The Shareholder Rights and Activism Review: USA
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 total number of activist campaigns has been remarkably consistent over the past five years, with an average of approximately 272 campaigns announced per year.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.
Legal and regulatory framework
The legal and regulatory framework relating to shareholder rights, activism and engagement in respect of US publicly traded companies primarily comprises 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$94 million for 2020.3 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 it had reasonable grounds to believe a threat to corporate policy and effectiveness existed, and that 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, State Street 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.
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 2019 proxy season, corporate governance-related proposals continued to represent approximately half of the Rule 14a-8 proposals voted on, and approximately 21 per cent of these proposals received sufficient shareholder support to pass.10 Other 2019 Rule 14a-8 proposals included environmental, social and political (ESP) proposals as well as compensation proposals, which have a very low pass rate. However, ESP proposals continued to gain momentum in 2019, with the ESP proposals that went to a vote receiving record average support of 28 per cent and a record nine proposals passing.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 2019, 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 19.2 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.
In recent years there has also been a noticeable blending of investment strategies by investors with historically distinct investment strategies, particularly activist hedge funds and private equity firms. While certain activist investors such as Paul Singer of Elliott Capital Management and Carl Icahn have long been selectively acquisitive due to their size, other activist investors are also starting to employ private equity-like strategies. For their part, some private equity firms have recently taken up their own form of activist investing, including acquiring minority stakes. Despite their historical differences, private equity firms and hedge funds share a common ultimate objective of acquiring an ownership stake in a company they consider to be undervalued, effecting certain changes at the company designed to boost value, and then realising a return on their original investment by exiting the company at a higher valuation. Other traditionally passive investors could also move towards an activist approach, paving the way for a further convergence of investment strategies.
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. BlackRock's Larry Fink has described 'purpose' as 'a company's fundamental reason for being – what it does every day to create value for its stakeholders'. In his 2020 annual letter to CEOs, Fink wrote that 'purpose is the engine of long-term profitability.'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. On average, approximately 10 per cent of the activist campaigns in each of the past five years targeted companies with market caps of greater than US $10 billion.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 Activists have targeted a wide variety of industries, with investment vehicles, pharmaceutical companies, software companies and other commercial service providers being the most targeted industries since 2014.17
iii Activist campaigns
The general consistency of the data in recent years suggests that activism will continue to be an important consideration for companies going forward.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. Mergers and acquisitions activity was a particular focus of activists in 2019, more than ever before, demonstrated by activists both calling for companies to initiate a sale or divestiture process and opposing previously announced transactions.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 are also adept at using media, including social and alternative electronic 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 – but not less common – scenarios, trying to replace at least a majority of the board of directors (a control slate contest). 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. As discussed further in Subsection (i), 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 2019.20 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.
It is 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.21
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.22
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.23
i eBay/Elliott and Starboard Value
In January 2019, Elliott published a letter revealing a 4 per cent stake in eBay Inc. (eBay) and outlining Elliott's 'Enhancing eBay Plan' to unlock value-creation at the company. The plan called for, among other things, divestment of eBay's Stubhub and eBay Classifieds Group franchises and renewed focus on eBay's core Marketplace business. Starboard Value LP was also reported to have a large position in eBay and to have urged the same changes at the company. On 1 March 2019, eBay announced that it had entered into cooperation agreements with both Elliott and Starboard, pursuant to which it would immediately add two new directors to the board, with Elliott also having the right to privately recommend to the company an additional independent director later in the year. eBay also announced a strategy review of its asset portfolio, including Stubhub and eBay Classifieds Group. In September 2019, eBay's CEO resigned after disagreements with the new board. In announcing the leadership transition, eBay noted that its strategic review of StubHub and Ebay Classifieds Group continued to move forward. On 25 November 2019, eBay announced an agreement to sell Stubhub to Viagogo for a purchase price of approximately US$4.05 billion in cash. The deal closed in February 2020.
ii EQT Corporation/Rice Investment Group
The year 2019 saw the first successful use of a universal proxy card for a control slate in the US when a shareholder group led by Toby Rice and Derek Rice (the Rice Team) prevailed in their proxy contest at EQT Corporation (EQT). In November 2017, the Rice Team sold Rice Energy, the company they had founded, to EQT for approximately US$6.7 billion. In December 2018, after EQT's stock price had fallen more than 50 per cent since the merger and EQT lowered its five-year outlook, the Rice Team began publicly calling for a 'course correction' and for EQT's CEO to be replaced with Toby Rice. In March 2019, the Rice Team nominated a control slate of nine director candidates for election at the 2019 annual meeting, including Toby Rice and Derek Rice. In April 2019, Toby Rice filed a lawsuit against the EQT board of directors, alleging an unfair playing field and refusal by EQT to use a universal proxy card for the election. A universal proxy card is 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, which is different from the default in which each side has its own proxy card. EQT and the Rice Team ultimately agreed to adopt a universal proxy card for the annual meeting. In May 2019, EQT announced that it had nominated three new director candidates for election and that three long-tenured board members (including the chairman) would retire. As a result, the Rice Team revised its director slate down to seven nominees (out of 12 board seats). The Rice Team's slate was supported by ISS and several large shareholders, including T Rowe Price and D E Shaw. On 10 July 2019, EQT announced that its shareholders had elected all seven of the Rice Team's nominees as well as the five EQT nominees it supported, with the Rice Team's slate receiving more than 80 per cent of the votes cast at the annual meeting. The board of directors elected Toby Rice as the President and CEO of EQT.
The US corporate regulatory and governance landscape is constantly undergoing reform. In the past few years, several governmental entities have also demonstrated an appetite for enforcing their existing regulations against activists.
In 2019, the SEC issued important guidance on proxy advisers. The guidance affirms that voting recommendations from proxy advisers, such as ISS and Glass Lewis, constitute a 'solicitation' under the SEC's proxy rules, and the interpretation reiterates the SEC's previously stated view that a 'solicitation' includes a communication by a person seeking to influence the voting of proxies by shareholders, regardless of whether that person is seeking authorisation to act as a proxy. Notably, this means that proxy adviser voting recommendations will be subject to anti-fraud rules and are prohibited from containing any 'false or misleading' statements and omitting any necessary material facts.24
The SEC also proposed amendments to the thresholds for filing shareholder proposals under Rule 14a-8. The proposed amendments would eliminate the 1 per cent ownership threshold under Rule 14a-8(b) and introduce a three-tiered approach to determining when shareholders are eligible to submit proposals to a company, under which a shareholder is eligible to submit proposals if it has continuously held:
- at least US$2,000 of the company's securities for at least three years;
- at least US$15,000 of the company's securities for at least two years; or
- at least US$25,000 of the company's securities for at least one year.25
The unprecedented covid-19 pandemic and its aftermath will heighten focus on corporate governance and the role of a talented management team and an engaged board as companies forge a path through the uncertain times ahead. While the covid-19 pandemic has slowed activist campaign activity in the short-term, practitioners fully expect that activists will attempt to capitalise on market volatility and other opportunities created by the crisis and resume campaigns with full force. In addition, the US is in the midst of presidential and congressional elections that will take place on 3 November 2020. It remains to be seen how the results of the elections will impact the federal and legislative agenda and influence the US corporate landscape, including the shareholder activism and engagement regimes, moving forward into 2021 and beyond. 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 and John W Karol for their assistance in drafting this chapter and Ms Boehmke for her overall assistance with this chapter.
2 For further information, refer to the Sullivan & Cromwell LLP publication, Review and Analysis of 2019 U.S. Shareholder Activism, dated 6 November 2019 (S&C 2019 Shareholder Activism Review), available at https://www.sullcrom.com/siteFiles/Publications/2019ShareholderActivismAnnualReport.pdf, at p. 14.
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 p. 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 p. 17.
10 For further information, refer to the Sullivan & Cromwell LLP publication, 2018 Proxy Season Review Part I - Rule 14a-8 Shareholder Proposals, dated 12 July 2019, available at https://www.sullcrom.com/files/upload/SC-Publication-2019-Proxy-Season-Review-Part-1-Rule-14a-8-Shareholder-Proposals.pdf.
11 id., at p. 7.
12 id., at p. 6.
13 See Lazard Shareholder Advisory Group, 2019 Review of Shareholder Activism (available at https://www.lazard.com/media/451141/lazards-2019-review-of-shareholder-activism-vf.pdf).
14 See 'Larry Fink's 2019 Letter to CEOs – Purpose & Profit' (available at https://www.blackrock.com/americas-offshore/2019-larry-fink-ceo-letter) and 'Larry Fink's 2020 Letter to CEOs – A Fundamental Reshaping of Finance' (available at https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter.
15 See S&C 2019 Shareholder Activism Review, at p. 19.
16 See 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 p. 15.
17 See S&C 2019 Shareholder Activism Review, at p. 19.
18 id., at p. 14.
19 id., at p. 4.
20 See S&C 2019 Shareholder Activism Review, at p. 15.
21 For further information, refer to Francis J Aquila, 'Negotiating a Settlement with an Activist Investor', Practical Law The Journal, April 2015, at p. 22, available at www.sullcrom.com/publications-aquila-column-negotiating-settlement-activist-investor-appears-practical-law-the-journal-2015.
22 See S&C 2019 Shareholder Activism Review at p. 33.
23 The campaign detail included in this section was sourced from FactSet Research Systems Inc and other public filings.
24 See S&C 2019 Shareholder Activism Review at p. 21.
25 For further information, refer to the Sullivan & Cromwell LLP publication, SEC Proposes Amendments to Proxy Solicitation and Shareholder Proposal Rules, dated 14 November 2019, available at https://www.sullcrom.com/siteFiles/Publications/2019ShareholderActivismAnnualReport.pdf.