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 an expectation for companies; 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.
Although 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. The number of large US public companies that have been subject to a public activist demand is more pronounced than ever, with an approximate 5 per cent increase in publicly announced campaigns against US companies in 2018 as compared with 2017.2 Those numbers do not 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 and increased support from prominent institutional investors, combined 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 continued 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 the 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 (the Exchange Act), the Sarbanes-Oxley Act of 2002 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 or 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; 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 (the HSR Act) may apply to an investment by a shareholder activist in a public company if the investment exceeds a certain size threshold, currently set at US$90 million for 2019.3 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 acquirer holding 10 per cent or less of a company's outstanding voting securities if made 'solely for the purpose of investment'.4 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.5 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.6
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. As described further in subsection iv, a corporation may use its organisational documents (certificate of incorporation 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.7 The Unocal test is particularly relevant to shareholder activism because it applies to defensive measures such as shareholder protection rights plans (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 take a 'what's the harm' approach and 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 some change is warranted at the company. ISS recommendations match the ultimate outcome of the vote in a majority of proxy contests. Although the gap between the voting practices of ISS and institutional shareholders has narrowed, 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 increasingly 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 the Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA-CREF), the California State Teachers' Retirement System (CalSTRS), and the Council of Institutional Investors, also set forth policy guidelines and express opinions on governance and activism.
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 prepare for 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 United States 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 preparation and 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 appear. 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. 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 filling 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 (see the Unocal defensive measures discussion in subsection ii), 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
The 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 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 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 promulgated 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 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, whereas 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 the activists including retail shareholders, advocates of social issues (e.g., environmentalists), religious organisations, pension funds and a variety of other groups. During the 2018 proxy season, corporate governance-related proposals continued to represent approximately half of the Rule 14a-8 proposals voted on, and approximately 14 per cent of these proposals received sufficient shareholder support to pass.10 Other 2018 Rule 14a-8 proposals included environmental, social and political (ESP) proposals as well as compensation proposals, which have a very low pass rate, although ESP proposals are gaining traction terms of both in the average percentage of votes cast in favour of those proposals and companies' receptivity to addressing ESP issues.11 The vast majority of Rule 14a-8 proposals are targeted at S&P 500 companies.12
Traditional institutional investors such as BlackRock, Fidelity, State Street and Vanguard may be considered shareholder activists as well. The concentration of ownership among these large institutional investors has continued to grow. As at December 2018, one of BlackRock, Vanguard or State Street was the largest single shareholder in 438 companies out of the S&P 500 and collectively the three firms owned 18.7 per cent of all shares in the S&P 500.13 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. 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 short-term focus.
ESP parameters are increasingly playing a prominent role in the public discourse of both Rule 14a-8 activists and institutional investors. Recently, several of the largest institutional investors reaffirmed this trend with clear statements that they continue to be focused on issuers' 'purpose,' how corporations treat their employees, communities and other stakeholders (not just shareholders), and similar concepts. In his annual letter to CEOs, BlackRock's Larry Fink described 'purpose' as 'a company's fundamental reason for being – what it does every day to create value for its stakeholders'.14
ii 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, proving that no company is immune to activism. In 2018, activists targeted companies with market capitalisations greater than US$10 billion (which represent 15 per cent of companies in the Russell 3000) in 11 per cent of total campaigns.15 However, given the capital required to acquire a significant stake in large-cap companies, only a small number of prominent activist investors consistently target Fortune 100 companies.16 All industries are susceptible to activism, with investment vehicles, pharmaceutical companies, software companies and other commercial service providers being the most targeted industries from 2014 to 2018.17
iii Activist campaigns
Although there was a modest uptick in the number of publicly announced activism campaigns against US companies in 2018 as compared with 2017, the general consistency of 2018 data with 2017 data across multiple metrics suggests that US activism practices are stabilising.18 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. In 2018, activist campaigns focused mostly on balance sheet issues and merger and acquisition actions.19
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', though 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 also become increasingly adept at using media, including social and alternative electronic media, to their advantage.20
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 at least a majority of the board of directors (a control slate contest). The percentage of proxy contests involving a control slate has ranged from 51 per cent to 74 per cent from 2014 to 2018.21 This suggests that, once activists invest in formally commencing a proxy contest, many are not content to merely gain a couple of seats at the table. 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 and prominent activist hedge fund Elliott Management (Elliott) has established a private equity arm.
iv Paths to resolution
Activist campaigns continued to achieve high levels of success in 2018.22 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 common for a company and shareholder activist to settle and enter into a cooperation agreement. A 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. In many cases, companies conclude 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.23
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 activist. Once the shareholder activist is represented on the board of directors, it will most 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. Activist designees that receive board seats also stay on the boards for long periods. Since 2010, prominent activist fund insiders who became directors following a settlement agreement stayed on the relevant board for an average of approximately two years longer than the minimum provided for in the settlement agreement, and many insiders in this subset are still on the relevant board.
IV RECENT SHAREHOLDER ACTIVISM CAMPAIGNS
Although there are many recent US shareholder activism campaigns worthy of discussion in this chapter, this section highlights two campaigns by US activist hedge funds against US public companies that helpfully demonstrate the varying nature and objectives of shareholder activists.24
i Campbell Soup Company/Third Point
In May 2018, Campbell Soup Company (Campbell), approximately 41 per cent of which is owned by heirs to the founder of Campbell, announced that its CEO had retired and the company planned to conduct a strategic review of its portfolio. On 9 August 2018, Third Point filed a Schedule 13D disclosing a 5.65 per cent stake in Campbell and its belief that the company's strategic review should result in a sale of the company. Third Point also stated that it might seek board representation. Third Point entered into an agreement to partner with George Strawbridge, a Campbell heir who owns approximately 2.8 per cent of the company. On 30 August 2018, Campbell announced the results of its strategic review, and its decision to focus on two distinct businesses and pursue divestitures of non-core businesses. In September 2018, Third Point nominated a full slate of 12 directors to replace Campbell's entire board, citing poor company performance and criticising the results of the strategic review. Third Point's proxy contest campaign involved a bold media strategy that gained widespread public attention. In October 2018, the other heirs to the Campbell founder pledged to vote their shares in support of the incumbent Campbell board. Also in October 2018, Third Point filed a lawsuit against Campbell and its directors claiming breaches of fiduciary duties related to Campell's proxy disclosure. In early November 2018, Third Point reduced its slate from 12 to five director candidates and ISS recommended that shareholders vote for all Third Point candidates. On 27 November 2018, Campbell agreed to place two Third Point nominees on the board and allow Third Point to consult on the appointment of a third independent director in exchange for certain standstill restrictions. In December 2018, Campbell announced the appointment of a new CEO.
ii athenahealth, Inc/Elliott
In May 2017, Elliott filed a Schedule 13D disclosing a 9.2 per cent stake in athenahealth, Inc (athenahealth) and its belief that the company had a 'disruptive value proposition' that was not reflected in the company's market value. Elliott also noted operational and strategic opportunities to unlock shareholder value that it would seek to discuss with the board. In early May 2018, two weeks after athenahealth announced disappointing earnings, Elliott filed an amended Schedule 13D reporting an 8.9 per cent stake and disclosing that it had made an offer an to acquire the remaining shares of the company. Valued at US$6.9 billion, this bid marked Elliott's largest takeover offer. Elliott's filing also disclosed that it had initially approached athenahealth regarding a take-private transaction in November 2017 but its bid was rejected. In late May 2018, athenahealth's largest shareholder stated publicly that athenahealth should initiate a strategic review process. In June 2018, athenahealth's CEO resigned and the company initiated a review of alternatives, including a potential sale of the company. In October 2018, there was speculation that athenahealth was close to finding a buyer. In November 2018, athenahealth announced that it was being acquired by Veritas Capital and Elliott for US$5.7 billion. The deal closed in February 2019.
V REGULATORY DEVELOPMENTS
The US corporate regulatory and governance landscape is constantly undergoing reform. In the past few years, and especially in 2018, several governmental entities have also demonstrated an appetite for enforcing their existing regulations against activists.
Section 8 of the Clayton Act restricts interlocking directors on the boards of competitors, which may become an issue for activist hedge funds, even where different individuals are serving on different company boards, if the activist is deemed to have 'deputised' the individuals because those directors may be seen as a conduit for sharing competitive sensitive information among competitors.
Although not directed at activists, the Commissioners of both the Federal Trade Commission and the SEC have noted that the competitive effects of common ownership by institutional investors, especially index funds, deserve to be studied. This issue has become an area of focus due to assertions that having such large shareholders exerting common influence could dampen competition among public companies.
Both the US legislature and the SEC have recently discussed the regulation of proxy advisers such as ISS and Glass Lewis. In May 2019, the SEC announced that its short-term agenda includes considering possible rule amendments to address proxy advisers' reliance on certain proxy solicitation exemptions in the SEC rules. The SEC also noted that it would consider possible amendments to the thresholds for filing shareholder proposals under Rule 14a-8.
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. Universal proxies would result in a significant change to voting practices in US proxy contests, but it is not on the SEC's short-term agenda.25
All indications are that shareholder activism will continue to play a prominent, and most likely permanent, role in the US corporate landscape. US public companies have devoted considerable resources to shareholder engagement and activism preparedness, and their enhanced focus on corporate governance, other ESP issues 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 For further information, refer to the Sullivan & Cromwell LLP publication, Review and Analysis of 2018 U.S. Shareholder Activism, dated 14 March 2019 (S&C 2018 Shareholder Activism Review), available at https://www.sullcrom.com/files/upload/SC-Publication-SandC-MnA-2018-US-Shareholder-Activism-Analysis.pdf, at page 15.
3 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
4 See 15 U.S.C. Section 18a(c)(9) and 16 C.F.R. Section 802.9.
5 See 43 Fed. Reg. 33,450, 33,465 (1978).
6 See US 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.
7 Unocal Corp v. Mesa Petroleum Co, 493 A.2d 946 (Del. 1985).
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 S&C 2018 Shareholder Activism Review, at page 15.
10 For further information, refer to the Sullivan & Cromwell LLP publication, 2018 Proxy Season Review, dated 12 July 2018, available at https://www.sullcrom.com/files/upload/SC-Publication-2018-Proxy-Season-Review.pdf
13 See S&C 2018 Shareholder Activism Review, at page 23.
14 See 'Larry Fink's 2019 Letter to CEOs – Purpose & Profit' (available at www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter).
15 See S&C 2018 Shareholder Activism Review, at page 21.
16 id., at page 19.
17 id., at page 22.
18 id., at page 3.
19 id., at pages 3, 13 and 27.
20 id., at page 12.
21 id., at page 33.
22 id., at page 19.
23 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-aquila-column-negotiating-settlement-activist-investor-appears-practical-law-the-journal-2015
24 The campaign detail included in this section was sourced from SharkRepellent, FactSet Research Systems Inc and other public filings.
25 S&C 2018 Shareholder Activism Review, at pages 10–12, 23–24 and 50.