The Shareholder Activism Report Best Practices and Engagement Tools for Public Companies
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The Shareholder Activism Report Best Practices and Engagement Tools for Public Companies by Matteo Tonello and Damien J. Park
8 Introduction 12 Part I: Recommendations to Public Companies 17 Part II: Shareholder Activism Today The New Economic Context The New Shareholder Rights 39 Part III: Addressing Shareholder Activism Understanding Shareholders Assessing Gaps and Vulnerabilities Responding to Requests for Change 146 Part IV: Directory of Activist Investors 152 Part V: Top 50 Activist Investor Profiles 298 Part VI: Proxy Contest Fact Sheets—2009 329 Part VII: Case Studies 335 Part VIII: Sample Documents DE220 Demand Letter Requesting Shareholder Lists Letters to Management or the Board Shareholder Proposals for Director Nomination Investor Presentation during Proxy Solicitations Settlement Agreements 401 The Shareholder Activism Resource Portal 403 Index of Charts and Tables 406 Appendixes About the Authors About the Expert Committee on Shareholder Activism About the Collaborating Firms Acknowledgements Related Resources from The Conference Board About The Conference Board Governance Center
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Contents (Expanded) 8 Introduction
39 Part III: Addressing Shareholder Activism
12 Part I: Recommendations to Public Companies
40 Understanding Shareholders
Understanding Shareholders Assessing Gaps and Vulnerabilities Responding to Requests for Change
Securities Holdings Intelligence Public filings Limits of Form 13F disclosure Confidential treatment
17 Part II: Shareholder Activism Today
Limits of Schedule 13D disclosure
18 The New Economic Context
Limits of Form 3 and Form 4 disclosure
The Growth of the Hedge Fund Industry
Segmentation of regulatory regime
Institutional investment in hedge fund strategies
Lists of beneficial owners
Shareholder activism as an alternative investment strategy
Securities surveillance services
The 2009 Proxy Season A shift in activism investment strategies 26 The New Shareholder Rights Director Elections
Trade settlement data from custodian banks Ethical and reliability concerns Activist Types and Investment Strategies Pension funds and investment companies
Majority voting
The prudent-man standard of care
Electronic delivery of proxy materials
Engagement-based activism
Broker discretionary voting
Communications among shareholders
Proxy access reform Separate notice and record dates for shareholder meetings Say on Executive Compensation
Supporting role of mutual funds Hedge funds and other private pools of capital Fewer regulatory restrictions Contract-based regulation
Proxy voting support
Compensation structure
Voluntary adoption
Adaptability
Legislative initiatives
Innovation
Enhanced Disclosure Board leadership structure
Activism as an investment strategy Shareholder Engagement
Director and nominee disclosure
SEC rules on board-shareholder communications
Diversity in the nomination process
The role of the governance committee
Directorships held and legal proceedings
Engagement policy
Risk oversight disclosure
Communication matters
Climate change risk disclosure
Communication practices and timing
Risk resulting from compensation policies
The role of the lead independent director
Compensation consulting fees
The role of management
Equity award value reporting
Governance and proxy voting professionals
CEO succession planning
Financial analysts, rating agencies, and proxy voting advisors
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59 Assessing Gaps and Vulnerabilities The Target Profile
The Shareholder Activism Report
CEO succession planning issues Succession planning board committee
High trading liquidity
Succession planning and compensation policy
Undervaluation
Succession planning and ERM
Low capitalization
Good operational performance Cash availability Debt capacity Asset diversification Low R&D expenditures Control enhancement devices Extensive institutional ownership Poor governance and disclosure practices The Activist Demands
Succession planning disclosure Performance evaluation issues Key Governance Issues in Activism Campaigns Board leadership Lead directors Majority voting Source of regulation for director election Board classification Shareholder rights plans (poison pills)
Financial demands
Restrictions on multiple board services
Strategic demands
Director compensation standards
Governance-related and organizational demands Key Financial Issues in Activism Campaigns Liquidity needs and other balance sheet issues Internal control, financial reporting, and auditing issues Financial reporting and MD&A disclosure Mark-to-market issues Key Strategic Issues in Activism Campaigns Strategy oversight issues Societal and business trends Cultural factors Human resources Financial soundness Incentives and controls Innovation and R&D Competition and globalization Stakeholder issues Risk oversight issues Risk inventory Interrelated risks ERM and business strategy Risk assessment ERM and compensation policy ERM and corporate governance ERM executive committee Risk mitigation and other responses Crisis management Risk disclosure
Total director compensation Director compensation mix Additional compensation for committee service Stock ownership guidelines for directors Executive compensation standards CEO—Cash and total compensation CEO—Compensation mix Highest-paid executives—Total compensation Recent shareholder proposals Advisory vote on executive pay Right to call special meetings Removal of supermajority requirements Approval of golden parachutes Anti gross-ups policy Vote on golden coffins Retention period for stock awards Establishment of bonus banks
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15 Responding to Requests for Change The Activist Tactics
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152 Part V: Top 50 Activist Investor Profiles 153 Barington Capital Group
Non-confrontational tactics
156 Breeden Capital Management
Confrontational tactics
158 Bulldog Investors
Threatening as a tactic
161 Cannell Capital
Group tactics Group activism Wolf packs Remora funds Ten-or-fewer rule
164 The Children’s Investment Fund Management (TCI) 167 Clinton Group 170 Costa Brava Partnership III 173 Crescendo Partners 176 D.E. Shaw & Co. 179 DellaCamera Capital Management
Free communication rule
182 Discovery Group
Electronic shareholder forums
184 Elliott Management Corporation
Share borrowing and empty-voting practices
187 GAMCO Investors
Empty voting
190 Greenlight Capital
Over-voting
193 Harbinger Capital Partners
Dividend recapture tactics
196 Icahn Associates Corp.
Fiduciary obligations and share recall
200 Jana Partners
The Delaware record date reform
202 Karpus Investment Management
Corporate Responses Response strategy Strategy execution Outreach as a response and preventive measure Support by proxy advisors Investor and stakeholder relations Outright criticism Defensive Measures Defenses against Hostile Acquisitions Rights plans
206 Lawndale Capital Management 209 Lion Fund 212 Lloyd I. Miller III 216 Locksmith Capital Management 218 MMI Investments 221 Nanes Balkany Partners 223 New Mountain Vantage 225 Newcastle Partners 228 Nierenberg Investment Management 231 Obrem Capital Management 233 Oliver Press Partners
Derivative positions
236 Pershing Square Capital Management
“NOL” rights plans
239 PL Capital/Financial Edge Fund
Section 203 of the DGCL
243 Ramius Capital
Supermajority vote and fair-price requirements
246 Relational Investors
Defenses in Proxy Contests Classified board structures Disallowing action by written consent Limiting the ability to call special meetings Adopting advance-notice bylaws Alternative Transactions
249 RGM Capital 251 Riley Investment Management 254 SAC Capital Advisors 257 Sandell Asset Management 260 Santa Monica Partners 263 Seidman & Associates 266 Shamrock Activist Value Fund 270 Southeastern Asset Management
146 Part IV: Directory of Activist Investors
273 Steel Partners II 275 Stilwell Value LLC 278 Strategic Turnaround Equity Partners 281 Third Point 284 Trian Fund Management 287 ValueAct Capital Management 290 Western Investment 293 Wintergreen Advisers 296 Wynnefield Capital Management
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298 Part VI: Proxy Contest Fact Sheets—2009
324 Tier Technologies, Inc. (Ticker: TIER)
299 Adaptec, Inc. (Ticker: ADPT)
324 TM Entertainment and Media, Inc (Ticker: TMI)
299 Advocat, Inc. (Ticker: AVCA)
325 Tollgrade Communications, Inc. (Ticker: TLGD)
300 Agilsys Inc (Ticker: AGYS)
325 Trico Marine Services, Inc. (Ticker: TRMA)
300 Amylin Pharmaceuticals, Inc. (Ticker: AMLN)
326 USA Technologies, Inc. (Ticker: USAT)
301 Amylin Pharmaceuticals, Inc. (Ticker: AMLN)
326 VaxGen Inc. (Ticker: VXGN)
301 Asure Software; DBA Forgent Networks (Ticker: ASUR)
327 Whitney Information Network, Inc (Ticker: RUSS)
302 Avigen Inc. (Ticker: AVGN)
327 Wilshire Enterprises, Inc. (Ticker: WOC)
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302 BellaVista Capital, Inc. (Ticker: N/A) 303 Biogen Idec Inc. (Ticker: BIIB)
329 Part VII: Case Studies
303 California Micro Devices Corp. (Ticker: CAMD)
330 Target Corporation
304 Cavalier Homes, Inc (Ticker: CAV)
331 Federal Signal Corp.
304 CF Industries Holdings Inc (Ticker: CF)
332 The Children’s Place Retail Stores, Inc.
305 Charlotte Russe Holding, Inc. (Ticker: CHIC)
333 Amylin Pharmaceuticals Inc.
305 Chemed Corporation (Ticker: CHE) 306 Children’s Place Retail Stores, Inc. (Ticker: PLCE) 306 CLST Holdings, Inc. (Ticker: CLHI) 307 CNS Response, Inc. (Ticker: CNSO) 307 Concord Milestone Plus (Ticker: N/A) 308 Consolidated-Tomoka Land Co. (Ticker: CTO)
335 Part VIII: Sample Documents 336 DE220 Demand Letter Peerless Systems Corporation to Highbury Financial Inc. (October 13, 2009) 340 Letters to Management or the Board
309 CPI Corp. (Ticker: CPY)
DellaCamera Capital Management LLC to Enzon Pharmaceuticals (July 1, 2008)
309 DWS RREEF Real Estate Fund, Inc. (Ticker: SRQ)
Obrem Capital, LLC to MDS, Inc. (June 26, 2008)
308 Conseco Inc. (Ticker: CNO)
310 Emulex Corp. (Ticker: ELX) 310 Fauquier Bankshares, Inc. (Ticker: FBSS) 311 Federal Signal Corporation (Ticker: FSS) 311 Highbury Financial Inc. (Ticker: HBRF) 312 Hooper Homes, Inc. (Ticker: HH) 312 Insured Municipal Income Fund, Inc. (Ticker: PIF) 313 iPass Inc. (Ticker: IPAS) 313 LCA Vision Inc (Ticker: LCAV) 314 Mac-Gray Corp. (Ticker: TUC) 314 MRV Communications, Inc. (Ticker: MRVC) 315 Myers Industries Inc. (Ticker: MYE) 315 Neuberger Berman Dividend Advantage Fund Inc. (Ticker: NDD) 316 NRG Energy, Inc. (Ticker: NRG) 316 Online Resources Corp (Ticker: ORCC)
Pershing Square Capital Management, L.P. to Wendy’s International (July 11, 2005) 352 Shareholder Proposals for Director Nomination Pershing Square Capital Management, L.P. to Target Corporation (March 16, 2009) Shamrock Capital Advisors, Inc. to Texas Industries, Inc. (June 29, 2009) 364 Investor Presentation during Proxy Solicitation Shamrock Capital Advisors, Inc. re: Texas Industries, Inc. (October 1, 2009) 390 Settlement Agreements Barington Capital Group and A. Schulman, Inc. (November 15, 2007) Obrem Capital Management, LLC and Micrel, Incorporated (March 19, 2009)
317 ORBCOMM, Inc. (Ticker: ORBC) 317 Orthofix International NV (Ticker: OFIX)
401 The Shareholder Activism Resource Portal
318 Penwest Pharmaceuticals Co. (Ticker: PPCO) 318 PHH Corp. (Ticker: PHH)
403 Index of Charts and Tables
319 Premier Exhibitions, Inc (Ticker: PRXI) 319 Presidential Life Corporation (Ticker: PLFE)
406 Appendixes
320 Providence Service Corp. (Ticker: PRSC)
407 About the Authors
320 Quigley Corporation (Ticker: QGLY)
407 About the Expert Committee on Shareholder Activism
321 Rancher Energy Corp. (Ticker: RNCH)
408 About the Collaborating Firms
321 Specialty Underwriters’ Alliance Inc. (Ticker: SUAI)
409 Acknowledgements
322 Sun-Times Media Group Inc. (Ticker: SUTMQ)
410 Related Resources from The Conference Board
322 Target Corp. (Ticker: TGT)
411 About The Conference Board Governance Center
323 Tecumseh Product Company (Ticker: TECUB) 323 Texas Industries, Inc. (Ticker: TXI)
Introduction Broadly speaking, shareholder activism is any attempt made by a public company investor to influence important business management decisions. Some forms of shareholder activism have existed for a long time, with large investment institutions urging additional corporate transparency or publicly voicing concerns about the long-term value creation strategy of their portfolio companies. However, in the last few years, the phenomenon has undergone a profound transformation that affected not only the type of shareholders involved but also their tactics and ultimate objectives. Today, activism is emerging as a separate class of investing all on its own, and corporations must take notice.
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Only a few years ago, the term shareholder activism was used to describe the effort of a small cadre of large institutional investors (mostly public pension funds or labor unions) to advance the dissemination of better standards of corporate governance in the business community. In retrospect, the denomination of shareholder advocates would have been more suitable to their modus operandi: these funds typically first endorse a set of best practices and then publicly advocate for change in all companies of their investment portfolio that diverge from those standards. Additional pressure may be applied by periodically releasing lists of companies that, despite their underperformance in the stock market, continue to resist efforts to improve their governance profile. (CalPERS, for example, has used its annual Focus List program since 1987, amid research indicating that Focus List companies tend to enjoy some share value increase above market benchmarks in the five years following their inclusion on the list—the so-called “CalPERS effect.”) Even when proven effective, these initiatives are never part of a broadbased investment strategy; rather, they are pursued to renew the commitment of public institutional investors to promoting the highest standards of corporate governance and transparency. As a result of changes that occurred in the last few years, shareholder activism today has assumed quite a different meaning. First, it is more commonly used to refer to the initiative of a different type of asset manager—private investment funds and, more specifically, hedge funds that are not subject to the strict regulatory environment in which pension funds operate. Rather than following more prudent rules of diversification, these entities allocate large sums of capital to a smaller number of investments and make extensive use of leverage techniques to further expand their positions in portfolio companies. Second, and equally important, the activist initiative itself has changed. Companies are specifically selected based on their underperformance and a rank of other criteria signaling that there is room for operational improvements. Requests are targeted to the needs of each company, as often these activists aim at obtaining board representation and a direct involvement in shaping the future strategic direction of the firm. Finally, tactics may include outright confrontation (by means of proxy contests or shareholder lawsuits) in those cases in which the activist does not achieve its objectives through an initial attempt to engage with management or the board. Public pension funds and other large institutional investors may continue to play a role even in the context of this new form of activism; however, theirs tends to be a supporting role that consists of voting proposals introduced by others. The publicity that often results from activism campaigns and the
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recommendations of influential proxy voting advisors (e.g., RiskMetrics) may also induce traditionally passive shareholders, such as mutual funds, to become engaged in the debate on the merit of a certain corporate decision that would otherwise not have been brought to their attention. Ultimately, they might decide to tag along and vote in favor of the dissident and against management, further magnifying the impact of the activism phenomenon. The following driving factors help explain the most recent evolution of shareholder activism:
• The expansion of the private investment fund industry (hedge funds, in particular), which was fueled by the extraordinary market performance preceding the financial crisis of 2008 and the continued search for new alternative investment strategies to outperform the competition.
• The momentum gained by the shareholder rights movement, which was especially galvanized by the emergence of influential proxy voting advisory businesses, the growing success of the campaign in support of majority voting for director elections, and the outrage with which the public most recently reacted to certain excessive corporate practices. These main factors have made shareholder activism a critical force in the current development of corporate governance standards. In the 2009 proxy season alone, activist investors filed resolutions—and received record support levels—on issues ranging from board declassification to the removal of poison pills and from the introduction of “say on pay” to the adoption of anti-gross-ups policies for senior executives. In some cases, activists have been able to engage with board members and management and obtain concessions to their proposals for shareholder value creation, without any recourse to proxy contests or lawsuits. In others, criticism led to confrontation and costly proxy fights or legal disputes. In some cases, companies rightly resisted requests that appeared speculative and self-serving. In others, directors and senior executives failed or refused to properly analyze the rationale of the demands; with their behavior, they contributed to the escalation of the activism campaign, in an extreme attempt to retain control of the business or perhaps underestimating the ability of the dissident shareholder to gain consensus and supporting votes by fellow investors. With The Shareholder Activism Report: Best Practices and Engagement Tools for Public Companies, The Conference Board responds to the need expressed by many of its member companies for education and guidance on how to address situations of shareholder activism. The report fully embraces the
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principle that being proactive and forward-looking is the best of all remedies. The possible exposure to shareholder activism may represent a threat to many organizations. However, it also offers an extraordinary opportunity to proactively review and update business strategies, financial plans, and corporate governance structures to ensure that they reflect new market circumstances and conform to current best practices. The Shareholder Activism Report aims at providing corporations with the tools required to understand their shareholder base, assess gaps and vulnerabilities that could make the company a target, and ultimately respond to possible requests for change.
“Shareholder Activism Today” (Part II) describes the economic and regulatory backdrop that is making today’s shareholder activism possible. It expands on the two main factors mentioned above that are driving activism as a separate investment class, citing data on the growth of the hedge fund industry and narrating the major accomplishments of the movement for enhanced shareholder rights since the adoption of the Sarbanes-Oxley Act of 2002. As part of the discussion on the economic landscape, the report examines the current opportunities for activism as it relates to undervalued companies and analyzes the shift in activist investment strategies resulting from the most recent liquidity crisis.
How to Use This Report
“Addressing Shareholder Activism” (Part III) expands on the recommendations of Part I by reviewing the empirical research that supports them. It is structured into three sections. Understanding Shareholders discusses ways a company can identify and learn about its shareholder base and investors’ expectations, including the systematic review of information included in select public filings, the use of stock watch services, and, most important, the establishment of a program for engaging with large shareholders.
The report is divided into multiple, interrelated parts. “Recommendations to Public Companies” (Part I) contains a list of practical recommendations, which build on the conclusions of The Conference Board’s Working Group on Hedge Fund Activism (2007), as well as on subsequent research regarding the implications of the financial crisis on the shareholder activism phenomenon. The recommendations are primarily intended for corporate directors, as it is the board— along with its monitoring responsibilities—that fulfills a crucial role in setting corporate strategy and ensuring that the organization’s finances and structure are suited to meet the business potentials. Since it encapsulates many of the research findings discussed elsewhere in the report, Part I can also be read as an executive summary of what follows it. To corroborate the research on what is, undoubtedly, an increasingly complex and multifaceted phenomenon, The Conference Board has drawn on a group of experts in several disciplines. The Expert Committee on Shareholder Activism was convened in October 2009 and is composed of leading professionals who contributed to the project a diverse array of expertise (legal, financial, proxy solicitation, investor communication, board assessment and succession planning, among others). Members of the committee provided comments and suggestions on the recommendations, and endorsed their final formulation. Furthermore, in March 2010, to engage a wider range of constituents in an open debate on the merit of these recommendations, The Conference Board released them for public comment. The comment process is open to any interested party, including corporations, investors, academics, selfregulatory organizations, and other interest groups.
Assessing Gaps and Vulnerabilities contains an extensive checklist of issues a company should consider to proactively evaluate the soundness of the strategic plan, the sustainability of the capital structure, and whether the company departs from critical best practices in corporate governance and risk management. To enable an assessment process tailored to the appropriate group of peer companies, most benchmarking data on corporate practices presented in the section are organized by industry and size groups. The discussion is supplemented with information on voting policies by proxy voting advisors, large institutional investors, and other reputable shareholder groups. Similarly, to help prioritize the analyses, this section offers data on the number and level of support of shareholder resolutions on current key issues. Responding to Requests for Change concludes Part III by discussing the steps board members and senior executives should consider taking to respond to explicit requests for change submitted by activist investors. The section supports with empirical evidence the argument that corporations should avoid, to the extent possible, any confrontational reaction or public criticism of investors. Instead, chances of success are higher when business leaders remain open-minded and analytical of the activist demands, without assuming that they reflect shortterm investment goals. However, for those situations in which cooperation appears unfruitful or the board concludes that requests are merely speculative, the section reviews forms of defenses from proxy contests or hostile acquisitions that the company might want to consider adopting.
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“Directory of Activist Investors” (Part IV) lists in alphabetical order all shareholders that filed a Schedule 13D with the U.S. Securities and Exchange Commission (SEC) in the 2008–2009 calendar years and followed with an explicit request for change from the public company. By referring to this list, a company can easily verify whether a new investor in the company’s shareholder base (or a shareholder from which the company has received a significant request) has previously engaged in activism strategies. “Top 50 Activist Investor Profiles” (Part V) features detailed profiles of the top 50 activist investors currently operating in the United States. Investor profiles include: 1. Fund description 2. Fund manager contact information 3. List of current investments 4. A detailed description of recent activism situations 5. References to a variety of activism-campaign related documents Part V was designed to assist companies in the preliminary education process, in which they learn about these investors’ structure, investment style, and track record. By referencing documents used by single activists in previous campaigns, the reader can gain insights into the fund’s tactics and methods. This is particularly true for documents such as letters sent to management or the board and investor presentations made in the course of a proxy solicitation. “Proxy Contest Fact Sheets” (Part VI) summarizes the most notable proxy contests that ended in a shareholder vote in the 2009 meeting season. Summaries are provided as a reference and benchmarking tool. They comprise essential information on:
• Target company • Activist investor(s) • Activist demand(s) • Data on institutional voting • Campaign outcome
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Data in Part VI are corroborated with a list of advisors to the target company and the dissident investor (i.e., legal, public relations, proxy solicitors, board assessment providers, board and executive search services, etc.) “Case Studies” (Part VII) discusses the shareholder activism situations recently faced by four companies—Target Corporation, Federal Signal Corp., The Children’s Place Retail Stores, Inc., and Amylin Pharmaceuticals Inc.—in which dissident shareholders sought board representation in 2009. The companies operate in industries as diverse as retail, manufacturing, and pharmaceuticals. While all of the dissidents were attempting to promote change, including fundamental changes in strategy, operations, organizational structure, corporate governance, and business divestiture, their equity ownership ranged from 3 percent to 30 percent of the company’s shares outstanding. A shaded box in the left highlights the industry in which the companies operate, the enterprise value and board structure, and the activist’s ownership and set of demands. The body of each case study provides the reader with the sequence of events that led to a shareholder vote. “Sample Documents” (Part VIII) concludes the report with a selection of sample documents that may prove useful during a shareholder activism campaign, including:
• DE220 letter to access shareholder lists • Letters to management • Shareholder proposals for director nominations • Presentations made in the course of proxy solicitations • Settlement agreements The Shareholder Activism Resource Portal supplements online this annual report with regular updates. It also contains other resources that could not be incorporated in the printed edition, such as a more comprehensive selection of corporate and investor documents (including examples of charters and bylaws, shareholder rights agreements, advance notice provisions, and other organizational materials) as well as a library of literature (including academic journals and client memorandum by prominent professional firms) on a diverse array of related topics. The Shareholder Activism Resource Portal can be accessed online at www.conference-board.org/sarp.
Part I
Recommendations to Public Companies Part I contains a list of practical recommendations based on the research findings discussed in detail in Part III. The recommendations build on the conclusions of The Conference Board Working Group on Hedge Fund Activism, which was instituted in 2007, as well as on subsequent research regarding the implications of the financial crisis on the shareholder activism phenomenon. The recommendations are primarily intended for corporate directors, as it is the board—along with its monitoring responsibilities—that fulfills a crucial role in setting corporate strategy and ensuring that the organization’s finances and structure are suited to meet the business potentials. Since they encapsulate many of the research findings discussed elsewhere in the report, the following recommendations can also be read as an executive summary.
Part II
Shareholder Activism Today Part II describes the economic and regulatory backdrop that is making today’s shareholder activism possible. It expands on the two main factors that are influencing the development of activism as a separate investment class, citing data on the growth of the hedge fund industry and narrating the major accomplishments of the movement for enhanced shareholder rights since the adoption of the Sarbanes-Oxley Act of 2002. As part of the discussion on the economic landscape, Part II examines the current opportunities for activism as it relates to undervalued companies and analyzes the shift in activist investment strategies resulting from the most recent liquidity crisis.
Part III
Addressing Shareholder Activism Part III expands on the recommendations of Part I by reviewing the empirical research that supports them. It is structured into three sections. “Understanding Shareholders” discusses the ways a company can identify and learn about its shareholder base and investors’ expectations, including the systematic review of information included in select public filings, the use of stock watch services, and (most important) the establishment of a program for engaging with large shareholders. “Assessing Gaps and Vulnerabilities” contains an extensive checklist of issues a company should consider to proactively evaluate the soundness of the strategic plan, the sustainability of the capital structure, and whether the company departs from critical best practices in corporate governance and risk management. “Responding to Requests for Change” discusses the steps board members and senior executives should consider taking to respond to explicit requests for change submitted by activist investors.
Part IV
Directory of Activist Investors This directory lists in alphabetical order all shareholders that filed a Schedule 13D with the SEC in the 2008–2009 calendar years and followed with an explicit request for change from the public company. By referring to this list, a company can easily verify whether a new investor in the company’s shareholder base (or a shareholder from which the company has received a significant request) has previously engaged in activism strategies.
Part V
Top 50 Activist Investor Profiles This features detailed profiles of the top 50 activist investors currently operating in the United States. Investor profiles include: fund description; fund manager contact information; list of current investments; a detailed description of recent activism situations; and references to a variety of activism-campaign related documents. Part V was designed to assist companies in the preliminary education process, in which they learn about these investors’ structure, investment style, and track record. By referencing documents used by single activists in previous campaigns, the reader can gain insights as to the fund’s tactics and methods. This is particularly true for documents such as letters sent to management or the board and investor presentations made in the course of a proxy solicitation. The profiles are exclusively based on public information acquired from SEC filings and investor websites, and often corroborated through direct contact with the respective investors.
Part VI
Proxy Contest Fact Sheets Part VI summarizes the most notable proxy contests that ended in a shareholder vote in the 2009 meeting season. Summaries are provided as a reference and benchmarking tool. They comprise essential information on: target company; activist investor(s); activist demand(s); data on institutional voting; and campaign outcome. Data in Part VI are corroborated with a list of advisors to the target company and the dissident investor (i.e., legal, public relations, proxy solicitors, board assessment providers, board and executive search services, etc.).
Part VII
Case Studies This section presents four companies — Target Corporation, Federal Signal Corp., The Children’s Place Retail Stores, Inc., and Amylin Pharmaceuticals Inc. — in which dissident shareholders sought board representation in 2009. The companies operate in industries as diverse as retail, manufacturing, and pharmaceuticals. While all of the dissidents were attempting to promote change, including fundamental changes in strategy, operations, organizational structure, corporate governance, and business divestiture, their equity ownership ranged from 3 to 30 percent of the company’s shares outstanding. Each case study provides the sequence of events that took place leading to a shareholder vote. Within each case study, boxed material highlights the industry in which the company operates, enterprise value, and board structure, along with the activist’s ownership and set of demands.
Part VIII
Sample Documents Part VIII concludes the report with a selection of sample documents that may prove useful during a shareholder activism campaign. They are organized as follows: I
DE220 letter to access shareholder lists
I
Letters to management or the board
I
Shareholder proposals for director nominations
I
Presentation made in the course of proxy solicitations
I
Settlement agreements
The documents included in Part VIII were either provided to The Conference Board by the investors or the companies that prepared them or, upon approval by those investors or companies, were extracted from the SEC website and reformatted.
The Shareholder Activism Resource Portal The Shareholder Activism Resource Portal supplements online this annual report with regular updates. It also contains other resources that could not be incorporated in the printed edition, such as a more comprehensive selection of corporate and investor documents (including examples of charters and bylaws, shareholder rights agreements, advance notice provisions, and other organizational materials), as well as a library of literature (including academic journals and client memorandum by prominent professional firms) on a diverse array of related topics. The Shareholder Activism Resource Portal can be accessed online at www.conference-board.org/sarp
Index of Charts and Tables
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Index of Charts 91
Chart III.18: Cash Retainer and Total Compensation by Revenue Group
Top-Ten Activist Investors, 2009 Proxy Season
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Chart III.19: Comparison of Director Compensation across Two Years
Chart II.4:
Top-Ten Activist Investors, 2008 Proxy Season
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Chart III.20: Compensation Mix for Board Members by Industry
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Chart II.5:
Activist Demands, 2009
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Chart II.6:
Proxy Contests Initiated in 2009
Chart III.21: Compensation Mix for Board Members by Revenue Group
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Chart III.1: Do you monitor changes in your investor base?
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Chart III.2: If yes, how do you monitor your investor base?
Chart III.22: Median Additional Compensation for Members of Three Major Committees by Industry
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Chart III.3: If you subscribe to a surveillance service, how accurate do you believe the information to be?
Chart III.23: Median Additional Compensation for Members of Three Major Committees by Revenue Group
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Chart II.1:
Hedge fund assets, 1990-2008
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Chart II.2:
Number of hedge funds, 1990-2008
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Chart II.3:
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Chart III.24: CEO Cash Compensation and Total Compensation by Industry
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Chart III.25: Two-Year Comparison, by Industry
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Chart III.26: CEO—Cash Compensation and Total Compensation by Revenue Group
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Chart III.4: How did you learn of the activist investor’s ownership?
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Chart III.5: Institutional asset growth, 19802008
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Chart III.6: Institutional asset growth (by type of institutions), 1980-2008
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Chart III.7: Share of total institutional assets (by type of institution), 1980-2008
Chart III.27: CEO—Compensation Mix Distribution by Industry Group
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Chart III.8: Average Strategy Returns, JanuarySeptember 2009
Chart III.28: CEO—Compensation Mix Distribution by Revenue Group
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Chart III.9: Breakdown by investment strategy type, January-September 2009
Chart III.29: CEO—Compensation Mix Distribution by Asset Group
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Chart III.10: Abnormal share turnover and market returns before and after Schedule 13D filings
Chart III.30: Shareholder Proposals on Key Governance Issues
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Chart III.31: Shareholder Voting on Key Governance Issues
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Chart III.11: Activist Demands, 2001-2006
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Chart III.12: Activist Demands, 2009
Chart III.32: Forms on non-confrontational first engagement
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Chart III.13: Separation of CEO—Chairman Positions and Lead Directors by Industry
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Chart III.33: Breakdown by tactics
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Chart III.34: Success rates, 2007
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Chart III.35: Success rates, 2009
Chart III.14: Separation of CEO—Chairman Positions and Lead Directors by Revenue Group
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Chart III.36: Success rates by demand type, 2007
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Chart III.37: CalPERS Securities Lending Program—Earnings
86
Chart III.15: Board Classification by Industry
135
86
Chart III.16: Board Classification by Revenue Group
Chart III.38 Who in your company first responded to the activist?
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Chart III.17: Cash Retainer and Total Compensation by Industry
Chart III.39: Poison Pills in Force at Year-End, 1998-2008
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Chart III.40: Shareholder Input on Poison Pills, 2000-2009
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Index of Tables 19
Table II.1:
Holdings of hedge funds and alternative instruments by the largest 200 defined benefit plans, 2006-2008
19
Table II.2:
Pension funds among the top 200 with defined benefit assets in hedge funds, 2008
83
Table III.1: Majority Voting by Industry
84
Table III.2: Majority Voting by Revenue Group
85
Table III.3: Source of Regulation for Director Election
85
Table III.4: Source of Regulation for Director Election
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Table III.11: CEO—Cash Compensation and Total Compensation by Industry
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Table III.12: CEO—Cash Compensation and Total Compensation by Revenue Group
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Table III.13: CEO—Cash Compensation and Total Compensation by Asset Group
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Table III.14: Highest-paid Executives—Total Compensation, by Compensation Rank
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Table III.15: Current Activism Campaigns
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Table III.16: Settlement Agreements
87
Table III.5: Shareholder Rights Plans by Industry
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Table III.17: Activism Campaigns Ending in a Shareholder Vote
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Table III.6: Shareholder Rights Plans by Revenue Group
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Table III.18: Withdrawn Demands
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Table III.19: Shareholder Rights Plans in Force, 2009
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Table III.20: Shareholder Proposals Targeting Takeover Defenses
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Table III.7: Restrictions on Multiple Board Service by Industry
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Table III.8: Restrictions on Multiple Board Service by Revenue Group
96
Table III.9: Director Stock Ownership Guidelines by Industry
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Table III.10: Director Stock Ownership Guidelines by Revenue Group
Appendixes I
About the Authors
I
About the Expert Committee on Shareholder Activism
I
About the Collaborating Firms
I
Acknowledgements
I
Related Resources from The Conference Board
I
About The Conference Board Governance Center
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About the Authors Matteo Tonello is director, corporate governance research, at The Conference Board in New York. For The Conference Board, Tonello has conducted governance and risk management analyses and research in collaboration with leading corporations, institutional investors, and professional firms. He has participated as a speaker and moderator in educational programs on governance best practices. Tonello is co-chair of The Conference Board Expert Committee on Shareholder Activism and has recently served on the Technical Advisory Group to The Conference Board Task Force on Executive Compensation. Before joining The Conference Board, he practiced corporate law at Davis Polk & Wardwell. Tonello is a graduate of Harvard Law School and the University of Bologna. Damien J. Park is president and CEO of Hedge Fund Solutions, LLC, a Philadelphia-based firm that provides investment research, strategy, and stakeholder communications consulting to companies and investors involved with shareholder activism. He is cochair of The Conference Board Expert Committee on Shareholder Activism, and in 2008 became a featured commentator on activist investments for TheStreet.com’s RealMoney. He is often quoted in leading business publications, including Wall Street Journal, New York Times, Financial Times, BusinessWeek, CFO Magazine, The Deal, CNN Money, The Nikkei and Newsweek Japan. Park frequently speaks at professional conferences and was the chairman of the Hedge Fund Activism & Shareholder Value Summit in 2008 and 2009. He holds a Master of Business Administration degree from Trinity College, Dublin, Ireland.
The Shareholder Activism Report
This project is part of a broader initiative by The Conference Board Governance Center to build new avenues for meaningful dialogue between companies and their shareholders (see “About The Conference Board Governance Center”). Andrew L. Bab Partner, Debevoise & Plimpton LLP Daniel H. Burch Chairman & Chief Executive Officer, MacKenzie Partners, Inc. Paul Caminiti Managing Director, Sard Verbinnen & Co Arthur Crozier Co-Chairman, Innisfree M&A Incorporated David Drake President, Georgeson, Inc. Edward Ferris Partner, Hedge Fund Solutions, LLC Joele Frank Managing Partner, Joele Frank, Wilkinson Brimmer Katcher Daniel Gagnier Managing Director, Sard Verbinnen & Co Mark H. Harnett President, MacKenzie Partners, Inc. David A. Katz Corporate Partner, Wachtell, Lipton, Rosen & Katz Alan Miller Co-Chairman, Innisfree M&A Incorporated James C. Morphy Managing Partner, Sullivan & Cromwell LLP Justus O’Brien Partner, Egon Zehnder International Inc. Damien J. Park (co-chair) President & CEO, Hedge Fund Solutions, LLC
About the Expert Committee on Shareholder Activism To corroborate the research on what has become an increasingly complex and multi-faceted phenomenon, The Conference Board has drawn on a group of experts in several professional disciplines. The Expert Committee on Shareholder Activism was convened in October 2009 and is composed of leading professionals who contributed a diverse array of expertise (legal, financial, proxy solicitation, investor communication, board assessment and succession planning, among others) to the project. Members of the committee provided comments and suggestions on the recommendations included in Part I and endorsed their final formulation. In addition, the group remains engaged in the development and update of the Shareholder Activism Resource Portal. The Conference Board thanks each firm for its generous support of this research and educational project. (See “About the Collaborating Firms,” p.408). In March 2010, to engage a wider range of constituents in an open debate on the merit of the recommendations, The Conference Board released them for public comment. The comment process is open to any interested party, including corporations, investors, academics, self-regulatory organizations, and other interest groups. To learn more about the comment process or submit your comments, visit www.conference-board.org/sarp.
Rachel L. Posner Senior Managing Director & General Counsel, Georgeson, Inc. Jeffrey J. Rosen Partner, Debevoise & Plimpton LLP Matthew Sherman Partner, Joele Frank, Wilkinson Brimmer Katcher Matteo Tonello (co-chair) Director, Corporate Governance Research, The Conference Board, Inc. Marc R. Trevino Partner, Sullivan & Cromwell LLP Kim A. Van Der Zon Partner, Egon Zehnder International Inc.
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About the Collaborating Firms With this report, The Conference Board Governance Center responds to the need expressed by many of its member companies for education and guidance on how to address situations of shareholder activism. The Conference Board thanks the following leading professional firms—all of which have distinguished themselves for their expertise on issues related to shareholder activism —for contributing financially to this educational initiative, as well as for sharing their invaluable intellectual resources and knowledge.
Debevoise & Plimpton LLP is a leading international law firm with extensive experience advising boards, independent directors and standing and special board committees on governance, fiduciary and M&A and other transactional matters. The firm regularly represents boards confronted with high-profile challenges ranging from shareholder activism and proxy fights to insider transactions, litigation, derivative actions, and high-level government investigations. Frequently Debevoise’s lawyers advise on situations that cut across an array of disciplines and unfold in multiple arenas—courtroom actions, contests for control, government probes, financial defaults and media and public relations crises. Debevoise has offices in New York, Washington D.C., London, Paris, Frankfurt, Moscow, Hong Kong, and Shanghai.
Founded in 1964, Egon Zehnder International is the world’s leading privately owned executive search and appraisal firm with some 380 consultants, working in 63 offices in 37 countries around the world. The firm was founded with a distinctive vision and structure aimed at creating corporate value through the assessment and recruitment of top-level management resources. Egon Zehnder’s core services include executive search, board consulting and director search, and talent management and assessment. The firm’s clients range in size from the world’s largest corporations to emerging growth companies and include all industry sectors.
Georgeson Inc. is the world’s leading provider of strategic proxy and corporate governance advisory services to corporations and shareholder groups working to influence corporate strategy. For over half a century, Georgeson has specialized in complex solicitations such as hostile and friendly acquisitions, proxy contests and takeover defenses. In 2008, Georgeson was the No. 1 proxy solicitor for M&A transactions worldwide. The firm also provides issuers with expertise in corporate events solutions such as post-merger unexchanged holder programs and information agent services.
Hedge Fund Solutions, LLC (HFS) provides investment research, strategy and stakeholder communications consulting to companies and investors interested in, or involved with, shareholder activist campaigns. Since 2001 HFS has become the trusted advisor to numerous institutional investors, CEOs and board members worldwide. The firm publishes The Catalyst Equity Research Report™, a free weekly report highlighting the companies being targeted by activist investors, and Catalyst Investment Research™, a fee-based research service that combines company-specific shareholder activism research with deep value investment analysis and access to industry insiders.
Innisfree M&A Incorporated is a full service proxy solicitation/investor relations firm providing clients with tactical and strategic advice and results-oriented implementation in proxy and consent solicitations (whether friendly or contested), tender and exchange offers, mergers, rights offerings, strategic restructurings and other domestic and cross-border transactions requiring action by public security holders. The firm’s services range on a wide array of matters, including executive compensation proposals, corporate governance issues and investor relations. Innisfree tracks, identifies and understands the shifting dynamics of a company’s security-holder base and provides advice based on that information.
Joele Frank, Wilkinson Brimmer Katcher (JF, WBK) provides communications counsel and support to help corporations advance their business and strategic objectives. JF, WBK’s clients include both large, global public corporations and smaller, private enterprises in a wide range of industries. JF, WBK consistently ranks among the top PR firms in announced M&A transactions, as well as restructurings. Areas of expertise include financial public relations and investor relations, transaction communications (mergers and acquisitions, IPOs, spin-offs, shareholder activism/proxy fights, unsolicited transactions), crisis communications (bankruptcies, restructurings, litigation, product liability, regulatory investigations, earnings surprises, management changes, labor strife), and public affairs and issues management.
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MacKenzie Partners, Inc. is a full-service proxy solicitation, investor relations and corporate governance consulting firm specializing in mergers-and-acquisitions and proxy contest related transactions. The firm has offices in New York City, Los Angeles, Palo Alto and London. MacKenzie’s services include—in addition to traditional proxy solicitation—corporate governance consulting, security holder solicitations, information agent services for tender and exchange offers, beneficial ownership identification, market surveillance and associated financial, investor and media relations services. MacKenzie professionals work in close partnership with their clients’ attorneys, investment bankers and other consultants, providing advice and counsel at each stage of the transaction.
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Founded in 1965, Wachtell, Lipton, Rosen & Katz is one of the most prominent business law firms in the United States. The firm specializes in merger and acquisition transactions, sensitive litigation matters, advice on corporate governance and related matters, and corporate restructurings. The firm handles demanding, high-profile transactions and advisory matters on an extremely personalized basis. Clients include enterprises of virtually every nature, such as industrial firms, financial institutions, securities firms, healthcare and pharmaceutical providers, technology companies, and media and information systems companies, including many Fortune 500 companies and other leading enterprises, in the United States and around the world.
Acknowledgments With offices in New York, Chicago and San Francisco, Sard Verbinnen & Co works at the nexus of investor and media relations, maintaining close relationships with financial journalists, financial analysts and the institutional investing community. The firm was founded in 1992 on the principle that clients want responsive, actively involved senior advisors, sound and realistic strategic counsel, high-quality writing and skilled implementation of agreed-upon plans. SVC has counseled hundreds of clients on a wide range of corporate communications and investor relations programs and situations, and has consistently ranked among the top M&A communications advisory firms. The firm has also helped clients handle communications surrounding sensitive legal and governance issues, including counseling companies and individuals regarding proxy fights, shareholder activism and litigation, civil and criminal actions, and regulatory matters.
Drawing on more than 130 years of industry leadership, Sullivan & Cromwell provides its global clients with legal expertise across a range of practice areas. With 12 offices on four continents, the firm quickly mobilizes the requisite resources to meet client needs. A pioneer and global leader in corporate governance and shareholder activism, the firm advises clients on the largest and first-of-their-kind contested transactions. Sullivan & Cromwell’s lawyers have a strong record of success representing potential acquirors and targets in hostile or unsolicited transactions, and in providing corporations and their boards with tailored advice on “best practices” related to shareholder relations and risk management.
The authors would like to thank the members of The Conference Board Expert Committee on Shareholder Activism for their intellectual contributions to the project: Andrew L. Bab, Daniel H. Burch, Paul Caminiti, Arthur Crozier, David Drake, Edward Ferris, Joele Frank, Daniel Gagnier, Mark H. Harnett, David A. Katz, Alan Miller, James C. Morphy, Justus O’Brien, Rachel L. Posner, Jeffrey J. Rosen, Matthew Sherman, Marc R. Trevino, and Kim A. Van Der Zon. The following firms provided invaluable help in collecting the information on advisors to companies and investors that was used in the proxy contest fact sheets: Georgeson, Inc.; Joele Frank, Wilkinson Brimmer Katcher; MacKenzie Partners; Olshan Grundman Frome Rosenzweig & Wolosky LLP; and Sard Verbinnen & Co. Additional thanks go to Frederick H. Alexander, Mark S. Bergman, Barbara Blackford, Timothy Brog, Timothy Concannon, Stephen Davis, Paul DeNicola, Janet Geldzahler, Jonathan Heller, Bill Ide, Jared Landaw, John Lukomnik, Mark Livingston, Samuel Park, Glen Schleyer, June Shelp, Jon Spector, John C. Wilcox, and Steve Wolosky for their comments and suggestions. Finally, the authors are grateful to Peter Drubin, Chuck Mitchell, Marta Rodin, and the entire Publishing team for their editorial and production assistance.
Publications Team Editor Marta Rodin Contributing Editors Timothy Dennison, Chuck Mitchell Design Peter Drubin Production Andrew Ashwell, Felton Brown, Margaret Cesario, Curtis Franklin, Rita Jones, Maria Cristina Rueda, Pam Seenaraine,
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Related Resources from The Conference Board Directors’ Institute The premier provider of governance education for directors, the Directors’ Institute offers your choice of round table forums or customized in-house forums. The Directors’ Institute brings together current and former directors, chairman, and CEO’s to share their experiences and wisdom with your company’s directors in a completely non-academic, hands-on format.
Publications Director Notes Adapting to Regulatory Developments and Emerging Practices Directors’ Duties and the Pursuit of Social Investments
• Only foremost directors and practitioners—not academics— serve as faculty, sharing their vast experience.
From Compliance Governance to Strategic Governance
• Topics covers practical “real-world” and “red-flag” issues.
The Duty to Monitor under Delaware Law: From Caremark to Citigroup
• Limited session size and restricted attendance to sitting directors to provide high-level peer dialogue. • One intensive program provides directors with a timeefficient method of getting up to speed with the latest best practices.
Councils
Directors’ Duties under the New SEC Rules on Disclosure Enhancement Executive Action Reports “The Role of the Board in Turbulent Times” Series Overseeing CEO Succession Planning
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Responding to Unsolicited Takeover Offers
Council on Corporate Compliance and Ethics
Avoiding Shareholder Activism
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Overseeing Internal Investigations
European Council on Corporate Governance European Legal Council Global Council on Business Conduct Council of Chief Legal Officers
Assessing Corporate Strategy: Liquidity Needs, Strategic Transactions, Internal Controls and Disclosure Overseeing Risk Management and Executive Compensation: Pressure Points for Corporate Directors Political Money: The Need for Director Oversight The Allure of Private Equity and Its Impact on Performance Pay in Publicly Held Companies Private Equity: Pirates or Saviors?
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The Governance Center draws upon almost two decades of authoritative research on issues of corporate law, governance, and risk oversight. Most recently, The Conference Board instituted the Task Force on Executive Compensation under the auspices and with support from Governance Center members. The Task Force was co-chaired by Robert E. Denham, former chairman and CEO of Salomon Inc., and Rajiv L. Gupta, former chairman and CEO of Rohm and Haas Company. Its members included Richard E. Cavanagh, former president and CEO of The Conference Board; Richard Ferlauto, deputy director of policy at the Securities and Exchange Commission’s Office of Investor Education and Advocacy and former director of corporate governance and pension investment at the American Federation of State, County and Municipal Employees (AFSCME), R. William Ide, III, chairman of The Conference Board Governance Center Advisory Board and former president of the American Bar Association; and Lord Charles David Powell, member of the board of directors of Caterpillar Inc., LVMH Moet Hennessy Louis Vuitton, and Mandarin Oriental International Ltd. The Task Force issued recommendations to public companies in September 2009. The final report of the Task Force is available at www.conference-board.org/pdf_free/ExecCompensation2009.pdf
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