in this post by Professor John Coffee, a “wolf pack” is “a loose association of hedge funds (and possibly some other activists) that carefully avoids acting as ‘group’ so that their collective ownership need not be disclosed on Schedule 13D when they collectively cross the 5% threshold.” In addition, because they purport not to be “groups,” wolf packs seem to be able to evade the types of “shareholder protection” measures, such as poison pills, that used to provide protection against these types of attacks.  (See also this post.)   Or, might Enforcement be looking at a possible failure to disclose some of the alliances that occur during the long ten-day filing window when, as discussed in this WSJ article, some “activist hedge funds are tipping each other off regarding their plans, while ordinary investors and targeted companies are left in the dark.” The practice of tipping other investors, the WSJ article charges, “is part of the playbook. Activists, who push for broad changes at companies or try to move prices with their arguments, sometimes provide word of their campaigns to a favored few fellow investors days or weeks before they announce a big trade, which typically jolts the stock higher or lower. In doing so, they build alliances for their planned campaigns at the target companies. Those tipped—now able to position their portfolios for price moves that often follow activist investors’ disclosures—benefit in a way that ordinary stockholders who are still in the dark don’t.”

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