Q3 2024 Earnings Conference Call and Webcast Slides
2014 West coast boardroom summit - Skadden and Georgeson
1. 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
2. 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. 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
4. 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
5. 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
6. 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
.
7. 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. 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
9. 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
10. 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
11. 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?
12. 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
13. 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
14. 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
15. 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?”
16. 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
17. 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
18. 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
19. 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
20. 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
Editor's Notes
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.