This year has seen a continuance of the high and increasing level of activist campaigns experienced during the last 14 years, from 27 in 2000 to nearly 250 to date in 2014, in addition to numerous undisclosed behind-the-scenes situations. Today, regardless of industry, no company can consider itself immune from potential activism. Indeed, no company is too large, too popular or too successful, and even companies that are respected industry leaders and have outperformed peers can come under fire. Among the major companies that have been targeted are, Amgen, Apple, Microsoft, Sony, Hess, P&G, eBay, Transocean, ITW, DuPont, and PepsiCo. There are more than 100 hedge funds that have engaged in activism. Activist hedge funds have approximately $200 billion of assets under management. They have become an “asset class” that continues to attract investment from major traditional institutional investors. The additional capital and new partnerships between activists and institutional investors have encouraged increasingly aggressive activist attacks.
Posts Tagged ‘Martin Lipton’
The ever evolving challenges facing corporate boards prompts an updated snapshot of what is expected from the board of directors of a major public company—not just the legal rules, but also the aspirational “best practices” that have come to have almost as much influence on board and company behavior.
Boards are expected to:
The experience of the overwhelming majority of corporate managers, and their advisors, is that attacks by activist hedge funds are followed by declines in long-term future performance. Indeed, activist hedge fund attacks, and the efforts to avoid becoming the target of an attack, result in increased leverage, decreased investment in CAPEX and R&D and employee layoffs and poor employee morale.
Several law school professors who have long embraced shareholder-centric corporate governance are promoting a statistical study that they claim establishes that activist hedge fund attacks on corporations do not damage the future operating performance of the targets, but that this statistical study irrefutably establishes that on average the long-term operating performance of the targets is actually improved.
In a memorandum issued by the law firm of Wachtell, Lipton, Rosen & Katz (Wachtell) last week, Do Activist Hedge Funds Really Create Long Term Value?, the firm’s founding partner Martin Lipton and another senior partner of the law firm criticize again my empirical study with Alon Brav and Wei Jiang, The Long-Term Effects of Hedge Fund Activism. The memorandum announces triumphantly that Wachtell is not alone in its opposition to our study and that two staff members from the Institute for Governance of Private and Public Organizations (IGOPP) in Montreal issued a white paper (available here) criticizing our study. Wachtell asserts that the IGOPP paper provides a “refutation” of our findings that is “academically rigorous.” An examination of this paper, however, indicates that it is anything but academically rigorous, and that the Wachtell memo is yet another attempt by the law firm to run away from empirical evidence that is inconsistent with its long-standing claims.
About a year ago, Professor Lucian Bebchuk took to the pages of the Wall Street Journal to declare that he had conducted a study that he claimed proved that activist hedge funds are good for companies and the economy. Not being statisticians or econometricians, we did not respond by trying to conduct a study proving the opposite. Instead, we pointed out some of the more obvious methodological flaws in Professor Bebchuk’s study, as well as some observations from our years of real-world experience that lead us to believe that the short-term influence of activist hedge funds has been, and continues to be, profoundly destructive to the long-term health of companies and the American economy.
The Pershing Square-Valeant hostile bid for Allergan has captured the imagination. Other companies are wondering whether they too will wake up one morning to find a raider-activist tag-team wielding a stealth block of their stock. Serial acquirers are asking whether they should be looking to take advantage of this new maneuver. Speculation and rumor abound of other raider-activist pairings and other targets.
Questions of legality are also being raised. Pershing Square and Valeant are loudly proclaiming that they have very cleverly (and profitably) navigated their way through a series of loopholes to create a new template for hostile acquisitions, one in which the strategic bidder cannot lose and the activist greatly increases its odds of catalyzing a quick profit-yielding event, investing and striking deals on both sides of a transaction in advance of a public announcement.
Corporate risk taking and the monitoring of risks have remained front and center in the minds of boards of directors, legislators and the media, fueled by the powerful mix of continuing worldwide financial instability; ever-increasing regulation; anger and resentment at the alleged power of business and financial executives and boards, including particularly as to compensation during a time of economic uncertainty, retrenchment, contraction, and changing dynamics between U.S., European and emerging market economies; and consistent media attention to corporations and economies in crisis. The reputational damage to boards of companies that fail to properly manage risk is a major threat, and Institutional Shareholder Services now includes specific reference to risk oversight as part of its criteria for choosing when to recommend withhold votes in uncontested director elections. This focus on the board’s role in risk management has also led to increased public and governmental scrutiny of compensation arrangements and their relationship to excessive risk taking and has brought added emphasis to the relationship between executive compensation and effective risk management. For the past few years, we have provided an annual overview of risk management and the board of directors. This overview highlights a number of issues that have remained critical over the years and provides an update to reflect emerging and recent developments.
Two articles (among several) in a comprehensive proposal to revise EU corporate governance would have a significant beneficial impact if they were to be adopted in the United States. In large measure they mirror recommendations by Chief Justice Leo E. Strine, Jr., in two essays: Can We do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, 114 Columbia Law Review 449 (Mar. 2014) and One Fundamental Corporate Governance Question We Face: Can Corporations Be Managed for the Long Term Unless Their Powerful Electorates Also Act and Think Long Term? 66 Business Lawyer 1 (Nov. 2010).
We published this post last August. Since then there have been several developments that prompt us to revisit it; adding the first three paragraphs below.
First, Delaware Supreme Court Chief Justice Leo E. Strine, Jr. published a brilliant article in the Columbia Law Review, Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law in which he points out the serious defects in allowing short-term investors to override carefully considered judgments of the boards of directors of public corporations. Chief Justice Strine rejects the argument of the academic activists and activist hedge funds that shareholders should have the unfettered right to force corporations to maximize shareholder value in the short run. We embrace Chief Justice Strine’s reasoning and conclusions.
We recently placed on SSRN a draft of a new paper, Toward a Constitutional Review of the Poison Pill, which will be published by the Columbia Law Review in the Fall of 2014. Last week, six senior partners of the law firm of Wachtell, Lipton, Rosen & Katz, including founding partner Martin Lipton, published a strongly-worded response, available on the Forum here. In this post, we rebut Wachtell’s criticism.
Wachtell’s response is a twelve-page, single-spaced Memorandum that describes us as “extreme” and “eccentric,” and characterizes our paper as “tendentious,” “misleading,” and “not a work of serious scholarship.” The Memorandum also attempts to offer a substantive rebuttal of the analysis in our paper. Given that Wachtell Lipton prides itself for creating the poison pill, we understand why an article raising doubt about the validity of the state-law rules authorizing the use of poison pills touches a sensitive nerve at the Firm. Wachtell’s response, however, fails to dispel those doubts—and, indeed, shows why there are serious questions about the constitutionality of state-law poison-pill rules today.
Wachtell does not dispute the analysis in our paper showing that state-law poison-pill rules today impose tighter restrictions on tender offers than those that federal courts have viewed as preempted by the Williams Act. Instead, Wachtell’s response asserts that the “true state of the law,” about which there is “no doubt,” is that the Williams Act “governs procedure, not substance,” and that the Act therefore does not preempt any antitakeover devices that states choose to authorize. As we explain below, this is not an accurate description of the state of the law: Wachtell’s view (1) is not established by Supreme Court precedent; (2) gives undue weight to two lower federal court opinions; and (3) discounts or ignores opinions of other lower federal courts that have expressed views that differ from Wachtell’s.