Activist shareholders are increasingly putting pressure on corporate boards to make changes and accept deals. One example is Harbinger Capital Partners, which owned 20% of NorthWestern Energy and pushed for a quick sale to another company. NorthWestern's board rejected the initial bid as too risky and low, angering Harbinger. However, the board conducted an auction which attracted higher offers from other suitors. They ultimately accepted a higher cash bid, satisfying all shareholders. While activist investors don't always get their way, this case shows that boards can succeed by remaining flexible, considering all options, and prioritizing the best long-term outcome for shareholders overall.

1. Activist Shareholders Flex Their Muscles; But boards finding ways to face down
power hitters
By Daniel Del’Re
21 August 2006
Top managers these days are finding a dash of wisdom in the adage "Be careful of the
company you keep."
Slugfests between corporate boards and shareholders are becoming common as a
wave of mergers and stock buybacks whets investors' appetite for quick returns. The
struggle is so fierce that many directors could use a crash course in how to survive in a
brave new world of "activist investors."
NorthWestern Energy, for example, was sued when its biggest shareholder, the
distressed-asset fund Harbinger Capital Partners, accused board directors of failing to
negotiate in good faith for rejecting a bare-bones takeover bid.
Distressed-asset funds like Harbinger pay pennies on the dollar for stocks and bonds of
companies in bankruptcy or on the verge of it, hoping for a big payoff when the
company emerges debt-free from Chapter 11 or is bought out.
NorthWestern, a Sioux Falls, S.D.-based electric utility, had emerged from bankruptcy
just five months before getting the offer in March 2005. During the 1990s Internet craze,
NorthWestern broke its bank bulking up on telecom gear. Now it faced a $900 million
takeover bid financed entirely in debt, which might put it back into Chapter 11 and leave
shareholders with nothing and customers with no electricity.
But Harbinger, which held approximately 20% of NorthWestern's shares, threatened to
propose a new set of directors and later sued when the utility's board decided to hold
out for a better offer.
NorthWestern's struggle illustrates the tests board directors face from activist
shareholders. From hedge funds to wealthy individuals, activists use large stakes in
companies to clamor for change and hold boards and managers accountable. In all
cases, activists claim to act for the general good of investors, but often put their own
interests first.
Activists have enjoyed recent successes in bending companies to their will. Kirk
Kerkorian, whose investment fund Tracinda owns 9.9% of General Motors shares,
forced the ailing carmaker to cut executive pay and its dividend. Now Kerkorian is
pushing GM to join a cost-saving partnership between Renault and Nissan.

2. Activists are also influencing transactions among utilities. In June, merchant energy
supplier Mirant confessed that pressure from Pirate Capital, a hedge fund with a 1.6%
ownership stake, contributed to its decision to scupper an $8 billion takeover of NRG
Energy. Pirate later forced Mirant to sell its stakes in three power plants in the
Philippines. Now, Pirate is pushing Mirant to put itself on the auction block and buy back
$4.7 billion in shares, roughly 60% of its market capitalization.
One-on-one confrontations with powerful investors can force directors to focus on short-
term goals that serve narrow interests rather than considering alternatives and using the
proxy process to recommend one for approval by all shareholders.
“Boards must have the flexibility to act with deliberate speed to make sure they get the
best deal for shareholders in the long run,” said Nell Minow of The Corporate Library, a
corporate governance research firm. “And the law is very clear in that it gives directors a
great deal of discretion to do this.”
In NorthWestern's case, Harbinger wanted a shotgun wedding with the first bidder.
Neither NorthWestern nor Harbinger would comment for this article, but details of their
struggle emerge from securities filings and sources close to the board.
In March 2005, just four months after NorthWestern emerged from bankruptcy, Montana
Public Power, a newly formed municipal entity, proposed a $900 million buyout financed
entirely with debt, and offered no breakup fee if the deal failed to close. What's more,
MPPI was a risky bet for NorthWestern's customers because it had no assets and had
never operated as a utility. There was no guarantee that it would continue providing
service.
“MPPI was a shell company,” said Gordon Bava, a partner with NorthWestern's legal
adviser Manatt, Phelps and Phillips. “In working with them, NorthWestern would have
taken all of the transaction risk.”
Nevertheless, Harbinger demanded that the board negotiate with MPPI and stepped up
its testy tactics by drafting tender documents. This ploy is common when a shareholder
tries to gain outsized clout by snapping up stock from other shareholders. NorthWestern
feared that Harbinger was trying to amass a large enough stake to push the board into
working with one bidder, perhaps exclusively, which would deter others from making
better offers.
Sensing investor discontent, Harbinger tried various means to pressure NorthWestern
into a quick sale, Bava says. Fund senior manager Philip Falcone threatened to rally
investors to remove the board. Harbinger also signed a confidentiality agreement with
another bidder, the South Dakota-based energy company Black Hills, signaling its intent
to join forces in pushing the board into a deal. When directors adopted a poison pill to
prevent this, Harbinger sued in the Delaware Court of Chancery hoping a judge would
remove this obstacle.

3. The board said it had an obligation to seek bids with a higher value and lower risk.
Chairman Linn Draper, a former utility executive, joined chief executive Mike Hanson on
trips to explain this to shareholders and ask for time to solicit offers from other suitors.
The directors also formed a mergers and acquisitions committee led by D. Louis
Peoples, a management consultant and utility turnaround specialist.
Within weeks, six suitors stepped forward with firm cash offers. NorthWestern ultimately
accepted the highest bid from the Australian infrastructure giant Babcock and Brown,
which agreed to assume debt and offered a $70 million break-up fee if the deal failed to
close.
Institutional Shareholder Services, which advises shareholders on how to vote for big
transactions, issued a statement approving of how NorthWestern conducted the
auction, and recommending shareholders accept Babcock's offer.
“Had the board just rolled over and allowed Harbinger to exert influence, we would have
had a deal at a significantly lower value,” Bava said. “This is a classic example of how a
board process worked, amid coercion and intimidation by a few large shareholders, to
do what was in the best interest of all stockholders and secure the highest tangible cash
price.”
Not all slugfests with activists turn out as well for the boards that battle them. But the
lesson is that it pays to have a flexible strategy and keep track of the big picture to come
out on top.