Ben Maiden talks to experts about how regulatory changes may impact activism in the US – and hears they may aid a shift toward more constructive engagement
A pair of long-discussed and highly anticipated regulatory changes affecting activist investors and the US companies they target are coming down the pike. But advisers say that rather than creating a fundamental power shift, the reforms are likely to underscore the importance to each side of having effective engagement and a good story to tell. The value of playing well with others is becoming more widely accepted, they say.
Back in February, the SEC proposed rule changes governing beneficial ownership reporting under Securities Exchange Act Sections 13(d) and 13(g). The proposal includes accelerating the filing deadlines for Schedule 13D beneficial ownership reports and, overall, the changes are seen by many as making it more difficult for activists to quietly build stakes in companies.
‘Investors can currently withhold market-moving information from other shareholders for 10 days after crossing the 5 percent threshold before filing a Schedule 13D, which creates an information asymmetry between these investors and other shareholders,’ said SEC chair Gary Gensler in announcing the proposal.
‘The filing of Schedule 13D can have a material impact on a company's share price, so it is important that shareholders get that information sooner. The proposed amendments would also clarify when and how certain derivatives acquired with control intent count toward the 5 percent threshold, clarify group formation and create related exemptions.’
NIRI gave a warm welcome to the measure following years of advocacy over beneficial ownership rules. ‘Today’s proposed rulemaking is an important step forward in bringing more transparency to the marketplace and closing certain 13(d) loopholes that have allowed certain investors to amass large positions in company stock without adequate public disclosure,’ said Gary LaBranche, then-president and CEO of NIRI, in a statement at the time.
All our interactions with companies over the last five years have been cordial, constructive and productive. We intend to keep it that way as it makes our job easier and more fun
Who benefits? Advisers to companies on activist campaigns are broadly cautious in predicting the impact of the SEC’s proposal. For one thing, the measures will most likely not come into effect until next year and may evolve from the original version.
Bruce Goldfarb, founder, president and CEO of Okapi Partners, says that regardless of the rule changes the best strategy for companies remains knowing who their investors are and how they behave by communicating with them regularly at roadshows, around the proxy season and beyond.
Michael Verrechia, managing director of the M&A and activism advisory group at Morrow Sodali, says it remains to be seen how the changes will affect different activists. He notes that accelerated filings would eliminate days of uncertainty for the company affected, adding that smaller activists may face more of a challenge in getting to the position they want after filing Schedule 13D and the company’s share price goes up. But top-tier activists already often file within a couple of days of breaching the 5 percent threshold and do so with ‘their ducks in a row’ in terms of the position they want, he notes.
In many cases there is a lot of interaction behind the scenes between an activist and a company before a campaign even launches, mostly resulting in a settlement and meaning that a speedier filing requirement would be irrelevant, Verrechia observes. Over the past two years he has become involved as an adviser even further in advance of a company’s AGM – for example, in the August ahead of an AGM the following May or June – because activists are doing so.
Bruce Goldfarb, Okapi Partners
The reason for this may be a growing focus on constructive activism. An investor that wants to run a meaningful campaign needs to be able to show that it didn’t merely surface and demand changes to a company’s board, but rather worked constructively and reasonably with the issuer, Verrechia explains. ‘The first question a proxy adviser will ask is, How did we get here?’ he says. The need to show the same effort also applies to companies and their boards, he emphasizes.
Edward Greene, managing director with Georgeson, is also not convinced that speedier Schedule 13D filing will have much of an impact on professional activists.
He is more interested in an element of the proposal that would mean holders of certain cash-settled derivative securities are ‘deemed’ beneficial owners of the reference equity securities. This could limit activists’ ability to stay under the 5 percent threshold and may mean they appear earlier than previously, he points out.
Like Verrechia, Greene sees the changes as having little effect on constructive activists that engage in lengthy talks with target companies. Those seeking to dash in and launch an activist campaign will be more impacted, he predicts.
All of this supports the need for IR and governance teams to have year-round investor engagement, Greene says. He also points to activists conducting lengthier engagements with firms and describes a narrative shift toward success in activism increasingly being seen as coming from a constructive approach aimed at long-term value creation rather than traditional activist approaches.
The first question a proxy adviser will ask is, How did we get here?
Edward Greene, Georgeson
This shift was underlined in March when Bill Ackman announced in his annual letter to shareholders that his Pershing Square Capital Management was getting out of the activist short-selling game.
‘Despite our limited participation in this investment strategy, it has generated enormous media attention for Pershing Square. In addition to massive amounts of media hits, our two short activist investments managed to inspire a book and a movie,’ Ackman wrote.
‘Fortunately for all of us – and as importantly for our reputation as a supportive constructive owner – we have permanently retired from this line of work.’
Perhaps it’s about more than just the money. ‘The world of large-capitalization public companies is small, and our reputation as a thoughtful investor has therefore become well known among CEOs, boards and others who matter,’ Ackman added.
‘The result is that all our interactions with companies over the last five years have been cordial, constructive and productive. We intend to keep it that way as it makes our job easier and more fun, and our quality of life better.’
Melissa Sawyer, partner and global head of Sullivan & Cromwell’s M&A group and co-head of the firm's governance & activism practice, notes a reduction in aggressive behavior by well-established activists, although some less-prominent investors continue to use poison-pen letters. She also suggests that the change among the top-tier players may in part be due to their need for support in their campaigns from large passive fund managers, which tend to focus on long-term value creation.
It’s still about reaching out to shareholders and explaining why your nominees are the right ones to lead the company
On the governance front, Sawyer says her firm is advising companies that have poison pills on the shelf to look at how they are drafted to make sure they are compatible with the revised rules.
More than just voting mechanics? A second regulatory reform heading into the activist arena is the universal proxy. The SEC last November voted to adopt the requirement that parties in a contested election must use universal proxy cards that include all director nominees who are up for election at a shareholder meeting – candidates from both the company and any dissident shareholders.
This means shareholders will be able to vote by proxy for their desired mix of board candidates, similar to voting in person. The changes will apply to any shareholder meeting involving a contested director election held after August 31 this year.
‘[These changes] will put investors voting in person and by proxy on an equal footing,’ Gensler pointed out when the measure was approved last year. ‘This is an important aspect of shareholder democracy.’
As with the beneficial ownership changes, Verrechia says it remains to be seen which side of the activism coin benefits most from the universal proxy.
Top-tier activists will run their campaigns as they have done in the past, while those with fewer resources to solicit shareholders will be able to piggyback on an issuer’s mailing, he says, adding that although a universal proxy is more a matter of voting mechanics, it does not undermine the need to run an effective campaign.
Similarly, Goldfarb says companies need to consider that a universal proxy card may mean more board seats end up going to activists. This, he says, underlines the need for a company entering a proxy fight to have its story carefully prepared to articulate.
‘It’s still about reaching out to shareholders and explaining why your nominees are the right ones to lead the company,’ he says.
He also warns that companies with a large retail shareholder base may find there is some confusion. With a universal proxy, every retail investor will receive a card with every nominee’s name on it and companies should work on getting those investors to make informed votes, be that by traditional means and email or using social media and other methods, he advises.
For compliance purposes, Sawyer says firms should ensure they understand the procedural requirements of giving notice to parties that will be using a universal proxy and check that their timelines and processes are in order.
Melissa Sawyer, Sullivan & Cromwell
ESG and the board Risk oversight is a core responsibility for all corporate boards and addressing ESG-related matters is becoming a core part of that oversight.
As US companies continue to face record numbers of – and support for – shareholder proposals related to ESG issues, so their boards are seeing growing scrutiny from investors, customers, employees, regulators and others in terms of how they are monitoring and responding to those issues.
As a result, some activists have targeted boards with ESG-based concerns and campaigns. So far, this approach has been seen most notably with Engine No 1’s historic victory over ExxonMobil in 2021. Professionals in general prefer not to comment on specific examples but broadly expect the rising tide of ESG interest among investors to ensure that such campaigns continue.
Kurt Moeller, managing director in the activism and M&A practice at FTI Consulting, expects the use of universal proxy cards to lead to more activism in general as it will be easier for an activist to put forward one or two nominees.
This, he says, could well feed into ESG-based campaigns for board seats – both where the ESG issue is key to the activist campaign and where it’s more of a label.
That last point is echoed by other advisers, who see a potential gray line between activists being wholeheartedly focused on ESG concerns and those using them as a means to attract investor support to press for unlocking value.
Many ESG proponents would argue that there is not necessarily a distinction between the two. Either way, as Sawyer notes, there is genuine interest in ESG matters among passive fund managers.
In a climate where there is at least anecdotal evidence of activists and companies increasingly looking to have more constructive dynamics, perhaps the growing stakeholder attention to issues such as the climate crisis and racial and gender inequality will lead to ESG being a more harmonious feature of the activism landscape.
Ben Maiden is editor-at-large of IR Magazine sister publication Corporate Secretary
