V1DIS

Corporate Board MemberWest Coast Boardroom Summit

& Peer Exchange

Topic Breakout:Preparing for Shareholder Activism

March 5, 2014

William P. FiskeSenior Managing DirectorGeorgeson Inc.

Kenton J. KingPartnerSkadden, Arps, Slate Meagher & Flom LLP

Topic Breakout: Preparing for Shareholder Activism

2

AGENDA

Shareholder Activism• Trends and Drivers• What Makes an Activist a Target?

M&A Activism• “Bumpitrage”• Spin-offs and Break-ups

Governance Activism• Director Elections• Shareholder Proposals

Responding to Activism• Advance Preparation• Investor Engagement and Dialogue

3

Shareholder ActivismRECENT TRENDS

Increasing frequency of overall activism against companies• Many situations “settle” before a proxy fight• Activists do not always seek board seats

Larger-cap companies increasingly being targeted

Sympathetic media attention on activists

More sophisticated approach by activists • Detailed economic theses• Hiring experienced financial, legal and proxy advisors• Nominating highly qualified director candidates• Willing to lay groundwork early – well in advance of a contest – including reaching

out to shareholders for public support early in the process

Emergence of new, next -generation activist funds o Keith Meister – Corvex Managemento Jeffrey Eberwein – Lone Star Value Fundso Scott Ferguson – Sachem Head Capital Managemento Richard “Mick” McGuire – Marcato Capital Management

Traditional long-term institutional investors increasingly willing to support an activist if dissatisfied

• Some are even encouraging activists to initiate campaigns in their portfolio companies

Shareholder Activism

In fights that “go the distance,” dissidents are winning more frequently

2010 2011 2012 20130%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

35%44% 46%

60%

65%56% 54%

40%

Dissident (or split) Victory Mgmt Victory

Fights That Went The Distance

Source: Sharkrepellent.net

Shareholder Activism

ACTIVISM DRIVERS

Often M&A driven

• Restructurings – sale of all/parts of companies and spin-offs

Increasingly focused on perceived financial weaknesses/vulnerabilities in companies

• Operational underperformance vs peers

• Recapitalization – leveraging up and buying back shares

• Underperforming CEO/management teams

Emphasis on governance weaknesses

• Board composition

• Executive compensation

• Corporate governance structures that are deemed to not be in the best interests of shareholders

5

Each situation requires specific analysis and an understanding of the temperament, tactics and capabilities of the relevant activist or bidder – all activists are not the same

Notable Activist Campaigns

6

Carl Icahn  

1/22/2014 8/13/2013 3/6/2013 2/14/2013 1/25/2013 10/31/2012 5/25/2012

GreenlightCapital

 

10/17/2011 5/26/2011 3/31/2011

ElliottManagement

 

5/16/2013 1/28/2013 11/26/2012 11/23/2012 5/14/2012

JANAPartners

 

9/71/2013 4/29/2013 4/11/2012 8/14/2012

Marcato

 

2/8/2013 11/28/2012 4/5/2012

PershingSquare

 

7/31/2013 5/16//2013 12/19/2012 7/12/2012 10/28/2011 10/8/2010

Corvex

 

12/3/2013 12/19/2012 11/28/2012 4/5/2012

StarboardValue

 

4/29/2013 1/22/2013 11/26/2012 11/1/2012 9/17/2012

Third Point

 

5/14/2013 10/2/2012 9/8/2011

Trian

 

8/15/2013 3/22/2013 11/7/2012 6/18/2012 5/9/2012

ValueAct 

4/22/2013 3/12/2013 11/28/2012 7/6/2012

.

Types of Activism

7

Investment Thesis

Goal Select Recent Examples

M&A

Operational

CapitalStructure

Potential M&A Target

Sale ofCompany

UnderperformingCompanies

Change in Management /Board / Structure

Change in Operations /Business Strategy

Businesses withDivestible or Non-Core Assets

Divestitures / Break-Up

Balance SheetCapacity / Cash-RichSituations

Return Cash toStockholders

• Carl Icahn / Oshkosh Corp.• Carl Icahn / CVR Energy• Elliott / BMC Software• Carl Icahn / Clorox• Elliott / Actelion• Carl Icahn / Mentor Graphics• Carl Icahn / Genzyme

• Carl Icahn / Biogen Idec• Trian / Family Dollar• Ramius / Luby’s• Elliott / Compuware• Value Act / Gardner Denver

• Pershing Square / Procter & Gamble

• Third Point / Yahoo!• Pershing Square / Canadian

Pacific• Carl Icahn / Forest Labs

• Ramius / CPI• Starboard / Regis

Corporation• Carl Icahn / Genzyme• Carl Icahn / Nuance

• Clinton Group / Stillwater• Starboard / Progress

Software• Elliott / Iron Mountain

• Trian / Heinz• Ramius / Zoran• Starboard / AOL• Carl Icahn / Oshkosh Corp.

• JANA / McGraw Hill• Relational / L-3• JANA / El Paso• ValueAct / Sara Lee• Pershing Square / Fortune

Brands• Relational / ITT

• Carl Icahn / Motorola• Ramius / SeaChange• Pershing Square / Target• Third Point / Sony• Barington Capital / Darden

Restaurants • Carl Icahn / eBay

• Elliott / Iron Mountain• Relational + JANA / Charles

River Labs• Carl Icahn / Transocean• Relational / Home Depot

• Carl Icahn / JANA / SAC / Time Warner

• Carl Icahn / Apple

8

What Makes a Company a Target?The following might make a company more susceptible to being the target of a shareholder activist campaign:

Financial Vulnerabilities

• A P/E ratio that is lower than industry peers 

• Capital allocation

• Poor stock performance relative to peers

• Underperformance of specific business segments

• Overcapitalized (i.e., excess cash on the balance sheet) or underleveraged companies

• Non-core businesses or assets that can be divested

• Parts are worth more than the whole

• Pursuing significant capital investment plans

Governance Vulnerabilities

• Perceived management/board “chaos”; long-tenured board

• A board that lacks either independence or certain competencies (e.g., no directors with significant experience in the company's industry, the lack of an independent chairperson, a board with significantly higher average length of service than peers)

• Corporate governance concerns / governance that favors management and the board (e.g., supermajority voting to amend bylaws, classified board membership, restrictions against shareholders calling special meetings or acting by written consent)

• Executive and/or director compensation significantly higher than peers, or pay-for-performance disconnect

M&A Activism

9

Increasing trend of activist attacks on announced deals

More than 2/3 of activist attacks in 2013 were successful in raising the deal price or terminating the transaction

• “Bumpitrage”

Successful Activist Campaigns – 2013 • MetroPCS / T-Mobile• Plains Exploration / Freeport-McMoRan• Sprint / Softbank / DISH• Clearwire / Sprint / DISH• Dell / Silver Lake• Outdoor Channell / InterMedia / Kroenke• American Realty / Realty Income• Energy Solutions / Energy Capital• American Greetings / Weiss Family• Atlantic Coast Financial / Bond Street

M&A Activism

10

Increasing trend of activists seeking to break companies apart

Major theme – Push to split up companies and divest businesses that don’t fit or are under-performing

2013 was very busy in this context

2014 – Already there are at least five companies being targeted• Dow Chemical – Dan Loeb pressuring to split into two companies• eBay – Carl Icahn pressuring company to spin-off PayPal unit

Even when companies are in the process of shrinking, activists pushing for more• Darden (2013)

o Barington Capital Group pressured to shed both Red Lobster and Olive Garden

o Starboard Value not happy after Darden announced plans to spin off Red Lobster, pressuring to shed Long Horn Steakhouse

Arguments activists use FOR break-ups:• Executives perform better in a more narrowly focused company• Empire building for the glory and prestige is not shareholder value driven

Counter arguments companies use AGAINST break-ups:• Significant cost savings in a bigger, broader revenue stream• Customer benefits• Creates less volatile earnings

Governance Activism

11

Not just a nuisance.

Frequently portends more difficult situations – increases vulnerability.

Board elections that have significant level of against/withhold votes.• May signal a lack of support• Public vote-no campaign

What causes low support for director re-elections?• Perceived lack of board responsiveness to majority backed SHPs• Poor attendance• Poison pill adoption without shareholder approval• Failure to act on past director concerns• Service on too many boards• Non-independents on key committees

Specific governance provisions of note• Classified board• Majority vs plurality voting in director elections• Combined vs split roles of CEO and Chairman (lead director duties)• Shareholder right to call special meetings / act by written consent• Proxy access?

Governance Activism

12

THE PROXY ADVISORY FIRMS – ISS AND GLASS LEWIS

Election of Directors - ISS issued negative recommendations for approximately 10% of directors in 2013 in uncontested circumstances

At Russell 3,000 companies, regarding board elections:• 44 directors failed to receive majority support in 2013 through June 30, 2013• 46 directors failed to receive majority support in 2012• 45 directors failed to receive majority support in 2011

Board composition and independence increasingly a focus• Tenure: Greater focus on director tenure, refreshment and succession planning

o ISS Quick Score recently adopted director tenure as a weighted factor• Director skill sets and industry experience• Gender

o “Thirty Percent Coalition” – has organized institutional investors / money managers representing >$1 trillion in assets to co-sign letters to 168 companies to increase gender diversity on their boards

Trend of Shareholder Proposals (for S&P 1500 Companies)

13

2011 2012 20130

5

10

15

20

25

30

35

40

45

50

70.00%

72.00%

74.00%

76.00%

78.00%

80.00%

82.00%

84.00%

33 44 24

77%

81%

79%

# of Proposals

Average % Support of Votes Cast

Repeal Classified Board

2011 2012 20130

5

10

15

20

25

30

35

30%

32%

34%

36%

38%

40%

42%

44%

29 14 11

40% 41%

44%

# of Proposals

Average % Support of Votes Cast

Shareholder Right to Call Special Meeting

2011 2012 20130

2

4

6

8

10

12

14

16

18

60%

62%

64%

66%

68%

70%

72%

74%

13 14 16

62%

69%

72%

# of Proposals Average % Support of Votes Cast

Eliminate Supermajority Vote Requirements

2011 2012 20130

5

10

15

20

25

30

35

36%

38%

40%

42%

44%

46%

48%

50%

32 20 27

48%

45%

40%

# of Proposals Average % Support of Votes Cast

Shareholder Right to Act by Written Consent

Trend of Shareholder Proposals (for S&P 1500 Companies)

14

2011 2012 20130

5

10

15

20

25

30

35

50%

52%

54%

56%

58%

60%

62%

64%

30 28 22

57%

61%59%

# of Proposals

Average % Support of Votes Cast

Majority Vote Standard for Director Election

2012 20130

2

4

6

8

10

12

14

30%

32%

34%

36%

38%

40%

42%

44%

6 13

42%

32%

# of Proposals

Average % Support of Votes Cast

Adopt Proxy Access

2011 2012 20130

10

20

30

40

50

60

70

25.00%

27.00%

29.00%

31.00%

33.00%

35.00%

37.00%

39.00%

22 46 58

32%

36%

32%

# of Proposals Average % Support of Votes Cast

Independent Board Chairman

2011 2012 20130

5

10

15

20

25

30

35

40

15%

17%

19%

21%

23%

25%

27%

29%

7 27 36

23.8%24.5%

23.6%

# of Proposals Average % Support of Votes Cast

Stock Retention/Holding Period

Responding to Activism

15

OVERVIEW

Assemble team early (counsel, investment bank, PR firm, proxy solicitor)

Engage early and often• Critical for company to clearly communicate strategic plan early to shareholders

o Imperative to do this before an activist surfaceso Include corporate governance contacts in addition to IR contacts

If activist approaches, may request a meeting with management• TAKE THE MEETING

o Sets the record of engagemento Opportunity to learn more about who you are dealing with and what their

agenda iso Do more listening than talking

As things play out…• Company should take the “high road” in responding to attacks• Must maintain consistent messaging• Not every argument requires a rebuttal

Board involvement• Lead director and chairs of governance/finance/nomination have special roles

Everything should be looked at through the lens of “What will win or lose votes?”

Assembling your Team

16

Internal Team

Assign responsibility among Company’s top executives and the Board to facilitate rapid action in response to activists

Preliminary list of internal team members:

• Chairman of the Board & Chief Executive Officer

• President

• Chief Financial Officer

• Senior Vice President and General Counsel

• Vice President, Investor Relations and Public Affairs

External Team

Assemble a group of advisors and other specialists who may be needed in the event an activist surfaces

Keep external team members fully briefed on corporate developments to reduce learning time involved in any situation where prompt action might be required

Preliminary list of external team members:

• Corporate Counsel

• Investment Banker

• Public Relations Firm

• Proxy Solicitor

Shareholder Analysis, Vote Projections and Engagement

17

Shareholder Composition Analysis• Stock watch services can track ownership shifts and accumulations• Consider influence of ISS and GL in broad terms

Vote Projections and Voting Scenarios• Predict the outcome of situations such as shareholder proposals, and contests

for control• Provides a blue print for the actual solicitation• Helps to provide risk assessment and aids in board decision making• In a proxy contest, must be constantly updated

Shareholder Engagement • Corporate governance engagement outside of the proxy season is increasingly

used and expected• Corporate governance contacts are frequently different contacts than the IR

contact• Index funds actively manage their voting policies and are willing to engage• Build relationships prior to an activist threat• Communicating proactively shows confidence, transparency and a willingness

to understand investor views.o Compensation (Say-on-Pay)o Review last year’s annual meeting resulto Understand why an investor may have voted against a proposalo Understand views on vulnerabilities regarding your corporate governance

structure

Identify and Address Potential Vulnerabilities

Conduct “vulnerability” test

• Review company’s structural provisions to assess vulnerability

• Conduct “economic vulnerability” testo Analyze company as an activist would – if there are ways to increase

value in short-term, company is vulnerable – allowing the company to anticipate and evaluate possible actions the activist might propose

• Develop strong strategic and business planso Company should review all alternatives to increase long- and short-

term shareholder value

• Proactively communicate company’s strategy to investorso Commitment to build shareholder value through strategic and

business plans and specific initiativeso Communicate directly with largest shareholderso Build and maintain relationships with investors, including the

governance teams who influence the vote

Preparedness Actions Can Build Value and Avoid Activist Threat Altogether

19

Credibility is about establishing a public record BEFORE an activist surfaces

• Strong strategic plan should be in place

• Communicate that plan and accomplishments to shareholders frequently

Responding publicly to an activist and how such a response is viewed

• A company is more persuasive when it has already considered proposed action, and can describe its reasons for rejecting it in favor of company’s strategic plan

Waiting to take action after an activist surfaces will put the company at disadvantage

• Enables activist to claim credit for seeking to increase shareholder value while making company look reactive

• Conventional response – “just say no” to activist, using legal protections, such as rights plan, staggered board, litigation – is not likely to work today

Shareholder Activism – Key Takeaways

Recognize that no company is immune from the possibility of shareholder activism

Identify and address potential vulnerabilities – both financial and corporate governance-related

Stay in touch with investors frequently throughout the year for better engagement – including corporate governance contacts

Questions?

William P. Fiske Kenton J. Kingbfiske@georgeson.com kking@skadden.com