2014 West coast boardroom summit  - Skadden and Georgeson
Upcoming SlideShare
Loading in...5
×
 

2014 West coast boardroom summit - Skadden and Georgeson

on

  • 168 views

Presentation from Georgeson and Skadden on preparing for the growing trend of shareholder activism.

Presentation from Georgeson and Skadden on preparing for the growing trend of shareholder activism.

Statistics

Views

Total Views
168
Views on SlideShare
168
Embed Views
0

Actions

Likes
0
Downloads
3
Comments
0

0 Embeds 0

No embeds

Accessibility

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment
  • No information available online, ISS only sent an email to Quickscore subscribersCompanies encouraged to keep their data current, as some black-out periods will be in effect prior to February 18, 2014.Until January 27, can view currently used data that will populate 2.0January 27 to February 7, can preview 2.0 data and request changesPost February 18, can verify 2.0 data on ongoing basisSame 4 categories (Board, COMP, SG Rts and Audit), but ISS hopes to draw no more distinction between companies + align ISS voting policies + co. performance, still relative companies.

2014 West coast boardroom summit  - Skadden and Georgeson 2014 West coast boardroom summit - Skadden and Georgeson Presentation Transcript

  • V1DIS Corporate Board Member West Coast Boardroom Summit & Peer Exchange Topic Breakout: Preparing for Shareholder Activism March 5, 2014 William P. Fiske Senior Managing Director Georgeson Inc. Kenton J. King Partner Skadden, Arps, Slate Meagher & Flom LLP
  • Topic Breakout: Preparing for Shareholder Activism 2 AGENDA  Shareholder Activism • Trends and Drivers • What Makes an Activist a Target?  M&A Activism • “Bumpitrage” • Spin-offs and Break-ups  Governance Activism • Director Elections • Shareholder Proposals  Responding to Activism • Advance Preparation • Investor Engagement and Dialogue
  • 3 Shareholder Activism RECENT TRENDS  Increasing frequency of overall activism against companies • Many situations “settle” before a proxy fight • Activists do not always seek board seats  Larger-cap companies increasingly being targeted  Sympathetic media attention on activists  More sophisticated approach by activists • Detailed economic theses • Hiring experienced financial, legal and proxy advisors • Nominating highly qualified director candidates • Willing to lay groundwork early – well in advance of a contest – including reaching out to shareholders for public support early in the process  Emergence of new, next -generation activist funds o Keith Meister – Corvex Management o Jeffrey Eberwein – Lone Star Value Funds o Scott Ferguson – Sachem Head Capital Management o Richard “Mick” McGuire – Marcato Capital Management  Traditional long-term institutional investors increasingly willing to support an activist if dissatisfied • Some are even encouraging activists to initiate campaigns in their portfolio companies
  • Shareholder Activism  In fights that “go the distance,” dissidents are winning more frequently 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2010 2011 2012 2013 35% 44% 46% 60% 65% 56% 54% 40% Dissident (or split) Victory Mgmt Victory Fights That Went The Distance Source: Sharkrepellent.net
  • Shareholder Activism ACTIVISM DRIVERS  Often M&A driven • Restructurings – sale of all/parts of companies and spin-offs  Increasingly focused on perceived financial weaknesses/vulnerabilities in companies • Operational underperformance vs peers • Recapitalization – leveraging up and buying back shares • Underperforming CEO/management teams  Emphasis on governance weaknesses • Board composition • Executive compensation • Corporate governance structures that are deemed to not be in the best interests of shareholders 5
  • Each situation requires specific analysis and an understanding of the temperament, tactics and capabilities of the relevant activist or bidder – all activists are not the same Notable Activist Campaigns 6 Carl Icahn 1/22/2014 8/13/2013 3/6/2013 2/14/2013 1/25/2013 10/31/2012 5/25/2012 Greenlight Capital 10/17/2011 5/26/2011 3/31/2011 Elliott Management 5/16/2013 1/28/2013 11/26/2012 11/23/2012 5/14/2012 JANA Partners 9/71/2013 4/29/2013 4/11/2012 8/14/2012 Marcato 2/8/2013 11/28/2012 4/5/2012 Pershing Square 7/31/2013 5/16//2013 12/19/2012 7/12/2012 10/28/2011 10/8/2010 Corvex 12/3/2013 12/19/2012 11/28/2012 4/5/2012 Starboard Value 4/29/2013 1/22/2013 11/26/2012 11/1/2012 9/17/2012 Third Point 5/14/2013 10/2/2012 9/8/2011 Trian 8/15/2013 3/22/2013 11/7/2012 6/18/2012 5/9/2012 ValueAct 4/22/2013 3/12/2013 11/28/2012 7/6/2012 .
  • Types of Activism 7 Investment Thesis Goal Select Recent Examples M&A Operational Capital Structure Potential M&A Target Sale of Company Underperforming Companies Change in Management / Board / Structure Change in Operations / Business Strategy Businesses with Divestible or Non- Core Assets Divestitures / Break-Up Balance Sheet Capacity / Cash- Rich Situations Return Cash to Stockholders • Carl Icahn / Oshkosh Corp. • Carl Icahn / CVR Energy • Elliott / BMC Software • Carl Icahn / Clorox • Elliott / Actelion • Carl Icahn / Mentor Graphics • Carl Icahn / Genzyme • Carl Icahn / Biogen Idec • Trian / Family Dollar • Ramius / Luby’s • Elliott / Compuware • Value Act / Gardner Denver • Pershing Square / Procter & Gamble • Third Point / Yahoo! • Pershing Square / Canadian Pacific • Carl Icahn / Forest Labs • Ramius / CPI • Starboard / Regis Corporation • Carl Icahn / Genzyme • Carl Icahn / Nuance • Clinton Group / Stillwater • Starboard / Progress Software • Elliott / Iron Mountain • Trian / Heinz • Ramius / Zoran • Starboard / AOL • Carl Icahn / Oshkosh Corp. • JANA / McGraw Hill • Relational / L-3 • JANA / El Paso • ValueAct / Sara Lee • Pershing Square / Fortune Brands • Relational / ITT • Carl Icahn / Motorola • Ramius / SeaChange • Pershing Square / Target • Third Point / Sony • Barington Capital / Darden Restaurants • Carl Icahn / eBay • Elliott / Iron Mountain • Relational + JANA / Charles River Labs • Carl Icahn / Transocean • Relational / Home Depot • Carl Icahn / JANA / SAC / Time Warner • Carl Icahn / Apple
  • 8 What Makes a Company a Target? The following might make a company more susceptible to being the target of a shareholder activist campaign:  Financial Vulnerabilities • A P/E ratio that is lower than industry peers • Capital allocation • Poor stock performance relative to peers • Underperformance of specific business segments • Overcapitalized (i.e., excess cash on the balance sheet) or underleveraged companies • Non-core businesses or assets that can be divested • Parts are worth more than the whole • Pursuing significant capital investment plans  Governance Vulnerabilities • Perceived management/board “chaos”; long-tenured board • A board that lacks either independence or certain competencies (e.g., no directors with significant experience in the company's industry, the lack of an independent chairperson, a board with significantly higher average length of service than peers) • Corporate governance concerns / governance that favors management and the board (e.g., supermajority voting to amend bylaws, classified board membership, restrictions against shareholders calling special meetings or acting by written consent) • Executive and/or director compensation significantly higher than peers, or pay-for- performance disconnect
  • M&A Activism 9  Increasing trend of activist attacks on announced deals  More than 2/3 of activist attacks in 2013 were successful in raising the deal price or terminating the transaction • “Bumpitrage”  Successful Activist Campaigns – 2013 • MetroPCS / T-Mobile • Plains Exploration / Freeport-McMoRan • Sprint / Softbank / DISH • Clearwire / Sprint / DISH • Dell / Silver Lake • Outdoor Channell / InterMedia / Kroenke • American Realty / Realty Income • Energy Solutions / Energy Capital • American Greetings / Weiss Family • Atlantic Coast Financial / Bond Street
  • M&A Activism 10  Increasing trend of activists seeking to break companies apart  Major theme – Push to split up companies and divest businesses that don’t fit or are under- performing  2013 was very busy in this context  2014 – Already there are at least five companies being targeted • Dow Chemical – Dan Loeb pressuring to split into two companies • eBay – Carl Icahn pressuring company to spin-off PayPal unit  Even when companies are in the process of shrinking, activists pushing for more • Darden (2013) o Barington Capital Group pressured to shed both Red Lobster and Olive Garden o Starboard Value not happy after Darden announced plans to spin off Red Lobster, pressuring to shed Long Horn Steakhouse  Arguments activists use FOR break-ups: • Executives perform better in a more narrowly focused company • Empire building for the glory and prestige is not shareholder value driven  Counter arguments companies use AGAINST break-ups: • Significant cost savings in a bigger, broader revenue stream • Customer benefits • Creates less volatile earnings
  • Governance Activism 11  Not just a nuisance.  Frequently portends more difficult situations – increases vulnerability.  Board elections that have significant level of against/withhold votes. • May signal a lack of support • Public vote-no campaign  What causes low support for director re-elections? • Perceived lack of board responsiveness to majority backed SHPs • Poor attendance • Poison pill adoption without shareholder approval • Failure to act on past director concerns • Service on too many boards • Non-independents on key committees  Specific governance provisions of note • Classified board • Majority vs plurality voting in director elections • Combined vs split roles of CEO and Chairman (lead director duties) • Shareholder right to call special meetings / act by written consent • Proxy access?
  • Governance Activism 12 THE PROXY ADVISORY FIRMS – ISS AND GLASS LEWIS  Election of Directors - ISS issued negative recommendations for approximately 10% of directors in 2013 in uncontested circumstances  At Russell 3,000 companies, regarding board elections: • 44 directors failed to receive majority support in 2013 through June 30, 2013 • 46 directors failed to receive majority support in 2012 • 45 directors failed to receive majority support in 2011  Board composition and independence increasingly a focus • Tenure: Greater focus on director tenure, refreshment and succession planning o ISS Quick Score recently adopted director tenure as a weighted factor • Director skill sets and industry experience • Gender o “Thirty Percent Coalition” – has organized institutional investors / money managers representing >$1 trillion in assets to co-sign letters to 168 companies to increase gender diversity on their boards
  • Trend of Shareholder Proposals (for S&P 1500 Companies) 13 33 44 24 77% 81% 79% 70.00% 72.00% 74.00% 76.00% 78.00% 80.00% 82.00% 84.00% 0 5 10 15 20 25 30 35 40 45 50 2011 2012 2013 # of Proposals Average % Support of Votes Cast Repeal Classified Board 29 14 11 40% 41% 44% 30% 32% 34% 36% 38% 40% 42% 44% 0 5 10 15 20 25 30 35 2011 2012 2013 # of Proposals Average % Support of Votes Cast Shareholder Right to Call Special Meeting 13 14 16 62% 69% 72% 60% 62% 64% 66% 68% 70% 72% 74% 0 2 4 6 8 10 12 14 16 18 2011 2012 2013 # of Proposals Average % Support of Votes Cast Eliminate Supermajority Vote Requirements 32 20 27 48% 45% 40% 36% 38% 40% 42% 44% 46% 48% 50% 0 5 10 15 20 25 30 35 2011 2012 2013 # of Proposals Average % Support of Votes Cast Shareholder Right to Act by Written Consent
  • Trend of Shareholder Proposals (for S&P 1500 Companies) 14 30 28 22 57% 61% 59% 50% 52% 54% 56% 58% 60% 62% 64% 0 5 10 15 20 25 30 35 2011 2012 2013 # of Proposals Average % Support of Votes Cast Majority Vote Standard for Director Election 6 13 42% 32% 30% 32% 34% 36% 38% 40% 42% 44% 0 2 4 6 8 10 12 14 2012 2013 # of Proposals Average % Support of Votes Cast Adopt Proxy Access 22 46 58 32% 36% 32% 25.00% 27.00% 29.00% 31.00% 33.00% 35.00% 37.00% 39.00% 0 10 20 30 40 50 60 70 2011 2012 2013 # of Proposals Average % Support of Votes Cast Independent Board Chairman 7 27 36 23.8% 24.5% 23.6% 15% 17% 19% 21% 23% 25% 27% 29% 0 5 10 15 20 25 30 35 40 2011 2012 2013 # of Proposals Average % Support of Votes Cast Stock Retention/Holding Period
  • Responding to Activism 15 OVERVIEW  Assemble team early (counsel, investment bank, PR firm, proxy solicitor)  Engage early and often • Critical for company to clearly communicate strategic plan early to shareholders o Imperative to do this before an activist surfaces o Include corporate governance contacts in addition to IR contacts  If activist approaches, may request a meeting with management • TAKE THE MEETING o Sets the record of engagement o Opportunity to learn more about who you are dealing with and what their agenda is o Do more listening than talking  As things play out… • Company should take the “high road” in responding to attacks • Must maintain consistent messaging • Not every argument requires a rebuttal  Board involvement • Lead director and chairs of governance/finance/nomination have special roles  Everything should be looked at through the lens of “What will win or lose votes?”
  • Assembling your Team 16 Internal Team  Assign responsibility among Company’s top executives and the Board to facilitate rapid action in response to activists  Preliminary list of internal team members: • Chairman of the Board & Chief Executive Officer • President • Chief Financial Officer • Senior Vice President and General Counsel • Vice President, Investor Relations and Public Affairs External Team  Assemble a group of advisors and other specialists who may be needed in the event an activist surfaces  Keep external team members fully briefed on corporate developments to reduce learning time involved in any situation where prompt action might be required  Preliminary list of external team members: • Corporate Counsel • Investment Banker • Public Relations Firm • Proxy Solicitor
  • Shareholder Analysis, Vote Projections and Engagement 17  Shareholder Composition Analysis • Stock watch services can track ownership shifts and accumulations • Consider influence of ISS and GL in broad terms  Vote Projections and Voting Scenarios • Predict the outcome of situations such as shareholder proposals, and contests for control • Provides a blue print for the actual solicitation • Helps to provide risk assessment and aids in board decision making • In a proxy contest, must be constantly updated  Shareholder Engagement • Corporate governance engagement outside of the proxy season is increasingly used and expected • Corporate governance contacts are frequently different contacts than the IR contact • Index funds actively manage their voting policies and are willing to engage • Build relationships prior to an activist threat • Communicating proactively shows confidence, transparency and a willingness to understand investor views. o Compensation (Say-on-Pay) o Review last year’s annual meeting result o Understand why an investor may have voted against a proposal o Understand views on vulnerabilities regarding your corporate governance structure
  • Identify and Address Potential Vulnerabilities  Conduct “vulnerability” test • Review company’s structural provisions to assess vulnerability • Conduct “economic vulnerability” test o Analyze company as an activist would – if there are ways to increase value in short-term, company is vulnerable – allowing the company to anticipate and evaluate possible actions the activist might propose • Develop strong strategic and business plans o Company should review all alternatives to increase long- and short-term shareholder value • Proactively communicate company’s strategy to investors o Commitment to build shareholder value through strategic and business plans and specific initiatives o Communicate directly with largest shareholders o Build and maintain relationships with investors, including the governance teams who influence the vote
  • Preparedness Actions Can Build Value and Avoid Activist Threat Altogether 19  Credibility is about establishing a public record BEFORE an activist surfaces • Strong strategic plan should be in place • Communicate that plan and accomplishments to shareholders frequently  Responding publicly to an activist and how such a response is viewed • A company is more persuasive when it has already considered proposed action, and can describe its reasons for rejecting it in favor of company’s strategic plan  Waiting to take action after an activist surfaces will put the company at disadvantage • Enables activist to claim credit for seeking to increase shareholder value while making company look reactive • Conventional response – “just say no” to activist, using legal protections, such as rights plan, staggered board, litigation – is not likely to work today
  • Shareholder Activism – Key Takeaways  Recognize that no company is immune from the possibility of shareholder activism  Identify and address potential vulnerabilities – both financial and corporate governance-related  Stay in touch with investors frequently throughout the year for better engagement – including corporate governance contacts Questions? William P. Fiske Kenton J. King bfiske@georgeson.com kking@skadden.com