The balance of power between shareholders and companies is constantly evolving, and both sides can claim major victories in recent times. Activists scored a win at eBay, for instance, which in early March agreed to conduct a strategic review of its assets and add three new board seats at the demand of Elliott Management and Starboard Value. In another high-profile battle, Elliott Management’s year-long campaign for change at Korean automotive company Hyundai has stalled amid resistance from other shareholders.
Mergermarket on behalf of Toppan Merrill spoke with four experts on how shareholder activism will impact dealmaking in 2019.
Toppan Merrill question: How effective do you think the current shareholder proposal system is at balancing the interests of activists and companies? And more broadly, what do you think of the current balance of power between activists and companies? Leading industry experts weigh in...
Aneliya Crawford, Schulte Roth & Zabel says: First of all, traditional activists would probably never use the shareholder proposal system in any real way. It’s really something that's used by the type of players who have a more patient and general strategy of improving the governance across a broad range of companies, such as the New York City Comptroller.
A traditional activist would probably never consider this an effective strategy, in part because most of these proposals are precatory in nature – they are not necessarily binding on the company, unless they fall within a very narrow category of actions that are within the shareholders' powers to decide, as opposed to the board. It's also a fairly prolonged process, involving a lot of back-and-forth with the company about what can or cannot be excluded from the company’s proxy. Then, even if you have your proposal included in the company's proxy statement, that means you lose some control over your ability to develop your case and solicit votes in your favor, because you now have a word limit, and it’s fairly short, and it is not your proxy solicitor receiving incoming proxies.
If you think of the more sophisticated campaigns that the Trians and Elliotts and Janas and Starboards of the world conduct, their materials include a ton of information, pages upon pages making their case, including tables, valuation analyses, and other details. They're able to solicit proxies in favor of those proposals, so they know where they stand.
To your second question, I don't think the playing field is skewed in favor of activists. I think it's actually the opposite. But it's not particularly difficult for a company to obtain an exclusion of some proposal. In fact, there was recent SEC guidance that seemed to indicate that the SEC will even look to the company as a first source of opinion on a critical issue related to whether a proposal can be excluded. There are certain proposals that can be excluded if they constitute “ordinary business” as opposed to being an extraordinary transaction about which shareholders can opine. If it's “ordinary business,” then the company can exclude it because, presumably, this is the type of thing that their board of directors should decide. The SEC had indicated that they would go to the company to find out if the company thought that something was ordinary business.
Professor Minor Myers, Brooklyn Law School adds: The shareholder proposal system does a decent job for the limited purpose it was designed to accomplish, but it’s not a system that can ever do much for anyone who wants to change the direction of a company.
When it comes to public companies, it’s the composition of the board that matters. Personnel is policy, and that’s where activists focus their efforts. An incumbent board, of course, might be willing to heed an activist’s recommendations without a proxy fight. But the threat of the proxy fight affects that choice by the board. If a board has nothing to fear from a proxy contest, then it can stiff-arm an activist with very few consequences.
The one system that really matters for an activist is the federal system of 13D blockholder disclosure. When an activist’s ownership stake crosses 5%, they have to make a public filing announcing their holdings. They have ten days to make the filing, and in that window an activist can rapidly increase its exposure to the investment. But even if the activist can acquire 20% of the company, that still means that the activist has to see a really valuable intervention to justify the investment. For every US$1 increase in value the activist creates, it only captures US$0.20. If through regulatory machinations the reporting threshold or window were to narrow, that would make life much harder for activists. And likewise it would insulate incumbents from their pressure.
Professor Claire Hill, University of Minnesota Law School weighs in: Before I address the question directly, let me give you some context that informs my perspective. One thing I tell my students is that how a person appraises particular laws depends enormously on the person’s view of the people who the laws will affect. For instance, many of my students have a reflexive bias in favor of shareholders and against managers. Until the bias is pointed out to them, they tend to favor the fewest hurdles possible for shareholders to have a voice, through proposals or even lawsuits, in what their companies do. But both sides have pathologies; both sides also have legitimate interests. The challenge is, of course, to get the balance right. Clearly, there are significant costs to companies in having to address shareholder proposals. But some things that have come out of the proposal process have been worthwhile and important. My comments here are of course about the social and governance activists; economic activists are operating in a different sphere.
Ultimately, I think the system is relatively balanced in both directions, and I’m not sure precisely what could be done to make it better. I certainly wouldn't make it easier for shareholders to bring proposals, but I also wouldn't make it easier for their proposals to be excluded. As the present rules do, continuing to take both size of stake and substance of the proposal into account should be continued, perhaps with some tweaking on both fronts.