Hedge Fund Activism

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1 Barry H. Genkin Barry H. Genkin SEC Hot Topics Institute SEC Hot Topics Institute Wednesday, September 24, 2008 Wednesday, September 24, 2008 Philadelphia, PA Philadelphia, PA Hedge Fund Activism Hedge Fund Activism

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Transcript of Hedge Fund Activism

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Barry H. Genkin Barry H. Genkin

SEC Hot Topics InstituteSEC Hot Topics Institute

Wednesday, September 24, 2008 Wednesday, September 24, 2008

Philadelphia, PAPhiladelphia, PA

Hedge Fund ActivismHedge Fund Activism

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Recent StatisticsRecent Statistics

• Q-1-2 (08) – Record Volume of Proxy Fights

• 265 New Activist Campaigns Announced during Q-1-2

• 57 of These Were New Proxy Fights (most in any 6 month period)

• During Q-1-2 Activists Attained Board Seats at 29 Companies

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Current TrendsCurrent Trends• Institutional investors and activists –

common goals• Greater willingness to take

aggressive positions• Stockholder focused governance as

opposed to director focused governance

• Greater stockholders demands on board of directors and management

• Shareholder activism garnering greater support in courts and marketplace

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Current Trends (Cont’d.)Current Trends (Cont’d.)• Expansion of hedge fund activism• Displaced investment bankers or

research analysts augmenting hedge funds Hedge fund joining forces –

emergence of “wolf pack” Greater press coverage Established relationships with

financial community More sophisticated strategic

approach

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Current Activist ActivitiesCurrent Activist Activities• Developments embolding activist

shareholder effective: Majority voting is becoming the norm Withhold/against vote campaigns increasing

with greater frequency Defensive provisions repealed with increased

frequency Stockholder proposals still prominent New eProxy rules will make proxy solicitations

much less expensive for dissidents

• Success breeds success – good activist track record

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Setting the TableSetting the Table

Important Definitions and Confusing Terminology

• Proxy Contest – Proposal, through use of a proxy, not supported by management

• Election Contest – Proposal, through use of a proxy, but relates to election of directors

• Consent Solicitation – Shareholder action not through proxy – no meeting, notice, or vote

• Hostile Takeover – Majority Voting Control (often used incorrectly)

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Setting the Table (Cont’d.)Setting the Table (Cont’d.)

• Scorched Earth Tactics – Throw everything, including kitchen sink

• Activist Shareholder – Voice heard – take action

• Hedge Fund – (Hedging, Arbitrage, Swap) - Now generally privately offered managed capital funds (unregulated)

• Full Slate/Short Slate – All directors/less than all

• e proxy rules - New SEC Rules re: electronic proxies

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Purposes of Proxy ContestPurposes of Proxy Contest

• Enhance Shareholder Value – Stock Undervalued

• Influence Board/Management – Take Action - “Sell”

• Gain Control (Without Buying Stock) – of BofD• No Premium to Shareholders• Quicker Timing than Other Methods – Short as

a Couple of Months (Consent Solicitation)• Lower Cost – Several Hundred Thousand• Achieve a Quick Settlement

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Legal/Regulatory FrameworkLegal/Regulatory Framework

• Articles• By-laws• State Law (Incorporation)• Change-in-Control Documents –

Employment Agreements• SEC Rules and Regulations

§13 – Schedule 13D – Filing “Group”) Derivatives – UK – Cash Settled Derivative

Positions (“CFDs”) – (i.e. Contracts for Differences)

Children's Investment Fund v CSX Corporation §14 – Proxy Rules

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Proxy Contest Team – Proxy Contest Team – Company SideCompany Side

• Insurgent/Activist/Hedge Fund• Selected Company Officers• Board of Directors (or

Committee)• Lawyers (and Local Counsel)• Investment Bankers• Investor Relations• Public Relations• Proxy Soliciting Firm

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Due Diligence on Target – Due Diligence on Target – Vulnerability AssessmentVulnerability Assessment

• Undervalued – Stock Trading• Vulnerabilities

Shareholder Action by Written Consent Advance Notice Provisions (CNET) Advance Notice Nomination Provisions

(CNET) Rights Plan (“Poison” Pill) Staggered Board Cumulative Voting

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Due Diligence on Target – Due Diligence on Target – Vulnerability Assessment Vulnerability Assessment

(Cont’d.)(Cont’d.)

• Vulnerabilities (Cont’d.) Removal of Directors With and

Without Cause (and definition) and by Whom

Size of Board Filling Vacancies Calling Special Meeting Amending Company By-laws (super

majority) Other

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Strategy – From the Viewpoint of Strategy – From the Viewpoint of the Insurgentthe Insurgent

• Knows company• Has been an investor for a while• Recognizes company undervalued• Has done a vulnerability analysis• Has a game plan in mind• Believes he can be successful (or

is a great card player)• Will not easily go away

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Strategy – From the Viewpoint Strategy – From the Viewpoint of the Insurgent (Cont’d.)of the Insurgent (Cont’d.)

• Will operate in stealth mode as long as possible (13D loophole for swaps)

• Has likely left a trail of warning signs• Has spoken to others (institutional

investors) who may share his views• Willing to commit time and financial

resources to the cause• Likely has a track record of having

done this before• Understands benefits of e proxy rules

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Strategy – From Target’s Strategy – From Target’s ViewpointViewpoint

• Know thine enemy (do your homework)

• Be vigilant to warning signs• Be realistic (don’t put on

blinders or be in denial)• Be prepared, be organized and

have a strategy• Know your vulnerabilities• Fine tune strategic plan

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Strategy – From Target’s Strategy – From Target’s ViewpointViewpoint

• Understand your shareholder base and monitor stock movements

• Be alert to communications from Hedge Funds

• Have a Plan A, B and C• Maximize communication

opportunities with RiskMetrics Inc. (ISS)

• The best defense is a good offense• Be nimble - ready to turn on a dime

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Strategy – From Target’s Strategy – From Target’s ViewpointViewpoint(Cont’d.)(Cont’d.)

• Recognize time is not your friend• Commit necessary time and resources

early on• Get support of Board/management early on• Keep Board (or Committee) up to speed –

communicate regularly• Don’t take eye off running the business• Have your team ready to hit the ground

running• Consider pre-emptive communication plan• Managing pressure to settle

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Recent StudiesRecent StudiesThe Conference Board (Hedge Fund Activism)European Governance InstituteNew York UniversityHarvard Business School

Conclusions• Upon announcement of hedge fund

involvement – Activism generates significant “abnormal” returns for 4 week window around announcement that do not dissipate over the subsequent year

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Recent Studies (Cont’d.)Recent Studies (Cont’d.)• Highest returns – when activist

targets the sale of the company or business strategy change – not governance.

• Over subsequent 2 year period operating results improve

• Activist skilled at identifying good takeover targets – less skilled at creating value relating to governance or operations

• What’s the harm – “costless” upside option, no real downside

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Recent Studies (Cont’d.)Recent Studies (Cont’d.)• Hedge fund engagement creates

long-term shareholder value, especially when activist wins board seats

• No study – concludes hedge fund activism destroys shareholder value

• All studies – activists achieve good results at least in short-term

• Governance activism creates little value

• “Sell the Company” activism creates the most value

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Recent Studies (Cont’d.)Recent Studies (Cont’d.)

• Issue – does hedge fund activism create environment where boards do not have flexibility to invest for the long-term

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HEDGE FUND ACTIVISMThe Activist Investor Playbook

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Less likely to PubliclyPress for Change

More likely to PubliclyPress for Change

Constructive Activist

Operational Activist Reluctant Activist

Pure Activist

THE PLAYERS | Categories of Activist Investors

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IdentifyUndervalued

Stock

ExamineCorporate

Structure &Governance

ReviewShareholder Base

DetermineChange Threshold

Buy MoreStock

Buy Stock

Contact Mgt. andRequest Change

Publicly

Discuss withOthers

Tagalong Investors Accumulate Positions

Buy More StockThreaten Proxy

ContestBuild Proxy

PlatformLaunch Proxy

Contest

NegotiateSettlement

Agreeable?

Settle

Shareholder Vote

Timeframe: 1 – 1.5 years

THE GAME PLAN | The Activist Process Model

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ABOUT US | Hedge Fund Solutions, LLC

BIOGRAPHY & CONTACT INFORMATION

DAMIEN PARK

Mr. Park is the President and CEO of Hedge Fund Solutions, a Philadelphia-based strategy consulting firm focused on providing substantive solutions for companies on issues relating to shareholder activism.

He is widely considered an expert on activist hedge funds, consults to numerous multi-billion dollar corporations, frequently speaks at seminars and events, and is often quoted in leading business publications like The Wall Street Journal, the Financial Times, BusinessWeek, Bloomberg, The Deal, CNN Money, The Nikkei and Newsweek Japan.

In addition, Mr. Park’s firm distributes a free weekly research report called the Catalyst Equity Research Report™, which highlights US-based companies where activist investors have taken sizeable investment positions and are pressing for change. The company also administers a blog on activist investing called The Official Activist Investing Blog™ which can be read at http://activistinvesting.blogspot.com/

Contact Information:Damien J. [email protected]: +1.215.325.0514

Subscribe for FREE to receive the weekly research reports on activist investing http://www.hedgerelations.com/research.html

Managing Activist InvestorsStrategy Consulting and Specialized Public Relations

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HEDGE FUND ACTIVISMThe Activist Investor Playbook

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Less likely to PubliclyPress for Change

More likely to PubliclyPress for Change

Constructive Activist

Operational Activist Reluctant Activist

Pure Activist

THE PLAYERS | Categories of Activist Investors

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IdentifyUndervalued

Stock

ExamineCorporate

Structure &Governance

ReviewShareholder Base

DetermineChange Threshold

Buy MoreStock

Buy Stock

Contact Mgt. andRequest Change

Publicly

Discuss withOthers

Tagalong Investors Accumulate Positions

Buy More StockThreaten Proxy

ContestBuild Proxy

PlatformLaunch Proxy

Contest

NegotiateSettlement

Agreeable?

Settle

Shareholder Vote

Timeframe: 1 – 1.5 years

THE GAME PLAN | The Activist Process Model

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ABOUT US | Hedge Fund Solutions, LLC

BIOGRAPHY & CONTACT INFORMATION

DAMIEN PARK

Mr. Park is the President and CEO of Hedge Fund Solutions, a Philadelphia-based strategy consulting firm focused on providing substantive solutions for companies on issues relating to shareholder activism.

He is widely considered an expert on activist hedge funds, consults to numerous multi-billion dollar corporations, frequently speaks at seminars and events, and is often quoted in leading business publications like The Wall Street Journal, the Financial Times, BusinessWeek, Bloomberg, The Deal, CNN Money, The Nikkei and Newsweek Japan.

In addition, Mr. Park’s firm distributes a free weekly research report called the Catalyst Equity Research Report™, which highlights US-based companies where activist investors have taken sizeable investment positions and are pressing for change. The company also administers a blog on activist investing called The Official Activist Investing Blog™ which can be read at http://activistinvesting.blogspot.com/

Contact Information:Damien J. [email protected]: +1.215.325.0514

Subscribe for FREE to receive the weekly research reports on activist investing http://www.hedgerelations.com/research.html

Managing Activist InvestorsStrategy Consulting and Specialized Public Relations

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HEDGE FUND ACTIVISM

SEC HOT TOPICS INSTITUTE

September 24, 2008

Philadelphia

Arthur B. Crozier

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Activism By Traditional Institutional InvestorsActivism By Traditional Institutional Investors

Originated in response to widespread adoption of take-over defenses, particularly poison pills, during M&A wave of mid to late 80’s

Primarily led by extremely large pension funds, particularly CalPERS, due to their inability to exit investments in companies adopting such measures as the result of their largely index based investing

The “Wall Street Walk” no longer feasible

Primarily seeking structural reform (elimination of poison pills, classified boards, adoption of majority voting in the election of directors) through shareholder proposals in managements’ proxy materials

Highly successful in achieving structural reforms, at least among large cap issuers

Such activism has produced little additional value for institutional activist

More aggressive activism such as proxy fights, extremely rare

High cost compared to relatively small investment

“Free rider” problem

Background

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Hedge FundsHedge Funds

Largely unregulated funds that can make more complex and risky investments

Investment parameters established by investment contract, rather than laws or regulations

Until recently, largely directed towards high net worth individuals

Goal is to seek absolute return under all market conditions, or “alpha”

Significantly more flexibility than traditional investment funds and can aggressively pursue leverage, short-selling, margin, derivatives and other strategies

Diversification requirements and limitations on illiquid investments much broader than other managers

Usual fee arrangements: 1-2% of assets under management (AUM) and 20% of profits

Can be higher, e.g. SAC Capital (equity funds 2% AUM, 50% of profits)

“Compensation scheme masquerading as an asset class”

Drives necessity for outsized returns

Background

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Largely driven by investments by institutional investors, hedge funds have grown dramatically in recent years

$1.8 trillion managed by 9,000 hedge funds worldwide, as of September 30, 2007, according to 2007 Databook, Pension & Investments 2007

87% of hedge fund assets are managed by funds with $1bn AUM or more

60% of hedge fund assets are managed by funds with $5bn AUM or more

Hedge funds represent approximately 5% of all U.S. AUM, but 30% of total equity trading volume, according to SEC Chairman Cox

Hedge Funds Have Grown DramaticallyHedge Funds Have Grown Dramatically

Background

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Hedge Fund AssetsHedge Fund Assets

Total Hedge Fund Assets (in Billions) 1990 - 2007

$39 $58

$168 $167 $185$257

$367 $375

$624

$819

$972

$1,810

$96

$538

$491

$1,104

$456

$1,463

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: 2007 Databook, P ensions & investments, 2007

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Number of Hedge FundsNumber of Hedge Funds

Total Number of Hedge Funds 1990 - 2007

610

9,917

8,664

3,873

4,454

1,1051,464

3,616

5,379

7,436

9,462

2,3832,781

2,9903,325

1,945

821

6,297

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: The Conference Board, 2008

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Hedge Fund by DomicileHedge Fund by Domicile

United States, 52%

Europe, 33%

Off Shore Centers, 8%

Asia, 2%

Other Countries, 5%

Source: Milken Institute, 2006

Hedge Funds by Domicile

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Currently, approximately 75 hedge funds with approximately $50bn AUM employ event-driven activist style investing

Activist Hedge Fund

Atticus Capital LP

Brandes Investment Partners LP

Breeden Capital Management LLC

Children’s Investment Fund Management

(UK) LLP

Centaurus Capital Ltd

D E Shaw & Co LLC

Elliott Associates LP

Hermes

Highfields Capital Management LP

Icahn Partners LP (Icahn Enterprises

Holdings L.P.)

Ichigo Asset Management

Jana Partners LLC

Knight Vinke Asset Management LLC

Perry Corp (Perry Capital)

Pershing Square Capital Management LP

Pirate Capital LLC

Polygon Global Opportunities Master Fund

Relational Investors LLC

SAC Capital Advisors LLC

Sparx Group

Steel Partners II LP

Tracinda Corporation

Trian Fund Management, LP

Recent Targets

Deutsche Börse; Arcelor S.A

Gannett Company Inc.

Applebee’s International, Inc.

Deutsche Börse; ABN Amro Bank N.V.; J-Power; CSX Corporation; Chubu Electric

Power

Stork N.V.; Royal Ahold N.V.

Endo Pharmaceuticals Inc.; Philips Electronics

Pier 1 Imports, Inc.

VW, Prudential plc, Italmobiliare

Circuit City Stores, Inc.; Wendy’s International Inc.; Wallace-Reader’s Digest

Funds

Time Warner Inc.; Motorola, Inc.; Blockbuster Inc.; Biogen-Idec; Yahoo; ICT&G

Tokyo Kohtetsu

CNET Networks Inc.; Titan International, Inc; Philips Electronics

HSBC Holdings PLC; Suez S.A., VNU Group b.v. (Nielsen)

Mylan Laboratories, Inc.; Universal American Financial Corp.

McDonald’s Corporation, Wendy’s International, Inc.; Borders Group, Inc.;

Barnes & Noble, Inc

Angelica Corporation, The Brink’s Company

British Energy plc; Newcastle United Football Club; J Sainsbury plc

The Home Depot, Inc.; Sovereign Bancorp, Inc.; Sprint Nextel Corporation

i2 Technologies, Inc.; Take-Two Interactive Software, Inc.

Pentax Corp.

Conseco, Inc.; Rowan Companies, Inc.; Aderans Co.; Bull-Dog Sauce; Sapporo

Brewing; KT&G DaimlerChrysler AG; General Motors Corporation; MGM Mirage

Wendy’s International, Inc.; H.J. Heinz Company; Kraft Foods, Inc.; Cadbury

Schweppes plc

PROMINENT ACTIVISTS

Hedge Fund ActivismHedge Fund Activism

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Why Hedge Funds Are Well Suited For Aggressive ActivismWhy Hedge Funds Are Well Suited For Aggressive Activism

High fee structure mandates extremely strong returns

Can take significant positions in targeted companies

Flexible investment diversification policies

Lock-up provisions limit investors ability to withdraw capital

“Roach Motels”

Recent increase in redemption demands by investors

Can continue to hold investment for sufficient time to pursue activism strategy

Average holding period is 20 months, Hedge Fund Activism, Corporate Governance, and Firm Performance

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Hedge Fund Activism

Hedge Fund Accumulations

Can Occur

with Extreme Rapidity

RiskMetrics Group & Hedge Funds:RiskMetrics Group & Hedge Funds:

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Hedge Fund Activism

ABC, Inc. Preliminary Shareholder CompositionABC, Inc. Preliminary Shareholder Composition

SHARES OUTSTANDING: 108,384,266

SHARES

CONTROLLED

SHARES AS A % OF

TYPE OF HOLDER CONTROLLED OUTSTANDING

INSTITUTIONAL INVESTORS (ISS) 33,717,125 31.11%

INSTITUTIONAL INVESTORS (NON-ISS) 23,343,908 21.54%

DISSIDENT GROUP 8,756,900 8.08%

OTHER HEDGE FUNDS 11,647,000 10.75%

DIRECTORS & OFFICERS 1,901,920 1.75%

BROKERS 26,236,670 24.21%

INDIVIDUALS 2,780,743 2.57%

108,384,266 100.00%

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Hedge Fund Activism

SHARES OUTSTANDING: 108,384,266

SHARES

CONTROLLED

SHARES AS A % OF

TYPE OF HOLDER CONTROLLED OUTSTANDING

INSTITUTIONAL INVESTORS (ISS) 20,668,127 19.07%

INSTITUTIONAL INVESTORS (NON ISS) 14,302,688 13.20%

DISSIDENT GROUP 8,757,000 8.08%

OTHER HEDGE FUNDS/ARBS 39,687,249 36.62%

DIRECTORS & OFFICERS 1,901,920 1.75%

BROKERS 19,919,854 18.38%

INDIVIDUALS 3,147,428 2.90%

108,384,266 100.00%

ABC, Inc. Shareholder Composition – Three Weeks LaterABC, Inc. Shareholder Composition – Three Weeks Later

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Hedge Fund Activism

Significant increase in clientele following 2003 voting disclosure regulations promulgated by SEC for mutual funds and money managers. Currently approximately 1,700 clients.

RiskMetrics clients typically hold 20%-30% of a public company’s voting power.

Many public pension funds, who are in turn ISS clients, are investors in activist hedge funds:

CalPERS PSERS (Pennsylvania) New Jersey PERS TIAA-CREF CalSTRS

RiskMetrics Group (formerly ISS)RiskMetrics Group (formerly ISS)

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RiskMetrics recommendation is frequently outcome determinative.

In the 55 relevant proxy contests where RiskMetrics issued recommendations regarding the contest, RiskMetrics supported AT LEAST ONE dissident in 39 (or 70.91%) of cases.

In the 10 contests where board control was at risk, RiskMetrics supported the full dissident slate in 1 contest and partial dissident slates in 5 others.

In the 45 contests where board control was not at risk, RiskMetrics supported all of the dissident nominees in 13 cases (28.89%), partial dissident slates in 20 cases (44.44%) and management in 12 cases (26.67%).

In the 39 proxy contests in which RiskMetrics supported dissidents, at least one dissident gained a board seat in 27 of them (or 69.23%).

RiskMetrics’ decision regarding the number of dissident nominees to support is influenced by their understanding of board dynamics, and their view that one dissident director is unlikely to have much of an effect on board deliberations.

RiskMetrics Group (formerly ISS) Supports Hedge Fund ActivismRiskMetrics Group (formerly ISS) Supports Hedge Fund Activism

Hedge Fund Activism

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Glass Lewis, Although Less Influential, Also Supports Hedge Fund ActivismGlass Lewis, Although Less Influential, Also Supports Hedge Fund Activism

In the 52 relevant proxy contests where Glass Lewis issued recommendations regarding the contest, Glass Lewis supported AT LEAST ONE dissident in 29 (or 55.77%) of cases.

In the 10 cases where board control was at risk, Glass Lewis supported the full dissident slate in 1 contest and a partial dissident slate in 4 others.

In the 42 contests where board control was not at risk, Glass Lewis supported all of the dissident nominees in 10 cases (23.81%), partial dissident slates in 13 cases (30.95%) and management in 19 cases (45.24%).

In the 28 proxy contests waged by hedge funds in which Glass Lewis supported dissidents, at least one dissident gained a board seat in 22 of them (or 78.57%).

Hedge Fund Activism, cont.

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RiskMetrics Group & Glass Lewis RecommendationsRiskMetrics Group & Glass Lewis Recommendations

Contest Dissident Date

Total Board Seats

Total Seats Up For Election

Controlat Risk

Blockbuster Video Icahn 05/ 11/ 05 7 3 N DISS (2 of 3) DISS (2 of 3) DISS (3)

BKF Steel Partners 06/ 23/ 05 9 3 N DISS DISS DISS (3)

Six Flags Red Zone LLC 12/ 23/ 05 7 3 N DISS DISS DISS (3)

Cenveo Burton Capital 12/ 24/ 05 9 73Y DISS DISS DISS4

(7)

Bally Total Fitness Pardus/ Liberation 01/ 26/ 06 9 3 N DISS MGMT DISS (3)

KT&G (Korea) Steel Partners 03/ 17/ 06 6 6/ 25N DISS DISS DISS (1)

GenCorp Pirate Capital 03/ 31/ 06 10 3 N DISS (1 of 3) DISS (2 of 3) DISS (3)

Yardville National Seidman 05/ 03/ 06 13 3 N MGMT MGMT MGMT

Massey Energy Third Point 05/ 16/ 06 9 3 N DISS (1 of 2) MGMT DISS (2)

infoUSA Dolphin 05/ 26/ 06 8 3 N DISS DISS MGMT

SCPIE Holdings Stilwell Value Partners 06/ 22/ 06 12 3 N MGMT MGMT MGMT

Motient Highland Capital 07/ 12/ 06 6 6 Y DISS (2 of 6) DISS (2 of 6) MGMT

Topps Crescendo 07/ 28/ 06 9 3 N DISS DISS DISS6(3)

H.J . Heinz Co. The Trian Group/ Sandell 08/ 16/ 06 12 127N DISS (3 of 5) DISS (2 of 5) DISS (2)

Tri-Continental Corp. Western Investments 09/ 28/ 06 9 3 N DISS DISS MGMT

Bradley Pharma Costa Brava 10/ 26/ 06 8 88N DISS (2 of 3) DISS DISS9

(2)

Rural Metro Accipiter 12/ 01/ 06 7 2 N MGMT MGMT MGMT

Openwave Harbinger Capital 01/ 17/ 07 6 2 N DISS (1 of 2) DISS (1 of 2) DISS (1)

Cyberonics Metropolitan Capital 02/ 01/ 07 8 810N DISS (2 of 3) DISS DISS11

(3)

Phoenix Technologies Ramius 02/ 14/ 07 6 2 N MGMT MGMT DISS12(2)

RMR Hospitality Bulldog Investors 03/ 08/ 07 5 2 N DISS (1 of 2) N/ A MGMT13

Motorola Icahn 05/ 07/ 07 11 1114N DISS MGMT MGMT

Center Bancorp Seidman 05/ 15/ 07 17 4 N DISS (2 of 3) DISS (2 of 3) DISS (3)

Bancorp Rhode Island PL Capital 05/ 16/ 07 15 515N MGMT MGMT MGMT

Pioneer Tax Balanced Western Investments 06/ 08/ 07 9 3 N DISS16DISS (2 of 3) DISS17

(2)

Peerless Systems Corp. Pembridge Cap./ Whitehall Cap. 06/ 11/ 07 7 4 N MGMT MGMT DISS (1)

Wilshire Enterprises, Inc. Bulldog Investors 07/ 19/ 07 8 2 N DISS (1 of 2) MGMT MGMT

Pomeroy IT Solutions, Inc. Flagg Street Capital 07/ 31/ 07 12 9 18N DISS (2 of 3) N/ A DISS (3)

Ryerson Harbinger Capital 08/ 23/ 07 11 11 19Y MGMT DISS (1 of 7) MGMT

Result

(Winner)2RiskMetrics

Rec.2Glass Lewis

Rec.2

Hedge Fund Activism, cont.

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RiskMetrics Group & Glass Lewis RecommendationsRiskMetrics Group & Glass Lewis Recommendations

Contest Dissident Date

Total Board Seats

Total Seats Up For Election

Controlat Risk

WCI Communities Icahn 08/ 30/ 07 10 10 Y MGMT MGMT Settled20

H&R Block Breeden Capital 09/ 06/ 07 11 3 N DISS DISS DISS (3)

Ceridian Corp. Pershing Square 09/ 12/ 07 7 7 Y DISS (2 of 7) MGMT (5 of 7) DISS21(4)

Gyrodyne Co. of America, Inc. Bulldog Investors 12/ 05/ 07 11 3 N DISS (1 of 3) MGMT MGMT

Nautilus Sherborne Investors 12/ 18/ 07 7 4 22Y DISS (2 of 4) DISS (2 of 4) DISS (4)

Datascope Ramius 12/ 20/ 07 7 2 N DISS (1 of 2) MGMT DISS (1)

MedQuist Inc. Costa Brava 12/ 31/ 07 12 6 N DISS (2 of 6) MGMT MGMT

A. Schulman Ramius 01/ 10/ 08 12 4 15N DISS DISS (1 of 2) DISS (2)

Luby's Ramius 01/ 15/ 08 10 4 N DISS (3 of 4) DISS (2 of 4) MGMT

Steak & Shake Company The Lion Fund 03/ 07/ 08 11 9 15N DISS DISS DISS (2)

Bassett Furniture industries, Inc. Costa Brava 04/ 15/ 08 9 9 Y DISS (3 of 7) MGMT MGMT23(0)

Office Depot Levitt Corp/ Woodbridge Equity 04/ 23/ 08 12 12 N MGMT MGMT MGMT

Media General, Inc. Harbinger Capital 04/ 24/ 08 9 3 N DISS (2 of 3) DISS (1 of 3) DISS (3)

Furniture Brands International, Inc. Sun Capital Partners, Inc. 05/ 01/ 08 8 3 N DISS DISS (2 of 3) DISS (3)

Phoenix Companies, Inc. Oliver Press Partners, LLC 05/ 02/ 08 13 5 N MGMT N/ A DISS24(2)

Charming Shoppes, Inc. Crescendo / Myca Partners 05/ 08/ 08 8 3 N DISS (2 of 3) DISS (1 of 3) DISS25(2)

Hexcel Corporation OSS Capital Management LP 05/ 08/ 08 10 10 N MGMT MGMT MGMT

Insituform Technologies, Inc. Water Asset Management 05/ 19/ 08 7 7 Y MGMT DISS (2 of 5) DISS (1)

Micrel Incorporated Obrem Capital 05/ 20/ 08 5 5 Y DISS (2 of 6) MGMT MGMT

Coinstar, Inc. Shamrock Partners 06/ 03/ 08 7 3 N MGMT MGMT DISS26(1)

Vaalco Energy Inc. Nanes Delorme Partners 06/ 04/ 08 7 3 N DISS (1 of 3) MGMT DISS27(0)

Footstar, Inc. Outpoint Capital Management LP 06/ 17/ 08 9 2 N MGMT MGMT MGMT

Biogen Idec Inc. Icahn 06/ 19/ 08 12 4 N MGMT MGMT MGMT

CSX T.C.I. / 3G Capital 06/ 25/ 08 12 5 N DISS (4 of 5) DISS (2 of 5) DISS28(2)

Emageon Inc. Oliver Press Partners, LLC 07/ 08/ 08 8 3 N DISS (2 of 3) DISS (1 of 3) DISS29(3)

Point Blank Solutions, Inc. Steel Partners 08/ 19/ 08 7 5 Y MGMT MGMT DISS (5)

Result

(Winner)2RiskMetrics

Rec.2Glass Lewis

Rec.2

Hedge Fund Activism, cont.

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Endnotes:

1) Includes contests later settled, if still contested at time of RiskMetrics recommendation.

2) Recommendation/Result refers to full slate unless otherwise noted.

3) Dissident sought to remove all directors, reduce Board size, and elect 7.

4) Company settled 5 days before meeting, agreeing to reconstitute Board with Dissident nominees, 1 Incumbent Director, and 1 mutually agreed upon Nominee.

5) Company and Dissident litigated the issue of how many seats were up for election, and therefore how many seats were available for Dissident nominees. Ultimately the Company’s agenda prevailed and only 2 seats were available to the Dissident nominees. RiskMetrics recommended for 2 of the 3 nominees originally proposed by Dissident.

6) Settlement included expanding Board to 10, Management support of Dissident’s 3 nominees.

7) Dissident ran 5 nominees under the “Short-Slate” Rule.

8) Common shareholders entitled to elect 3 directors only.

9) Settlement reached post meeting. Two Dissident nominees elected by common holders; 1 Dissident nominee withdrew. The 2 Dissident directors then appointed 1 Management director.

10) Dissident ran 3 nominees under the “Short-Slate” Rule.

11) Three days before the meeting, Company announced settlement, with 3 incumbent nominees withdrawing and the appointment of all 3 Dissident nominees.

12) Company settled a week after the initial RiskMetrics recommendation, with company replacing its 2 nominees with 1 Dissident nominee and 1 nominee jointly representing the Dissident and the Company’s second largest shareholder (AWM).

13) Dissident did not present proxies at the meeting.

14) Dissident ran 1 nominee under the “Short-Slate” Rule.

15) Dissident ran 2 nominees under the “Short-Slate” Rule.

16) Two Dissidents ran two 3-nominee slates, with Western Investment’s slate fully supported by RiskMetrics.

17) Meeting of preferred holders to elect third nominee was adjourned for lack of quorum.

18) Dissident ran 3 nominees under the “Short-Slate” Rule.

19) Dissident ran 7 nominees.

20) Management and Dissident each named 3 directors, with balance named by large shareholders.

21) Parties reached an agreement shortly before the meeting whereby Dissident withdrew from contest, Management expanded Board from 7 to 11, and 4 Dissident nominees were added to the Board.

22) Dissident sought to remove and replace 4 directors, fixing Board size at 7.

23) Settlement included Dissident support of Management nominees, Management agreed to provide dissident with a board observer.

24) Settlement included expanding Board to 15, adding 2 dissident representatives.

25) Expand board to 11 directors, appointed 2 dissident nominees.

26) Settlement included appointing 1 dissident nominee, select and appoint to its Board an additional director from a pool of candidates to be nominated by the major stockholders of the Company, reimburse Shamrock for up to $350,000 of their reasonable out-of-pocket expenses incurred in connection with soliciting proxies

27) Settlement included increasing the size of the Board to 8, appointing a new independent director to the Board submitting a binding proposal to the Company’s stockholders at the 2009 Annual Meeting for the declassification of the Company’s Board, separating roles of CFO and President, and undertake to hire a new CFO.

28) 2 Dissident nominees appointed to the Board, 2 Dissident nominees are currently undecided pending resolution of litigation.

29) Settlement included expanding Board to 9, adding 3 dissident representatives.

Hedge Fund Activism, cont.

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Hedge Fund Activism

Activism is not limited to the United StatesActivism is not limited to the United States

Contest Dissident

Knight Vinke • HSBC• Royal Dutch Shell• Suez SA• VNU

Steel Partners • KT&G (with Icahn)• Bull Dog Sauce• Sapporo Holdings• Aderans

TCI • ABN Amro• Deutsche Börse• J-Power• Chobu Electric Power

Cevian Capital • Skandia AB• Intrum Justita AB• Telia Sonera• Volvo

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Hedge Fund Activism

Activism is not limited to the Hedge FundsActivism is not limited to the Hedge Funds

Contest Dissident

Fidelity • VNU• Clear Channel

T. Rowe Price • Laureate• Diversa• Cablevision

Franklin Templeton • TXU• Taro Pharmaceuticals

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Dealing With Hedge Fund Activism -- PreliminaryDealing With Hedge Fund Activism -- Preliminary

*Source: RiskMetrics Group

Identify and understand shareholder base on an ongoing basis.

Be informed as to investment strategies pursued by any activists that take a position

Don’t panic -- remember that not all hedge funds are activists

Evaluate corporate strategy in light of shareholder base

Ensure corporate strategy has been communicated clearly and concisely to buy side and sell side analysts

Negative sell side comments in particular can be important third party validation for activist

Review all legal and regulatory remedies available

Carefully consider ramifications of each remedy

Review corporate governance structure and proxy proposals well in advance of meeting to determine if changes would be advantageous

Prepare vote projections to evaluate activist's likelihood of success and probable tactics

Vote projections will serve as road map for solicitation strategy by identifying strong and weak constituencies

Prepare for potential attacks against records of Board members and management, if a director fight

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Winning The BattleWinning The Battle

Establish timetable allowing sufficient time to gather favorable votes

Prepare communications tailored to concerns of key constituencies

Messaging must be consistent across constituencies

Personal visits with key investors

Be proactive, not defensive

Maximize turn out from individual shareholders

Fight letters

Advertisements

Telephone Calls

Meet with the relevant proxy voting advisory services.

Even if they are likely to vote against, such meetings can blunt activist’s criticism and can soften what might otherwise be an extremely harsh recommendation

Track votes as they come in to identify voters

Be prepared to adjust strategy during solicitation period

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APPENDIX: PROFILESAPPENDIX: PROFILES

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Trian is an operational activist hedge fund

Trian “seeks to invest in undervalued and under-performing companies and to work closely with the management of those companies to enhance shareholder value through a combination of strategic re-direction, improved operational execution, more efficient capital allocation and stronger focus”

Trian often publishes a “white paper” outlining its investment thesis in a target and a roadmap for value creation

“The form of activism he's practicing is legitimate,” says Heinz's lead director, Tom Usher, the retired CEO of U.S. Steel. “[Peltz has] been a positive force at Heinz.” (Fortune, March 16, 2007)

Past targets include

Wendy’s – After the threat of a proxy fight in 2006, obtained 3 of 15 board seats. Has recently agreed to acquistion

Heinz – Obtained 2 of 12 board seats in a 2006 proxy contest

Cadbury-Schweppes – After Trian acquired a large stake in the company in early 2007, Cadbury-Schweppes announced its intention to separate its confectionery and Americas Beverages businesses

Trian Fund Management (Nelson Peltz & Peter May)Trian Fund Management (Nelson Peltz & Peter May)

Profiles

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Former Chairman of the Securities and Exchange Commission

Has served as corporate monitor of KPMG, WorldCom, Hollinger and Fannie Mae

Launched a hedge fund in 2005 with CalPERs as a principal investor

Breeden will “seek quiet reform where possible and become as actively involved as necessary to achieve desired transformations and prevent value-diminishing corporate actions”

Applebee’s – After threatening a proxy contest in 2007, obtained 2 (of 14) board seats in a settlement

H&R Block – Obtained 3 (of 11) board seats in a 2007 proxy contest

Currently targeting Zale Corp., a specialty jewelry retailer, in which Breeden recently met with management and plans to continue discussions with executives and directors regarding the company's financial performance and strategic options, including an auction of key assets

Breeden Partners L.P. (Richard Breeden)Breeden Partners L.P. (Richard Breeden)

Profiles

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Purchase significant block

File 13D indicating intention to influence direction of company

Threaten or wage proxy contest and/or tender offer

Obtain representation on Board

Force sale, buyback or other extraordinary action

Kerr McGee, Temple Inland, ImClone Systems, MedImmune, Blockbuster, Fairmont Hotels, Lear, Time Warner, Motorola, WCI Communities, Circuit City, Yahoo!

New stakes include BEA Systems, Biogen-Idec

Carl Icahn: Pioneered Strategic Block InvestingCarl Icahn: Pioneered Strategic Block Investing

Profiles

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An active activist: recent targets have included, among others Ligand, Salton, Western Gas Resources, Star Gas Partners, LP, Massey Energy, Potlach, Intercept, Warnaco and Penn Virginia

Claims 28.9% return since ’95

Known for his “take-no prisoners” approach and letter writing style

To the Warnaco Board of Directors (8/21/03):

“…Do not confuse our significant equity stake with a vote of confidence in the Company’s Chairman, C.E.O. or certain members of the Board of Directors. In fact, we have grave concerns about the competency, judgement and motivation of these individuals…Stuart Buchalter, Chairman of the Board of Directors, extracted $500,000 as a non-executive Chairman in 2002 and currently receives the indefensible salary of $250,000 --- an outrageously high sum for a non-executive Chairman who had already been gifted 12,975 free shares. Appallingly, Mr. Buchalter also received a one-time cash bonus of $210,004 upon the Company’s emergence from bankruptcy in February, 2003…I knew little of Mr. Buchalter other than what he told me about himself. He informed me that he had known my father, a former partner at Irell and Manella in Los Angeles and had known my late, great-aunt, Ruth Handler, the legendary founder of Mattel, Inc. (NYSE:MAT). I met Mr. Buchalter in person at a Warnaco Annual Meeting, a handsome middle-aged gentleman, his shock of gray hair and beard and his bold red striped shirt and polka dot red tie made him look oddly like Burt Reynolds character, the pornographic producer, in the film ‘Boogie Nights’.”

Third Point (Dan Loeb)Third Point (Dan Loeb)

Profiles

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To Irik P. Sevin: Chairman, President and CEO, Star Gas Partners L.P (2/14/05):

“…Sadly, your ineptitude is not limited to your failure to communicate with bond and unit holders. A review of your record reveals years of value destruction and strategic blunders which have led us to dub you one of the most dangerous and incompetent executives in America. (I was amused to learn, in the course of our investigation, that at Cornell University there is an ‘Irik Sevin Scholarship.’ One can only pity the poor student who suffers the indignity of attaching your name to his academic record…It is time for you to step down from your role as CEO and director so that you can do what you do best: retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites.”

To Ken Griffin: President, Citadel Investment Group (9/14/05):

“…I find the disconnect between your self-proclaimed ‘good to great, Jim Collins-esque’ organization and the reality of the gulag you created quite laughable. You are surrounded by sycophants, but even you must know that the people who work for you despise and resent you. I assume you know this because I have read the employment agreements that you make people sign…Good luck extracting exorbitant management fees and generating mediocre returns with your bloated organization and ego. By the way, there is little I enjoy as much as watching from afar as your reputation and ‘organization’ declines at the same rate as your falling returns.”

Third Point (Dan Loeb)Third Point (Dan Loeb)

Profiles

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Purchase Founded in 2002, Pirate is an aggressive activist and event-driven hedge fund which reportedly grew from $300 million at the end of 2004 to $1.8 billion in 2006.

Activist investments include Angelica, Brinks and Pep Boys

In 2007, the fund’s assets reportedly declined by 80%

Pirate has recently barred investor withdrawals from two of its funds by designating four stocks held by those funds as “special investments”

In an August 31st letter to investors, Pirate stated “[i]n view of the activist nature of the funds, prior redemptions, market turmoil and their effect on the funds' individual positions and portfolios as a whole, we determined that the best way to manage the positions is through the Special Investment designation”

Pirate CapitalPirate Capital

Profiles

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SOUND ADVICE FOR EXTRAORDINARY CIRCUMSTANCES

Windsor House39 King StreetLondon EC2V 8DQTel 44 (0)20 7710 9960Fax 44 (0)20 7710 9961

501 Madison Avenue20th FloorNew York, NY 10022Tel 1 212 750 5833Fax 1 212 750 5799