IV. SHAREHOLDER ACTIVISM

Transcription

1 IV. SHAREHOLDER ACTIVISM Moderator: Art Hall, Calfee, Halter & Griswold LLP Presenters: Keith Mabee, Falls Communications Kris Spreen, Calfee, Halter & Griswold LLP RR DONNELLEY SEC HOT TOPICS INSTITUTE CLEVELAND, OH 1

2 Shareholder Activism RR Donnelley SEC Hot Topics Institute November 19, 2015 Art Hall, Calfee, Halter & Griswold LLP (Moderator) Keith Mabee, Falls Communications Kris Spreen, Calfee, Halter & Griswold LLP

3 Overview Shareholder activism is increasingly mainstream, and is on the rise Change in perception - activist vs. raider Large institutional investors more willing to support activists Dissidents able to attract more qualified candidates Nature of activism has evolved over the last few years Number of shareholder proposals has generally declined (although 2015 was up because of proxy access) Number of hedge fund activist campaigns have steadily increased Number of public activists have gone up dramatically (27% from 2013 to 2014; 267% in four years)

4 Overview Why? Activists have been quite successful (73% of 2014 campaigns were at least partially successful) M&A transactions Returning capital to shareholders Enhancing operating performance Governance successes (but often just a tool to make the case for change) Past successes breed further activism Shareholders more receptive to activists ISS influence and perceived pre-disposition to activism Companies more inclined to engage

5 2016: High Interest Activism in a Low Interest Environment Activism becomes embedded asset class; institutions ramp up fight support Heightened M&A activity with accelerating activist involvement (Darden/Starboard) Boards need to be more engaged with and accessible to shareholders; big difference between disclosure and engagement Black Rocks CEO Fink s clarion call for long-term interests vs. shorttermism Majority voting and proxy fight trends emphasize stronger board and management succession planning and execution Dupont/Trian fight is seminal governance moment; winning CEO s resignation is harbinger Proxy access mandates (107 proposals filed in 2015) leverage shareholder constructivism trend Calfee, Halter & Griswold LLP 2009

6 Proxy Access The governance issue of the 2015 proxy season Number of proposals up over 400% from 2014 Approximately 60% of the proposals passed NYC Comptroller brought a majority of the proposals (75 of them) Proposals established the 3%--3 year--25% standard SEC declined to provide no-action relief to exclude proposals based on direct conflict with mgmt proposal Expect ubiquitous activity in 2016

7 Proxy Access Preparing for Potential Proposals Monitor developments Prepare a form of proxy access by-law acceptable to the Board in case it is needed Consider whether to adopt by-law proactively or wait and react to a proposal Note that in 2015 more restrictive mgmt proposals did not deter % proposals SEC guidance suggests no-action relief will be unavailable

8 Withhold Vote Campaigns Five just vote no campaigns in 2015 Most notable was H Partners Management campaign to withhold from three incumbent Temper Sealy International directors Settled with three directors stepping down, two dissident directors appointed and expenses paid SEC permitted H Partners to distribute its own proxy card even though not a true contested election

9 Contested Elections Activist threat rests on ability to succeed in proxy contest Number of proxy contests down from 2014 to 2015 Activism is not declining; rather, companies are more inclined to make concessions to avoid a contest More contests in 2015 went to a vote Success of activism and increased credibility means even large, well-performing companies can be affected

10 DuPont/Trian Trian Fund Management proxy contest for 4 of 12 DuPont director seats Trian held only 2.7% of the stock ISS and Glass Lewis supported Trian DuPont prevailed; all directors elected Vanguard, Blackrock and State Street all voted with DuPont Institutional investors increasingly independent from proxy advisory firms

11 DuPont/Trian Proactive shareholder engagement before activist arrives is crucial Articulation of clear strategic plan Good governance; strong independent board Activist playbook White papers Investor meetings Better director candidates

12 Shareholder Proposals 2015 Results Number of shareholder proposals up because of proxy access proposals Public Pension funds were significantly more active (23% of governance proposals in 2015, versus 16% in 2014) Fewer proposals withdrawn Calfee, Halter & Griswold LLP 2014

13 Shareholder Proposals Types of Proposals Submitted 47% Board-related Proxy access proposals Independent Chair proposals 21% related to executive compensation Eliminate accelerated vesting of equity awards, adopt recoupment policies and stock retention requirements were most popular 16% shareholder right to act by written consent/call special meeting Calfee, Halter & Griswold LLP 2014

14 Shareholder Proposals What can we expect in 2016? Popular governance proposals likely to remain hot Proxy Access!! Independent chair Declassified boards (no brainer - 77% support) Elimination of supermajority voting requirements Shareholders right to call special meetings/act by written consent Board diversity Director tenure/overboarding Calfee, Halter & Griswold LLP 2014

15 Say on Pay Votes Results remain relatively steady Larger companies continue to see improved results (79% of S&P 500 exceeded 90%, vs. 63% in 2011). Only 0.7% failed in 2015 Russell 3000 slightly lower results (76% exceeded 90%; 3.2% failed (up from 1.4% in 2011) Average support remains strong (91%) ISS recommendation remains significant on this front (shareholder support 32% lower with an ISS against ) Calfee, Halter & Griswold LLP 2013

16 Say on Pay Votes Status can change year-over-year Not many repeat failed votes 91% have passed all five years Most companies made changes in response to the prior year s vote Modified proxy statement disclosures Altered compensation packages to add/enhance performance-based elements Increased outreach to shareholders and proxy advisory firms Other companies saw equally dramatic negative reversals due to change in comp. practices (ex. - non-performance based mega grants) Calfee, Halter & Griswold LLP 2013

17 What Attracts Shareholder Activists To A Company Governance Perceived inadequate Board composition; limited independence from management; insufficient attention to shareholder proposals or investor concerns; a history of reporting, accounting and/or governance issues; excessive compensation; apparent lack of succession planning management and Board Management Diminished investor confidence, remaining in power despite performance issues or lack of articulated strategic direction Ownership Heavy institutional and/or hedge fund concentrations, limited insider ownership, large founding family holdings potentially looking for exit Financial/Operational High cash balance, stable cash flow, low debt levels, low book-to-market ratio, underperforming line(s) of business, underutilized assets, fuzzy strategy execution Triggering Events Restructurings, cyclical downturns, change in CEO/Chairman/Board, transaction announcement, crisis damages reputation/valuation, public/investor vulnerability by association (Volkswagen, oil), poor governance ratings, etc. Calfee, Halter & Griswold LLP 2009

18 Proactive IR/Financial Communications What To Deliver In Today s Environment Assertively market your company s investment brand by consistently articulating: Disciplined and exacting strategic planning process Corporate growth and capital allocation strategy (acquisitions, R&D, stock buyback) Value drivers behind results and future desired state Targeted financial and operational performance metrics Distinctive tangible and intangible assets: what sets your company apart Consistent and credible transparency/disclosure Corporate governance policies and best practices Ensure strong working relationships with key media; investment community, proxy governance firms, regulatory agencies Buy-side analyst research indicates effective IR programs contribute a median premium of 10% to valuation, while ineffective IR programs cost a median discount of 15%; intangibles can account for 30 50% of valuation Calfee, Halter & Griswold LLP 2009

19 How To Prepare For A Shareholder Activist Campaign Evaluate potential valuation degradation scenarios annually as part of enterprise risk/reputational management/board review Establish a SWAT team of relevant outside advisors: legal and IR/PR counsel, proxy firm, financial advisor Pay attention to governance best practices and address trends before they manifest into a shareholder proposal for your company Develop a contingency communications plan and vetted ready response messaging platform Actively monitor shareholder base, accumulations, market intelligence, Street social media chatter Know and understand current shareholder perceptions, motivations, potential wolf pack relationships Regularly conduct Opposition Research on Board members and candidates to understand vulnerabilities Be willing to listen, engage and negotiate prudently to give the Board time to exercise their fiduciary responsibilities fully Mobilize credible third party testimonials for a fight; leverage credibility with investors, media, regulators, communities, employees Calfee, Halter & Griswold LLP 2009

20 Preparation in Advance of Activism Best practices (see DuPont/Trian Example) Board engagement/independence Enhance disclosures (be pro-active) Board structure Strategic plan/vision Compensation arrangements Risk management Director qualifications Prepare the Board Frequent discussion about strategic direction, review and evaluation of business plan Review shareholder base and structural defenses periodically, anticipate activist arguments Be measured and thoughtful in response to activism Calfee, Halter & Griswold LLP 2014

21 Advance Planning from a Legal Perspective Consider Possible Activist Tactics Shareholder proposals as method of applying pressure Attempt to call a special meeting of shareholders Expanded list of possible agenda items (declassify Board, removal of directors) In limited circumstances, written action of shareholders/proposals from the floor Evaluate and understand structural defenses/areas of vulnerability Limited legal defenses to proxy contest Calfee, Halter & Griswold LLP 2014

22 Responding and Dealing with Activists Activist Hedge Funds at Work - What is the end game? Motivations behind proposals intended to enhance shareholder value Board Presence Sale of Company or Assets New Management Team Share Repurchase M&A Bid Elimination of Defense Mechanisms Special Dividend Use of aggressive actions until a settlement is reached with the company or the proposal is contested through a proxy solicitation Going public with letters to the Board, progressive SEC filings, rumor mongering, press releases/story placements, political style attack ads, social media speculation, promoting churn in the stock Calfee, Halter & Griswold LLP 2009

23 Responding and Dealing with Activists Defense analysis -- poison pills May be beneficial; may backfire Meetings with activists Who should attend from company? Preparation/response NDA? Strategy impacted by reputation/nature of activist? Settlement or Fight? Be honest in assessment of possible battle (how has company performed/have you gotten the message out in advance) Very distracting/consumes management & Board attention