NATIONAL DIRECTORS INSTITUTE - Foley & Lardner · NATIONAL DIRECTORS INSTITUTE Executive Exchange...
Transcript of NATIONAL DIRECTORS INSTITUTE - Foley & Lardner · NATIONAL DIRECTORS INSTITUTE Executive Exchange...
NDINATIONAL DIRECTORSINSTITUTE
Executive Exchange
CO-SPONSORS
IN-KIND SPONSORS
Preparing Your Board to Deal With Activist Shareholders
PREPARING YOUR BOARD TO DEAL WITH ACTIVIST SHAREHOLDERS
Panel: Phillip Goldberg, Foley & Lardner LLPBenjamin Garmer, Foley & Lardner LLPRick Grubaugh, D.F. King & Co.Mohammed Ali, CarboniteGreg Taxin, Spotlight AdvisorsRichard Lashley, PL Capital LLC
Activist Simulation Exercise
During the breakout session, the Panel will be separated into two teams.
Activist Team: Phillip Goldberg, Richard Lashley and Greg Taxin
Company Team: Mohammed Ali, Ben Garmer and Richard Grubaugh
The Panel and other participants are to assume that an initial 13D was filed by anactivist investor group.
The Panel and other participants are to assume that simultaneous with the filing of theinitial 13D, the activist group forwarded the attached letter (an actual letter prepared byan activist fund) to the Company announcing its share acquisition and views onCompany performance and direction.
The exercise will begin with the Company Team discussing first steps in reacting andresponding to the activist letter.
The Activist Team will then consider/discuss the Company Team’s response.
The teams will proceed to discuss how the activist engagement might progress, whatsteps would likely be taken and ultimately, how those steps might be viewed by the proxyadvisory firms and shareholders (both institutional and retail) asked to decide theoutcome.
Breakout participants are encouraged to interject at any time during the course of thisexercise to ask questions and weigh in on strategy.
Activism Preparation Presentation
October 21, 2015 © 2015 D.F. King & Co., Inc. Strictly Confidential
Table of Contents • Section 1 – Overview of Current Activism Landscape
• Section 2 – What to Do / What to Expect • Section 3 – Proxy Contest Stats
OVERVIEW OF CURRENT ACTIVISM LANDSCAPE Section 1:
2014 – 2015 Season Highlights
Carl Icahn
Corvex/Related Casablanca
Carl Icahn
Trian Partners
Trian Partners
Starboard Value LP
Large Companies Under Attack
Contests for Control
Glenview Capital Management TPG-Axon
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Appaloosa Management LP, Taconic Capital Advisors LP,
Harry J. Wilson
Land & Buildings Investment Management LLC
Elaine Wynn
H Partners Management LLC
Elliott Management Groveland Capital, LLC Daniel and Nathan Milikowsky
Starboard Value LP
Pershing Square / Valeant Pharmaceuticals
2014 - 2015 Season Highlights
Pershing Square / Valeant Pharmaceuticals
TIG Advisors Alan Spachman Brandes Investment Partners
Unsolicited Offers
Starboard Value LP
Contested Mergers
Special Meetings
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Jeffrey Moore
Land & Buildings Investment Management LLC, Orange Capital LLC
Engine Capital Management LLC BCG Partners,
Inc.
Starboard Value LP, Oliver Press Partners
LLC
Teva Pharmaceuticals Mylan N.V.
Who are the Activists?
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• 3G Capital Partners
• Altai Capital
• Appaloosa Management
• Atticus Capital
• Barington Capital
• Becker Drapkin Management
• Biglari Capital
• Blue Harbour Group
• Breeden Partners
• B. Riley
• Bulldog Investors
• Cannell Capital
• Carlson Capital
• Casablanca Capital
• Chieftain Capital
• Citadel
• Clinton Group
• Coghill Capital
• Coppersmith Capital
• Corvex Management
• Crescendo Partners
• Davis Selected Advisers
• D.E. Shaw & Co.
• Dialectic Capital
• Discovery Group
• Dolphin Partners
• Elliott Associates
• Engaged Capital
• Engine Capital
• ESL Partners
• Farallon Capital Management
• First Manhattan
• Franklin Mutual Advisers
• GAMCO
• Glenview Capital
• Greenlight
• H Partners
• Harbinger Capital
• Hayman Capital
• Heng Ren Investments
• Highfields
• Highland Capital Management
• Icahn Capital
• Isaac Capital
• JANA Partners
• Jet Capital
• Jewelcor Management
• Karpus Investment Management
• Lawndale Capital Management
• LCV
• Lone Star Value Management
• Locksmith Capital Management
• Loeb Capital Management
• Lucas Advisors
• Marcato Capital Management
• Mason Capital
• MCM Management
• Mercury Real Estate Advisors
• Millennium Management
• MMI Investments
• Newcastle Partners
• Noonday Asset Management
• Oliver Press
• Pardus Capital Management
• Point72
• Pershing Square
• PL Capital
• Raging Capital
• Red Mountain Capital
• Roark, Rearden & Hamot
• Sachem Head
• Sandell Asset Management
• Sarissa Capital
• Scepter Holdings
• Seidman and Associates
• Seneca Capital
• Shamrock
• SMP Asset Management
• Soroban Capital
• SpringOwl Asset Management
• Stadium Capital
• Starboard Value (formerly Ramius)
• Steel Partners
• Stilwell Value
• Third Point
• TCI
• TPG-Axon
• Tracinda
• Trian
• Tudor Investment
• ValueAct Capital
• Vertex Capital
• Voce Capital
• Viking Capital
• Western Investment
• Wynnefield Capital
What’s Different in Current Activism Climate?
• Activists more sophisticated in their analysis and communications
• Larger companies targeted
• Investors seeking appraisal rights
• Hedge funds interfering with announced transactions
• New types of alliances
− Among activists
− Corporations joining with hedge funds
• More funding; above average hedge fund returns
• Increase clout in board rooms
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Trends in Shareholder Activism
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• Growth of dedicated activist funds
− Publicly traded activist funds
• Increasing diversity of activists
− Dedicated activist funds
− Occasional / opportunistic activists
− Small holder activism
• Accelerating the pace of activism
− Companies being targeted after short periods of underperformance
− Activists using special meetings / other tactics to pursue campaigns outside annual meeting
window
− “Real-time” activism via CNN, Twitter, etc.
• Recurrent activism
− Companies can no longer count on being a one-time target
How Activists Pick Their Targets
• Potential takeover target
• Business units with no synergies
• Potential for spin off or divestiture
• Significant cash on balance sheet
• Compensation
• Performance
• Missed targets and/or earnings
• Underperforms compared to peers
• Shareholder profile
• Corporate governance structure
• Threshold to call special meeting
• Ability to act by written consent
• Staggered board
• Pay for performance concerns
• Director qualifications and tenure
• Previous years vote results
• Overall support
• Quorum
• Capital allocation (e.g., returning cash to shareholders)
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Key Motivations for Shareholder Activism
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Short-Term Gain Most shareholder activism is motivated by a single goal –
to make money, in a timeframe generally measured from a matter of
months to 1-2 years
Long-Term Frustration A substantial, long-term investor or
group that is disappointed by investment performance pursues activism, usually as a last resort
Internal Division A founder, current or former senior
manager or board member disagrees with the company’s strategy or
leadership and campaigns for change
Source: FactSet Shark Repellent
Activism Will Remain Part of the Landscape
• Expanded array of tactics
• Superior financial performance of some
activist funds
• Willingness of mainstream investors to
join the fray
Activists also benefit from…
• Excess cash
• Low borrowing costs
• Investor skepticism
Activists have been encouraged by their own success
Activist hedge fund assets under management has significantly increased: ($36B in 2009 to $200B+ in 2015)
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WHAT TO DO / WHAT TO EXPECT Section 2:
Common Activist Themes
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M&A Explore strategic alternatives
• Sale of the company or other strategic transaction
• Spin-off or sale of divisions or assets
Operational
Seek operational improvements • Reduce costs
• Eliminate business lines or products
• Pursue new business strategies
Balance Sheet
Return capital to shareholders • Share buyback program
• Special dividend
Corporate Governance
Improve corporate governance • Change management/board composition
• Separate chairman / CEO role
• Declassify board
• Compensation reform
• Other corporate governance changes (e.g., repeal poison pill)
Evolution of an Activist Campaign
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Phase I Information Gathering
• Due diligence
• Attend public
presentations
• Speak to third
parties
• Meet with
management
Phase II Accumulation
• Toehold
• “Stealth”
accumulation
• Public
disclosure/13G/
Vanilla 13D
Phase III Escalation
• Aggressive 13D
• Letters to management
• Engagement with
shareholders
• “White Paper”/public
presentation
• Proxy contest
• Bid/value maximization
demand
Phase IV Exit
• Sell on appreciation
• Sell on transactional
event
Dealing with a Contested Situation – What Can the Board Expect
• Opposition – Company, Board and management team go under a microscope
– Greater scrutiny by investors and media
– No strategy or statement goes unchallenged
– Directors and management open to public criticism
• Similar to a Political Campaign – Battle for shareholder support / votes
– Rhetoric can often be heated
– Third party advocates needed
– Strategic, “ rapid response” communications required
• Critical to stay on message and control the forum for delivery
• Key strategic discussions to be made in close cooperation with the Board
• Necessary to screen phone calls (office and cell) – Dissidents may try to contact Board members directly, all conversations are “on the record” and any comments
may be used by dissidents in their proxy materials
– Preference is for all communications to be channeled through designated spokespeople
Everything you say can and will be used against you
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Potential Steps to Avoid Becoming an Activist Target
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While every situation is different, there are a number of guidelines for reducing activist vulnerability. Advance preparation is key to successful defense outcomes.
Assess Performance Against Peers
• Review share price performance and operational benchmarking compared to peers
• Assess any potential valuation gaps
Review Capital Allocation Policies
• Comparison of cash balance compared to peers – communication to street on liquidity needs
• Periodic review of potential for changes to buyback or dividend policy
• Provide investor roadmap on capital allocation targets
Review of Business Portfolio
• Review of potential underperforming business units or businesses frequently considered “non-core” by street
• Communications with street on turnaround plans and timing
• Periodic review of potential value creation from asset sales or spins
Investor Communication • Be mindful of investor sentiment regarding potential “hot button” issues • Careful communication around acquisition strategy
Preparing to Engage Activists
• Identify the most credible spokespeople on your team and regularly ascertain feedback • Important to know where you stand • Do not refuse or shy away from meetings with potential activists
− Meetings with activist early in process help with understanding of threat level and specific attacks • Important to hear activist feedback and agree to discuss activist ideas with working group • Open and candid communication early in the process can help in attaining support from investors
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Maximize Likelihood of Favorable Shareholder Interaction
• Articulate company strategy consistently • Take investors’ calls whenever possible to gauge support for current board’s strategy • Take advantage of all opportunities to communicate • Get in front of any negative developments • Constantly update ownership reporting and vote projections based on feedback received
from investors
Seek to anticipate/defuse contentious situations
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Top 10 “Do’s” for Staying Prepared
1) Be proactive – identify and address potential vulnerabilities
2) Keep the board informed and constructively engaged
3) Define core messages / positioning and set clear benchmarks
4) Keep shareholders close – be nimble and adjust approach as needed
5) Be open to engaging the dissident
6) Focus on your company’s strengths and business
7) Maintain tight team communications
8) Be measured in responses and prepared for rapid response escalation
9) Continually review defensive posture
10) Recognize that everything you say can and will be used against you
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Organizational Checklist
• Organizational Considerations / Contingencies – Retain defense team (law firm, investment bank, PR firm, proxy solicitor)
– Decide whether to engage with the activist / protocol for engagement
– Role of investor relations / scheduling investor meetings
– Public relations / corporate communications
– Communications to employees
– Determine if additional external advisors will benefit process
• Board Considerations – Inform board of responsibilities
– Dissident may attempt to contact board members
– Decide whether situation warrants setting up a special committee
– Decision on hiring any outside consultants
• Tactical Strategy – Who will run the fight?
– How do we set the tone?
– Complete review of the company’s defenses
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PROXY CONTEST STATS Section 3:
Number of Proxy Contests
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42 56 100 109 126 133 100 93 77 90 92 95 1
52%
43%
37%35%
41% 38% 37%
27%
36%33%
35%
27%
0%
10%
20%
30%
40%
50%
60%
0
20
40
60
80
100
120
140
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Number of contests % Went to vote
*Data as of September 9, 2015 Source: FactSet Shark Repellent
Proxy Contest Results 2015
Proxy Contest Results 2013-2014
Proxy Contests Results for Minority Representation
Total: 43 Meetings Total: 60 Meetings
1 Includes proxy contests that went to a vote Data: Russell 3000 Index Members
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21%
16%
47%
16% 20%
22%
46%
12%
ISS / GL Support at Proxy Contests for Minority Representation
ISS Support: 2013-2014 ISS Support: 2015
Glass Lewis Support: 2015 Glass Lewis Support: 2013-2014
1 Includes proxy contests that went to a vote Data: Russell 3000 Index Members
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Published Recommendations : 16 Meetings Published Recommendations : 25 Meetings
38% 62%
Supported Board Supported at Least 1 Dissident
56% 44%
Supported Board Supported at Least 1 Dissident
40%
60%
Supported Board Supported at Least 1 Dissident
56%
44%
Supported Board Supported at Least 1 Dissident
Proxy Contest Results 2015
Proxy Contest Results 2013-2014
Proxy Contests Results for Board Control
Total: 17 Meetings Total: 26 Meetings
1 Includes proxy contests that went to a vote Data: Russell 3000 Index Members
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12%
12%
64%
12% 4%
50% 38%
8%
Dissident obtained board control at 9 meetings Dissident obtained board control at 5 meeting
ISS / GL Support at Proxy Contests for Board Control
ISS Support: 2013-2014 ISS Support: 2015
Glass Lewis Support: 2015 Glass Lewis Support: 2013-2014
1 Includes proxy contests that went to a vote Data: Russell 3000 Index Members
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Published Recommendations : 4 Meetings Published Recommendations : 14 Meetings
75%
25%
Supported Board Supported at Least 1 Dissident
50%
50%
Supported Board Supported at Least 1 Dissident
21%
79%
Supported Board Supported at Least 1 Dissident
29%
71%
Supported Board Supported at Least 1 Dissident
Both ISS and Glass Lewis supported Dissident control at 0 meetings Both ISS and Glass Lewis supported Dissident control at 4 meetings
Dissident Success in Proxy Contests
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1Number of outright victories, partial victories or settlements by the dissident as a percentage of all proxy contests where an outcome has been reached, 2Includes proxy contests for board control or representation from January 1, 2013 to June 30, 2015, excluding funds
Source: FactSet Shark Repellent
Dissident Success Rate1 Proxy Contest Outcomes2
Total: 146 Proxy Contests