The danger is that directors end up talking to the loudest voices in the room – the funds who publicly
call them idiots – while spurning contacts with anyone else. By the time it comes to a showdown with
an agitator such as Mr Icahn, they have little hope of getting others on their side. That is, as some are
coming to realise, stupid.
In other words, directors and investment institutions have a mutual interest in talking to each other
routinely, rather than waiting to battle in a Delaware courtroom or accepting Mr Icahn’s lead. Twoway communication does not sound like a very radical notion but it has come slowly to the US.
The tradition of arm’s length antagonism between boards and unhappy investors goes back to the late
1970s, when Mr Icahn rose to fame. Martin Lipton, a founding partner of the corporate law firm
Wachtell, Lipton, Rosen & Katz invented the poison pill defence in 1982 as a way for boards under
siege to block raiders.
The poison pill endures – it was, for example, deployed by Netflix against Mr Icahn in 2012 – and Mr
Lipton is still hard at work. But the intellectual tide has gradually turned against him. Mary Jo White,
chair of the Securities and Exchange Commission, argued in a speech in December that “there is
widespread acceptance of many of the policy changes that so-called activists seek”.
Carl Icahn insists that he does not buy securities with the intention of getting a quick pop
Indeed, Mr Lipton seems to have lost a recent argument that he really should have won. Wachtell
Lipton petitioned the SEC two years ago to tighten up lax US disclosure rules that have allowed hedge
funds to build up stakes in target companies without having to show their hands promptly, as they do
in the UK, Australia and elsewhere.
Lucian Bebchuk, a Harvard professor who has tussled constantly with Mr Lipton in the cause of
shareholder rights, promptly swung into action, arguing that the existing rules are strict enough. So
far, the SEC has not acted – Mr Lipton has been poisoned by his own pill.
The temptation now is for giant institutions such as Fidelity and BlackRock to freeride with activists.
The latter can build stakes of up to 5 per cent (often more if they act together or use derivatives to
mask their activities) before declaring an interest and waging war. If they force the company into a
deal, or into distributing cash to investors, everyone gets a payout.
That works fine if the interests of activists and the bigger institutions are similar. In some cases they
are – Mr Icahn insists that “we do not buy securities with the intention of agitating for a quick ‘pop’
and then ‘flipping’ them for a speedy profit”, and Mr Bebchuk’s research indicates that hedge fund
activism tends to improve the operating performance of target companies.
But this is not inevitable – activist investors are biased towards events, such as a merger, rather than
steady improvement that increases long-term returns. “Activists are good at presenting their views as
long-term and mainstream investors have to chip away at that and reassure themselves it is genuine,”
says Michelle Edkins, BlackRock’s head of corporate governance.
There is not much time if a company has remained aloof from investors until it becomes a target. “The
dialogue must start on a sunny day because by the time [a company’s directors] get out there on a
rainy day, the game is over,” says Jim Woolery, deputy chairman of the New York law firm
Cadwalader, Wickersham & Taft.
In the past, a board could deploy a poison pill and dismiss any critical investor as a greenmailer. There
is less chance of that being sufficient now activism is respectable. Activist funds have $80bn under
management and succeeded in 70 per cent of campaigns last year to block or alter the terms of agreed
corporate deals, according to the law firm Simpson Thacher.
The formation this month of the Shareholder-Director Exchange, a body intended to facilitate direct
conversation between institutional investors and board directors, is one sign of attitudes changing.
Both sides realise that, if they leave it to others to seize the initiative, they may not like the result.
US capital markets have moved on from equating investor activism with asset-stripping. They have yet
to reach the point where activism does not always mean a fight.