Shareholder activism is and will continue to be a prominent feature of the corporate landscape in the United States. Following a wave of corporate scandals in the early 2000s (most memorably Enron Corporation), there was a sea change in US corporate governance. Subsequently enacted federal regulations that focus on corporate governance have dramatically changed the face of US corporate boards of directors; shareholder engagement has become a priority for companies and a hallmark of basic good governance; and a number of other legal and cultural changes have increased the power of shareholders of US public companies.
Shareholder activism historically referred to an asset class of hedge funds that raided and agitated US publicly traded companies. In present times, however, there is broader recognition that shareholders more generally have a desire to engage with management and boards of directors regarding governance reforms and other aspects of a company's business. This trend has caused the lines between the traditional shareholder activists and other shareholders of public companies to blur, thereby diluting the brand of shareholder activism. There is now an increased expectation that shareholders will seek to have more influence over governance and strategic decisions made by public companies, although it is still the case that certain activist campaigns become a public display of the differences of strategic vision between the shareholder activist and its subject company.
While the term ‘activist' may have become diluted by more types of shareholders entering the mix, the increased acceptance of activism in the corporate landscape has by no means decreased its frequency. To the contrary, activist activity in the US continues to steadily rise. The number of shareholder activists and the number of US public companies that have been subject to a public activist demand is more pronounced than ever. Those numbers do not even tell the entire story: for every public activist demand, there may be another activist campaign that never becomes public knowledge. Success by activist hedge funds in raising capital, coupled with activists achieving their objectives and gaining board seats at public companies (through both settlements with companies and proxy contests), has fuelled increased activity. As a result, US public company boards of directors and management teams have intensified their focus on understanding shareholder activism as well as working to prevent, and preparing to respond to, activist campaigns.
II LEGAL AND REGULATORY FRAMEWORK
The legal and regulatory framework relating to shareholder rights, activism and engagement in respect of US publicly traded companies is primarily comprised of federal laws and regulations and state corporations laws. US public companies also must comply with the listing rules of their stock exchange (either the New York Stock Exchange or NASDAQ Stock Market), which include corporate governance requirements. Additional sources of practice with respect to shareholder activism and engagement include proxy advisory firms and guidelines set forth by other investment community members. Taken together, the applicable laws and regulations, as well as other influential sources of practice govern, the means by which a shareholder activist pursues an activist campaign and the structural defences against shareholder activists available to US public companies.
i Federal laws
Federal securities laws relating to shareholder activism and engagement include the Securities Act of 1933, the Securities Exchange Act of 1934 (Exchange Act), the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). The federal securities laws, and the rules and regulations promulgated thereunder, are administered by the Securities and Exchange Commission (SEC). A key focus of the federal securities regulations is on disclosure and ensuring that shareholders and the market have the information required to make fully informed investment decisions.
The Exchange Act provides the SEC with broad authority to regulate the securities industry. Pursuant to Section 13(a) of the Exchange Act, the SEC requires periodic and current reporting of information by public companies, and companies must consider these disclosure requirements in reporting on corporate governance matters. Section 13(d) of the Exchange Act requires reporting by persons who have directly or indirectly acquired beneficial ownership of more than 5 per cent of an outstanding class of a company's equity securities. An activist investor that crosses the 5 per cent threshold must file a report with the SEC within 10 calendar days disclosing its ownership and certain additional information, including its activist intentions. Section 13(d) also governs whether investors are considered a ‘group' for purposes of acquiring, holding and disposing of a company's securities, a very relevant consideration for shareholder activists who may form a ‘wolf pack' to work together on an activist campaign.
Section 14(a) of the Exchange Act imposes disclosure and communications requirements on proxy solicitations, or the materials used to solicit shareholders' votes in annual or special meetings held for the election of directors and the approval of other corporate actions. Shareholder activists that wage a proxy contest to nominate directors for election in opposition to a company's slate of director nominees must comply with these proxy solicitation rules. These rules apply to, and require the timely filing of, all written communications made as part of the solicitation, including investor presentations, transcripts of speeches and certain interviews, and social media postings. Further, the Exchange Act governs disclosure by anyone seeking to acquire more than 5 per cent of a company's securities by means of a tender offer.
Regulation Fair Disclosure (Regulation FD), which aims to promote full and fair disclosure by ensuring that companies do not engage in selective disclosure, requires a public company to make public disclosure of any material non-public information disclosed to certain individuals, including shareholders, who may trade on the basis of that information. Regulation FD applies to discussions between a company and a shareholder activist and, therefore, companies must be mindful of this regulation when holding discussions with an activist.
The Sarbanes-Oxley Act, enacted in response to the corporate scandals in the early 2000s, mandated numerous reforms to enhance corporate responsibility and financial disclosures. The Dodd-Frank Act implemented further reforms, including with respect to trading restrictions, corporate governance, disclosure and transparency. Both statutes have had a significant influence on corporate governance and shareholder activism and engagement.
In addition to the federal securities laws, the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) may apply to an investment by a shareholder activist in a public company if such investment exceeds a certain size threshold, currently set at US$80.8 million for 2017.2 If an activist will cross the size threshold with respect to the amount of voting securities of a company it intends to acquire, the activist is required to make a filing with US antitrust authorities and observe a waiting period prior to completing the transaction. The HSR Act provides an exemption from reporting requirements for acquisitions that result in the acquiror holding 10 per cent or less of a company's outstanding voting securities if made ‘solely for the purpose of investment'.3 This investment-only exception has been construed narrowly; it does not apply if an investor intends to participate in and influence business decisions, which is often the case with shareholder activists.4 In July 2016, activist hedge fund ValueAct Capital agreed to pay a record US$11 million fine to settle a lawsuit filed by the US government alleging that ValueAct violated the HSR Act by improperly relying on the investment-only exception in connection with its US$2.5 billion investment in Halliburton Company and Baker Hughes Inc.5
ii State laws
State corporations law governs actions by companies in the state's jurisdiction and establishes the fiduciary duty regime that applies to a company's directors and officers. This chapter focuses on corporate law in the state of Delaware because it is the most popular state of formation for legal entities and its laws significantly influence corporate law in other states. Many provisions of the Delaware General Corporation Law (DGCL) govern the relationship between a corporation and its shareholders, impacting the processes by which a shareholder activist may pursue, and a company may defend against, an activist campaign.
The DGCL includes laws governing, among other things, the composition of the corporation's board of directors, annual and special meetings of shareholders, actions by written consent, voting thresholds for approving corporate actions, requests by shareholders for books and records and appraisal rights. Certain activist investors are known to exercise appraisal rights in the context of a merger as an arbitrage strategy. As described further below, a corporation may use its organisational documents (certificate of incorporate and by-laws) to customise certain elements of its corporate governance to the extent not inconsistent with the DGCL.
All directors and officers of Delaware corporations owe the company and its shareholders fundamental fiduciary duties of care, loyalty and good faith. Subject to certain exceptions, when reviewing a company's decision the Delaware courts apply the ‘business judgement rule', which presumes directors satisfied these fiduciary duties, and will not second-guess the directors' decision if it has a rational business purpose. However, enhanced judicial review applies in certain circumstances, including when a board of directors takes defensive measures in response to a perceived threat to corporate control. Under the Unocal test, a board that has implemented a defensive measure has the burden of demonstrating that (1) it had reasonable grounds to believe a threat to corporate policy and effectiveness existed and (2) its defensive response was reasonable in relation to the threat posed.6 The Unocal test is particularly relevant to shareholder activism because it applies to defensive measures such as shareholder protection rights plans, commonly known as poison pills. Shareholder activists may, as part of their campaign strategy, file lawsuits against a corporation and its directors and officers alleging fiduciary duty violations.
iii Additional sources of practice
Shareholder activism and engagement are influenced by other sources of practice and various members of the investment community. Although their impact has waned somewhat in recent years, proxy advisory firms such as Institutional Shareholder Services (ISS) and, to a lesser extent, Glass Lewis have an impact on a company's corporate governance policies and may affect the outcome of a proxy contest with a shareholder activist. These advisory firms set forth policy guidelines as well as make recommendations with respect to proposals to be voted upon at a shareholders' meeting, such as director elections, fundamental transactions and other governance matters. As an adviser to many institutional shareholders, ISS is keen on shareholder engagement and is often inclined to recommend in favour of at least one activist director candidate in a proxy contest for minority representation on the board of directors if the shareholder activist has demonstrated that change is warranted at the company.
Large traditional institutional investors such as Blackrock, Fidelity and Vanguard have generally stopped relying on the analysis of proxy advisory firms and have instead developed internal proxy advisory functions to make decisions in proxy contests and put forth corporate governance initiatives. Given that the stock ownership of many US public companies is concentrated at a relatively small number of these large institutions, it is critical for both the company and the shareholder activist to garner the support of these investors.
Other members of the investment community, such as TIAA-CREF, CalSTRS, and the Council of Institutional Investors, also set forth policy guidelines and express opinions on governance and activism. In July 2016, a group of 13 executives from some of the largest US public companies and asset managers, as well as shareholder activists, public pension funds and mutual fund companies, released a statement of corporate governance principles for public companies, their board of directors and shareholders, which the group named the Commonsense Principles of Corporate Governance.7
iv Company defences
A company's best defence against shareholder activism is strong financial performance, a solid record of shareholder engagement and adoption of corporate governance best practices. A company must also adopt a proactive strategy to anticipate and defend against the potential for an activist campaign, including actively monitoring the company's shareholder base and conducting regular and thorough reviews of the company's business plan, strategic alternatives and intrinsic value. In the current environment, in which there is now an expectation that shareholders will be more involved in governance and strategic decisions made by public companies, it is crucial for companies to maintain a positive dialogue, relationship and credibility with its shareholders, particularly key institutional investors and other large holders. Practising consistent shareholder engagement, including articulating the company's current and long-term vision for creating shareholder value and practising good governance, will pay dividends for the company in terms of both understanding investor concerns and securing support in the face of future shareholder activism campaigns. A shareholder activist may face an uphill battle if the company already has a strong relationship with, and the support of, its large institutional shareholders.
The prevalence of shareholder activism in the US has created an entire cottage industry of firms, such as proxy solicitors, dedicated to helping companies monitor their shareholders and set up meetings with institutional investors. Investment banks and law firms also have groups of professionals dedicated to activist defence. A company facing an activist investor requires a core response team of outside advisers, including a law firm, proxy solicitor, investment bank and public relations firm. The most prepared companies create these teams in advance and establish procedures that are ready to be implemented on a moment's notice should an activist come knocking. In addition to monitoring a company's shareholders and facilitating shareholder engagement, a company's adviser team can assist the company with ‘thinking like an activist' by routinely assessing the company's strengths and vulnerabilities to activism, reviewing its structural defences and keeping current on the evolving corporate governance practices and preferences of its shareholders and the broader market.
Companies have structural governance defences that may protect them against shareholder activists. It is important to note that the value of any particular structural defence will depend on the specific activist situation and no defence will fully protect a company against activism. As mentioned above, a company may customise certain governance elements in its organisational documents. For example, most public companies have by-laws that require a shareholder to provide advance notice and certain information to the company before it is permitted to nominate a director for election to the company's board of directors or propose business before a shareholders' meeting, and these by-laws eliminate the possibility of surprise from last-minute proposals. Companies also specify in their by-laws that the board of directors has the sole right to determine its own size and fill vacancies, both of which prevent activist shareholders from packing the board of directors with their preferred candidates. Companies may also restrict its shareholders' ability to call special meetings or take actions by written consent, either entirely or below certain ownership thresholds.
Some companies have adopted even more stringent structural defences, such as having two classes of stock (one of which has additional voting rights and is not publicly traded, limiting an activist's ability to obtain voting power) or creating a classified board of directors (directors are divided into three classes with staggered, multi-year terms, making it more difficult for an activist to replace board members). Companies may also adopt a poison pill, which can be triggered by the company to dilute the equity and voting stake of a shareholder activist that has purchased over a certain percentage of the company's stock by allowing all other shareholders to purchase additional shares at a steep discount. Most large US companies have abandoned these harsher defences in recent years in light of scrutiny from the institutional investor community and proxy advisory firms. It is recommended that companies keep a poison pill ‘on the shelf' and ready to be implemented in response to a threat from a particular activist (note the Unocal defensive measures discussion above), although the company must weigh the possibility that it will lose some credibility in the market even if it successfully blocks an activist campaign.8
DGCL Section 203 includes an anti-takeover provision that prevents a corporation from entering into certain business combination transactions with an interested shareholder (generally one that owns more than 15 per cent of the company's stock) for a period of three years after becoming an interested stockholder unless the business combination is approved in the manner prescribed by the statute.
The HSR Act requires an investor to provide written notice to a company before acquiring shares that are subject to the HSR Act's filing requirements, which may serve as the first warning to the company that an activist intends to take a significant stake in the company and advocate for change, or alternatively that an existing shareholder has altered its intentions with respect to the company from passive to active and plans to increase its stake.
III KEY TRENDS IN SHAREHOLDER ACTIVISM
i The shareholder activists
Shareholder activists primarily fall into two categories: hedge fund activists and Rule 14a-8 activists. Hedge fund activists are investors whose investment strategy is to identify what they consider to be vulnerabilities at certain companies and purchase a sizeable minority stake in those target companies with the view that changes they recommend and agitate for, if successful, will increase shareholder value and result in a financial gain for their investment portfolio. Rule 14a-8 activists are shareholders that submit proposals to companies under Rule 14a-8 under the Exchange Act, a rule that requires a public company to include a shareholder proposal in its proxy materials for a shareholders' meeting if certain requirements are met by the shareholder. A company's preparation for and response to activism will differ depending on the type of shareholder activist it faces.
Hedge fund activists are the main focus of this chapter. Hedge funds pursuing activist strategies have had tremendous success in raising capital in recent years, with aggregate assets under management of hedge funds engaged in activism exceeding US$100 billion since 2014.9 This trend is expected to continue in the near term and has been instrumental in driving increased activist activity. Each hedge fund activist has its own strategy, objectives, personality and frequency of engaging in activism. Some activists, such as Carl Icahn and Third Point, are long established, while others are second generation. The investment horizon of an activist hedge fund can range from very short term to somewhat longer term. Certain hedge fund activists invest their own funds, while others invest third-party funds. Additionally, an activist hedge fund's redemption policy (e.g., whether investors have the right to redeem their funds quarterly or have longer-term ‘lock up' commitments) may impact its behaviour and investment strategy.
Rule 14a-8 activism is often socially driven, with activists including retail shareholders, advocates of social issues (e.g., environmentalists), religious organisations, pension funds and a variety of other groups. During the 2017 proxy season to date, corporate governance related proposals continued to represent approximately half of the Rule 14a-8 proposals voted on, and approximately 25 per cent of such proposals received sufficient shareholder support to pass.10 Other 2017 Rule 14a-8 proposals included social and political proposals as well as compensation proposals, which have a very low pass rate.11 The vast majority of Rule 14a-8 proposals are targeted at S&P 500 companies.12
Traditional institutional investors such as Blackrock, Fidelity and Vanguard may be considered shareholder activists as well. These institutions have developed internal proxy advisory functions and are displaying an increased willingness to directly express their views on governance matters in recent years. These investors are long-term shareholders by nature, and their inability to exit investments nimbly increases their incentive to advocate for changes that will increase enterprise value and protect their investment. F William McNabb III, the president and chief executive officer (CEO) of Vanguard, has explained, ‘we are permanent stockholders. … That is precisely why we care so much about good governance.'13 Traditional institutional investors also increasingly support activism, although in certain cases there may be a tension between the institutional investor's long-term outlook and a shareholder activist's near-term focus. In October 2016, State Street Global Advisors issued a market commentary that pointedly raises the concern that, under pressure from shareholder activists, companies may pursue short-term interests at the expense of longer-term results.14
ii The target companies
Hedge fund activists target companies in which they think there is potential to increase shareholder value, and often look for traditional ‘red flags' such as stock price underperformance, operational challenges relative to peers, significant unused cash on the balance sheet, perceived management weakness, multiple business lines, undervalued assets or perceived excessive executive compensation. However, more recently shareholder activists have also been targeting companies that have performed in line with or better than their peers. A company's liquidity and size of its market cap can play a role in its susceptibility to activism; it is inherently more difficult for a shareholder activist to amass a large enough stake to influence a company with illiquid stock or a large market cap. Nevertheless, activists have been successful with small stakes (under 1 per cent) and have targeted even the largest and most well-run companies (e.g., AIG, Apple, DuPont, General Electric and Procter & Gamble) as they have gained more capital and credibility, proving that no company is immune to activism. In 2016, 104 S&P 500 companies were publicly subjected to activist demands.15 All industries are susceptible to activism, with investment vehicles, pharmaceutical companies, software companies, other commercial service providers and regional or mid-sized banks being the most popular targets in recent years.16
iii The activist campaigns
The number of campaigns by shareholder activists has continued to increase each year as the activists have become empowered by their success in achieving their objectives and gaining board seats at public companies. Shareholder activists pursue a variety of objectives, including pursuing a company's sale to a third party (or conversely seeking to block a planned merger), pushing for another type of fundamental transaction such as a spin-off, balance sheet demands such as dividends or share repurchases, operational and capital structure demands and governance demands. Shareholder activists frequently pursue multiple objectives in the same campaign, with governance demands - particularly board representation or seeking changes in management - often used as a means of achieving economic objectives.
Shareholder activists utilise a number of different strategies to achieve their objectives, depending on factors such as the activist itself (many have a consistent modus operandi) and the subject company's defensive posture. The standard activist ‘playbook', while not applicable to every campaign, follows a series of escalating tactics with the key objective of creating an impression of inevitability. A shareholder activist often begins a campaign by engaging in a private dialogue with the company's management before its stake in the company becomes public. If successful, these discussions can avoid further agitation by leading to either an informal or formal settlement between the company and the shareholder activist. If private discussions fail, the shareholder activist may initiate a public campaign to apply pressure on the company through press releases, open letters to management, the board of directors and shareholders, issuing ‘white papers' presenting its investment thesis and analysis, and using other means of communication to rally the company's other shareholders to support its cause. Shareholder activists have become increasingly adept at using the media to their advantage.
The shareholder activist may then threaten and eventually initiate a proxy contest for representation on the company's board of directors. Shareholder activists seek to gain representation by either replacing only a minority of the company's directors or, in more extreme scenarios, trying to replace a full board of directors. If a shareholder activist is well funded, it may also commence a lawsuit (sometimes in conjunction with other tactics) to obtain information from the company, reverse board decisions or redeem the company's poison pill, among other claims. With some notable exceptions, shareholder activists do not usually make an offer for the entire company, although hostile offers have been made by hedge fund activists in past campaigns.
iv Paths to resolution
Activist campaigns have continued to achieve high levels of success, although activists did face some headwinds in 2016.17 Shareholder activists place a high value on the public perception of a successful campaign, including a partial victory or settlement, even without achieving an outright ‘win' for all of its demands. Partial success can entail the shareholder activist receiving at least one board seat (either through a settlement or proxy contest that goes to a vote) or the company agreeing to pursue one of the activist's economic objectives.
As shareholder activism and campaigns by activist hedge funds have become more mainstream, it has also become increasingly common for a company and shareholder activist to settle and enter into a cooperation agreement. The typical cooperation agreement provides the shareholder activist with minority board representation and includes customary standstill restrictions for the benefit of the company, such as prohibiting the activist from soliciting proxies in opposition to management prior to the company's next annual meeting. Recently a trend has evolved toward settlements being announced shortly after the shareholder activist has publicly announced its stake in a company or even prior to any public disclosure. In many cases, companies are concluding that settling with a reputable activist is preferable to expending significant time and resources on a protracted and distracting proxy contest. A company's board of directors has an interest in appearing firm but open-minded about an activist's credible suggestions to its other shareholders and the investment community at large. Most shareholder activists also have an interest in creating working relationships with the company's board of directors and building a public reputation for playing fair, which can facilitate future negotiations with the company and the future subject companies.18
Companies must recognise that providing a shareholder activist with board representation is simply the beginning and not the end of the company's discussions with the shareholder activist. Once the shareholder activist is represented on the board of directors, it will likely seek changes that it believes are in the best interests of the company and its shareholders. In addition, the presence of the activist's director designees may alter boardroom dynamics.
IV RECENT SHAREHOLDER ACTIVISM CAMPAIGNS
While there are many recent US shareholder activism campaigns worthy of discussion in this chapter, this section highlights three campaigns by US activist hedge funds against US public companies that helpfully demonstrate the varying nature and objectives of shareholder activists.19
i Yahoo! Inc/Starboard Value LP
Starboard first contacted Yahoo's CEO Marissa Mayer and board of directors in September 2014, urging the board to take a series of steps outlined by Starboard to unlock shareholder value. Over the next year, during which Yahoo abandoned a plan to spin off its minority equity stake in Alibaba, Starboard continued to express public concern that Yahoo's core business was in major financial distress as its revenue and profit continued to decline. Starboard became increasingly frustrated with what it considered to be Yahoo's dismissive approach to its concerns and agitated the company to hire a financial adviser to sell the core business. In February 2016, Yahoo formed a special committee of independent directors to help the company continue to explore strategic alternatives. In March 2016, Starboard disclosed that it was seeking to replace Yahoo's entire board of directors (including Mayer) at the 2016 annual meeting, citing the current board's failure to deliver results and lack of perspective to make decisions in the best interests of Yahoo's shareholders. In April 2016, Yahoo and Starboard announced an agreement to settle the potential proxy contest, pursuant to which Yahoo agreed to appoint four of Starboard's director nominees to the board of directors (out of 11 total directors up for election). Yahoo agreed to reimburse Starboard for up to US$2 million of expenses, including legal expenses. In July 2016, Yahoo ended the speculation surrounding a very public sale process by announcing that it had agreed to be acquired by Verizon Communications. Following almost a year of uncertainty and a significant reduction in the deal price, the transaction closed on 13 June 2017.
ii Xerox Corporation/Carl Icahn
In November 2015, Carl Icahn filed a Schedule 13D with the SEC disclosing a 7.13 per cent stake in Xerox Corporation. Within the Schedule 13D filing, Mr Icahn stated his intent to engage in discussions with representatives of the company's board of directors and management regarding improving operational performance and pursuing strategic alternatives, including the possibility of seeking board representation. In January 2016, following completion of a review of the company's portfolio and capital allocation options made public in October 2015, Xerox announced that its board of directors approved a plan to separate Xerox into two separate publicly traded companies. The same day, Xerox announced that it had reached an agreement with Mr Icahn relating to one of the future companies, pursuant to which three of the nine board members would be chosen by Mr Icahn (at least one of which is an Icahn insider). Xerox also agreed that Mr Icahn would have an observer to oversee the CEO selection process for that company.
iii United Continental Airlines/Altimeter Capital Management LP and PAR Capital Management, Inc
Two long-time airline investors that do not typically engage in activism teamed up against United in one of only three campaigns in 2016 that targeted companies with a market cap above US$10 billion. In January 2016, Altimeter and Par filed Schedule 13Ds with the SEC disclosing that they had formed a ‘group' and collectively hold a 5.5 per cent stake in United. The Schedule 13D stated that the shareholder activists were engaging in discussions with United's board and management regarding capital structure and allocation, corporate governance, board composition and strategic alternatives to enhance shareholder value. In March 2016, United announced that it expanded its board to appoint three new independent directors. The next day, Altimeter and Par sent a letter to the board announcing their intent to nominate six candidates to United's board of directors at the 2016 annual meeting, citing a company record of sustained underperformance and an underqualified, ineffective and entrenched board. United responded publicly that it was disappointed Altimeter and Par had become hostile and noted that the company had offered to negotiate a settlement and even amend its by-laws to extend its director nomination deadline. After further public dialogue, in late April 2016, the two sides entered into a cooperation agreement to revamp the composition of the board and add three new independent directors approved by the activists.
V REGULATORY DEVELOPMENTS
The US corporate regulatory and governance landscape is constantly undergoing reform. Proxy access, which was the defining corporate governance matter in the 2015, 2016 and 2017 US proxy seasons, is the latest in a series of initiatives by shareholders to effect structural changes that facilitate increased accountability of directors. Proxy access provides one or more shareholders (almost always up to 20 shareholders) that hold a required percentage of shares (almost always 3 per cent) for at least a specified time period (almost always three years) with the right to nominate a certain percentage of directors to a company's board (almost always the greater of two directors or 20 per cent) and to include those nominees in the company's proxy materials.20 The proponents of proxy access are Rule 14a-8 shareholder activists. In each of 2015, 2016 and 2017, the New York State Comptroller put forth a sizeable proportion of the proxy access proposals. Companies that have not yet received a proxy access proposal should prepare for the possibility of a future proxy access initiative and consider proactive implementation of proxy access.
In October 2016, the SEC released a proposal for universal proxies, which would require the use of a proxy card in contested elections at listed US public companies that includes the director candidates nominated by both the company and the shareholder activist.21 Universal proxies would result in a significant change to voting practices in US proxy contests, but it is uncertain whether or not this proposal will move forward under the direction of the new SEC commissioner.
President Donald J Trump took office on 20 January 2017. It remains to be seen how and to what extent the new administration's legislative and administrative agenda will influence the US corporate landscape, including the shareholder activism and engagement regimes, moving forward into 2018 and beyond.
All indications are that shareholder activism will continue to play a prominent, and likely permanent, role in the US corporate landscape. US public companies are increasingly devoting considerable resources to shareholder engagement and activism preparedness, and their enhanced focus on corporate governance and strategic review may further push the envelope of good governance practices. It is important to remain alert to developments in shareholder activism as the types of activists, companies targeted by activism and activist campaigns evolve.
1 Francis J Aquila is a partner at Sullivan & Cromwell LLP. The author thanks Lauren S Boehmke for her assistance in drafting this chapter and overall assistance with this project.
2 The current threshold, which is adjusted annually for inflation by the Federal Trade Commission, is available at www.ftc.gov/enforcement/premerger-notification-program/current-thresholds.
3 See 15 U.S.C. Section 18a(c)(9) and 16 C.F.R. Section 802.9.
4 See 43 Fed. Reg. 33,450, 33,465 (1978).
5 See U.S. Department of Justice press release, ‘Justice Department Obtains Record Fine and Injunctive Relief against Activist Investor for Violating Premerger Notification Requirements', dated 12 July 2016.
6 Unocal Corp v. Mesa Petroleum Co, 493 A.2d 946 (Del. 1985).
7 For further information, refer to the Sullivan & Cromwell LLP publication ‘Executive Group Publishes Statement of Commonsense Principles of Corporate Governance', dated 22 July 2016, available at www.sullcrom.com/executive-group-publishes-statement-of-commonsense-principles-of-corporate-governance.
8 For further information, refer to Francis J Aquila, ‘Adopting a Poison Pill in Response to Shareholder Activism', Practical Law The Journal, April 2016, at page 22, available at www.sullcrom.com/publications-aquila-column-issues-considering-adoption-poison-pill-published-practical-law-journal-2016.
9 Sullivan & Cromwell LLP publication, ‘2016 U.S. Shareholder Activism Review and Analysis', dated 28 November 2016 (‘S&C 2016 Shareholder Activism Review'), available at www.sullcrom.com/2016-
us-shareholder-activism-review-and-analysis-activists-face-headwinds-in-2016, at page 7.
10 For further information, refer to the Sullivan & Cromwell LLP publication ‘2017 Proxy Season Review', dated 17 July 2017 (S&C 2017 Proxy Season Review), available at www.sullcrom.com/2017-proxy-season-review.
13 F William McNabb III's keynote address at the Lazard 2015 Director Event, ‘Shareholder Expectations: The New Paradigm for Directors', as posted to the Harvard Law School Forum on Corporate Governance and Financial Regulation on 24 June 2015.
14 For further information, refer to the Sullivan & Cromwell LLP publication ‘State Street Becomes Latest Large Asset Manager to Outline Concerns Over Board Responses to Activist Short-Termism', dated 17 October 2017, available at www.sullcrom.com/state-street-becomes-latest-large-asset-manager-to-
15 Activist Insight, ‘Activist Investing: An annual review of trends in shareholder activism', 2017 (Activist Investing 2017), at page 7.
16 S&C 2016 Shareholder Activism Review, at page 14.
17 See S&C 2016 Shareholder Activism Review.
18 For further information, refer to Francis J Aquila, ‘Negotiating a Settlement with an Activist Investor', Practical Law The Journal, April 2015, at page 22, available at www.sullcrom.com/publications-
19 The campaign detail included in this section was sourced from SharkRepellent, FactSet Research Systems Inc.
20 See S&C 2017 Proxy Season Review.
21 See S&C 2016 Shareholder Activism Review.