Hedge Fund Activism

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  • 1. Hedge Fund Activism Barry H. Genkin SEC Hot Topics Institute Wednesday, September 24, 2008 Philadelphia, PA
  • 2. Recent Statistics
    • Q-1-2 (08) Record Volume of Proxy Fights
    • 265 New Activist Campaigns Announced during Q-1-2
    • 57 of These Were New Proxy Fights (most in any 6 month period)
    • During Q-1-2 Activists Attained Board Seats at 29 Companies
  • 3. Current Trends
    • Institutional investors and activists common goals
    • Greater willingness to take aggressive positions
    • Stockholder focused governance as opposed to director focused governance
    • Greater stockholders demands on board of directors and management
    • Shareholder activism garnering greater support in courts and marketplace
  • 4. Current Trends (Contd.)
    • Expansion of hedge fund activism
    • Displaced investment bankers or research analysts augmenting hedge funds
      • Hedge fund joining forces emergence of wolf pack
      • Greater press coverage
      • Established relationships with financial community
      • More sophisticated strategic approach
  • 5. Current Activist Activities
    • Developments embolding activist shareholder effective:
      • Majority voting is becoming the norm
      • Withhold/against vote campaigns increasing with greater frequency
      • Defensive provisions repealed with increased frequency
      • Stockholder proposals still prominent
      • New eProxy rules will make proxy solicitations much less expensive for dissidents
    • Success breeds success good activist track record
  • 6. Setting the Table
    • Important Definitions and Confusing Terminology
    • Proxy Contest Proposal, through use of a proxy, not supported by management
    • Election Contest Proposal, through use of a proxy, but relates to election of directors
    • Consent Solicitation Shareholder action not through proxy no meeting, notice, or vote
    • Hostile Takeover Majority Voting Control (often used incorrectly)
  • 7. Setting the Table (Contd.)
    • Scorched Earth Tactics Throw everything, including kitchen sink
    • Activist Shareholder Voice heard take action
    • Hedge Fund (Hedging, Arbitrage, Swap) - Now generally privately offered managed capital funds (unregulated)
    • Full Slate/Short Slate All directors/less than all
    • e proxy rules - New SEC Rules re: electronic proxies
  • 8. Purposes of Proxy Contest
    • Enhance Shareholder Value Stock Undervalued
    • Influence Board/Management Take Action - Sell
    • Gain Control (Without Buying Stock) of BofD
    • No Premium to Shareholders
    • Quicker Timing than Other Methods Short as a Couple of Months (Consent Solicitation)
    • Lower Cost Several Hundred Thousand
    • Achieve a Quick Settlement
  • 9. Legal/Regulatory Framework
    • Articles
    • By-laws
    • State Law (Incorporation)
    • Change-in-Control Documents Employment Agreements
    • SEC Rules and Regulations
      • 13 Schedule 13D Filing Group)
          • Derivatives UK Cash Settled Derivative Positions (CFDs) (i.e. Contracts for Differences)
          • Children's Investment Fund v CSX Corporation
      • 14 Proxy Rules
  • 10. Proxy Contest Team Company Side
    • Insurgent/Activist/Hedge Fund
    • Selected Company Officers
    • Board of Directors (or Committee)
    • Lawyers (and Local Counsel)
    • Investment Bankers
    • Investor Relations
    • Public Relations
    • Proxy Soliciting Firm
  • 11. Due Diligence on Target Vulnerability Assessment
    • Undervalued Stock Trading
    • Vulnerabilities
      • Shareholder Action by Written Consent
      • Advance Notice Provisions (CNET)
      • Advance Notice Nomination Provisions (CNET)
      • Rights Plan (Poison Pill)
      • Staggered Board
      • Cumulative Voting
  • 12. Due Diligence on Target Vulnerability Assessment (Contd.)
    • Vulnerabilities (Contd.)
      • Removal of Directors With and Without Cause (and definition) and by Whom
      • Size of Board
      • Filling Vacancies
      • Calling Special Meeting
      • Amending Company By-laws (super majority)
      • Other
  • 13. Strategy From the Viewpoint of the Insurgent
    • Knows company
    • Has been an investor for a while
    • Recognizes company undervalued
    • Has done a vulnerability analysis
    • Has a game plan in mind
    • Believes he can be successful (or is a great card player)
    • Will not easily go away
  • 14. Strategy From the Viewpoint of the Insurgent (Contd.)
    • Will operate in stealth mode as long as possible (13D loophole for swaps)
    • Has likely left a trail of warning signs
    • Has spoken to others (institutional investors) who may share his views
    • Willing to commit time and financial resources to the cause
    • Likely has a track record of having done this before
    • Understands benefits of e proxy rules
  • 15. Strategy From Targets Viewpoint
    • Know thine enemy (do your homework)
    • Be vigilant to warning signs
    • Be realistic (dont put on blinders or be in denial)
    • Be prepared, be organized and have a strategy
    • Know your vulnerabilities
    • Fine tune strategic plan
  • 16. Strategy From Targets Viewpoint
    • Understand your shareholder base and monitor stock movements
    • Be alert to communications from Hedge Funds
    • Have a Plan A, B and C
    • Maximize communication opportunities with RiskMetrics Inc. (ISS)
    • The best defense is a good offense
    • Be nimble - ready to turn on a dime
  • 17. Strategy From Targets Viewpoint (Contd.)
    • Recognize time is not your friend
    • Commit necessary time and resources early on
    • Get support of Board/management early on
    • Keep Board (or Committee) up to speed communicate regularly
    • Dont take eye off running the business
    • Have your team ready to hit the ground running
    • Consider pre-emptive communication plan
    • Managing pressure to settle
  • 18. Recent Studies
    • The Conference Board (Hedge Fund Activism)
    • European Governance Institute
    • New York University
    • Harvard Business School
    • Conclusions
    • Upon announcement of hedge fund involvement
    • Activism generates significant abnormal returns for 4 week window around announcement that do not dissipate over the subsequent year
  • 19. Recent Studies (Contd.)
    • Highest returns when activist targets the sale of the company or business strategy change not governance.
    • Over subsequent 2 year period operating results improve
    • Activist skilled at identifying good takeover targets less skilled at creating value relating to governance or operations
    • Whats the harm costless upside option, no real downside
  • 20. Recent Studies (Contd.)
    • Hedge fund engagement creates long-term shareholder v

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