Long-Term Investors Increasingly Hiding Behind Activists

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By Che Odom

March 10 — A growing number of shareholder activist campaigns in the U.S. are being backed—often secretly—by long-term investors, which may be signaling a sea change in investor attitudes, attorneys said at a March 10 conference.

“We may end up seeing that the activist hedge funds may start diminishing, and we may see T. Rowe Price and other large asset managers develop activist divisions as their interests are becoming more in line with activists,” Ethan A. Klingsberg, partner in the New York office of Cleary Gottlieb Steen & Hamilton LLP who focuses on mergers and governance matters, said at Georgetown Law School's annual Corporate Counsel Institute in Washington.

Activist shareholders target companies for a variety of reasons, but most commonly because the issuers are under-performing or have controversial governance practices. Other activist efforts are aimed at forcing a company to consider a merger or spin-off, or they are pushing for greater return on capital .

Recently, a wider spectrum of investors are adopting activist issues and tactics. As a result, companies can no longer be concerned merely with the likes of billionaire investors Carl Icahn or John Paulson, because BlackRock, T. Rowe Price, State Street and Vanguard Group are working behind the scenes to support individual activists, according to Carmen Molinos, a managing director in Morgan Stanley’s mergers and acquisitions department who spoke at the conference.

“Longs [long-term investors] are fine hiding behind the activists,” Molinos said.

New Strategy

The new strategy among asset managers has been in the works for years. In 2012, representatives of four investment managers, including T. Rowe Price, told attendees at a Council of Institutional Investors (CII) conference that shareholders must work together more often to bring about governance changes .

In 2015—when U.S. companies saw 375 campaigns—the activists had a strong year generally in getting their way. Companies settled within 56 days on average after an activist demanded board representation, compared with 67 days in 2014 and 74 days in 2013 .

Even index funds, which had been very passive in the past, are becoming more active, Klingsberg said. “The stigma of activists is no longer there, really,” he added.

This presents a challenge for companies because they may not, at least initially, know who they are dealing with when an activist comes knocking about a potential transaction, proxy access or other issue, Molinos said. The first line of defense may be listening, she added.

Assess Vulnerabilities and Listen

Before going into an initial conference with an activist, assess the company’s vulnerabilities so that you can provide a response if and when the investor mentions it, Molinos suggested.

Shareholder engagement, however, can be time-consuming. In fact, year-round engagement is the new norm for large companies, so much so that those involved—executives, directors and investors—are having trouble finding time to accommodate meeting requests, according to reports released Dec. 9 by the CII .

Klingsberg said most companies will not have the time to meet with all asset managers individually, which means they should reserve some staff members so they are available to address particular investors when significant issues arise.

Keep Your Enemies Closer

Activists can serve as allies in fights with more threatening activists. James C. Snyder, former senior vice president and general counsel of Family Dollar Stores Inc., said during the conference that he was able to find an ally in activist-turned-director Edward Garden when Icahn bought a stake in the grocery-store chain hoping to push it into a sale .

Management presented information to Garden to demonstrate that Icahn’s propositions were not in the best interests of the company, and Garden was able to sway enough shareholders, Snyder said.

“You often hear about wolf packs,” Snyder said. “In fact, it may be the opposite. Activists are all independent thinkers and they are their own economic animals, and you may be able to use your information advantage to bring them to your side” when faced with a challenge by other activists.

To contact the reporter on this story: Che Odom in Washington at codom@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com