Favorable market conditions appear to be producing a substantial increase in shareholder activism and hostile takeover activity this year. Led by pension funds and hedge funds, activist investors have been emboldened by recent changes in corporate governance. As boards of directors and management teams address demands by regulators as well as heightened attacks from shareholder activists, directors need to be fully prepared with state-of-the-art plans ready for immediate use. When facing increased hostile takeover activity, directors should keep in mind that the fundamentals remain unchanged: the business judgment rule still applies, and takeover defenses, especially of the structural variety, are as effective as ever when used appropriately.

…continue reading: Holding Steady in an Active Market

In a speech to the Council of Institutional Investors recently, Nelson Peltz, one of the most successful of the activist investors, said the recent changes in corporate governance would enable him to make investments in the heretofore “untouchables”—companies with market capitalizations over $50 billion. Mr. Peltz noted that the new governance rules give activists more tools with which to pressure companies, noting that larger companies provide bigger profit opportunities than smaller companies.

…continue reading: Activists Target Companies with Market Caps over $50 Billion

Proxy Access

The SEC passed a new rule which would give shareowners greater “Proxy Access” and an avenue to challenge unresponsive directors. By a 3-2 vote, the SEC gave individual (or groups of shareowners) who held 3 percent ownership for 3 years the right to put candidates on corporate ballots. Shareowners would be able to nominate at least one director and as much as 25 percent of a board. In September, the Business Round Table and the U.S. Chamber of Commerce filed legal challenges to the rule arguing that the SEC failed to adequately measure the costs imposed on companies. As a result, the SEC put a hold on the implementation of Proxy Access until the legal questions are resolved, with its earliest application occurring in 2012 if it passes the legal challenges.

…continue reading: Florida SBA Supports Proxy Access and Advisory Firm Transparency

The State Board of Administration (SBA) supports the adoption of internationally recognized governance practices for well-managed corporations including independent boards, transparent board procedures, performance-based executive compensation, accurate accounting and audit practices, and policies covering issues such as succession planning and meaningful shareowner participation. The SBA also expects companies to adopt rigorous stock ownership and retention guidelines, annually seek shareowner ratification of external auditors, and implement well designed incentive plans. As noted in a recent Fitch Ratings research piece, “Assessing an issuer’s governance practice begins with its board of directors. An independent, active, knowledgeable, and committed board of directors signals a robust governance framework. A board that is not committed to fulfilling its fiduciary responsibilities can open the door for ineffective, incompetent, and in some cases, unscrupulous management behavior.”

…continue reading: Florida SBA Seeks to Use Proxy Voting to Promote Good Governance Practices

In our paper Does Governance Travel Around the World? Evidence from Institutional Investors, forthcoming in the Journal of Financial Economics, we examine whether institutional investors affect corporate governance by analyzing portfolio holdings of institutions in companies from 23 countries during the period 2003-2008.

We find that international institutional investors export good corporate governance practices around the world. In particular, foreign institutional investors and institutions from countries with strong shareholder protection are the main promoters of good governance outside of the U.S. Our results are stronger for firms located in civil-law countries. Thus, international institutional investment is especially effective in improving governance when the investor protection in the institution’s home country is stronger than the one in the portfolio firm’s country.

…continue reading: Does Governance Travel Around the World?

Shareholder activism in France is increasingly influenced by networks of hedge fund investors and other specialized players (including proxy advisory firms and investor associations). In the last few years, these networks have professionalized the way shareholder activism is conducted in the country. This report summarizes notable activism developments in France and examines the phenomenon of professionalization with two recent examples: the Suez-Gaz de France and the Atos Origin cases.

…continue reading: The Professionalization of Shareholder Activism in France

At the peak of the last public company merger frenzy in 2006 and early 2007, it was common for activist shareholders (mostly hedge funds and arbitrageurs) to mount vote no campaigns against announced deals. [1] Frequently such campaigns resulted in relatively small price bumps and an abandonment of the vote no campaign. On a few occasions, the vote no campaign sparked a bidding war. However, in a number of others, the vote no campaign ended with a worst-case result; defeat of the merger deal with no competing transaction in sight. Icahn’s proposed acquisition of Lear Corporation in the summer of 2007 is one the most memorable of the worst cases. After Icahn refused to raise his final price to “buy-off” an activist investor vote no campaign, the merger was voted down. Lear remained independent and, as a result of the virulent 2008 economic crisis, wound up filing for bankruptcy, wiping out all shareholder value.

…continue reading: Adoption of Poison Pill to Deter Activist Investor Opposition to Negotiated Mergers

In the paper, Is Carl Icahn Good for Long-Term Shareholders? A Case Study of Shareholder Activism, which was recently published in the Journal of Applied Corporate Finance, we examine the case of Carl Icahn, whose career as a shareholder activist now spans at least three decades. The increase in activist campaigns by entrepreneurial investors and hedge funds in the past decade has raised considerable debate about their benefits for average shareholders. Although critics have longed charged that the proposals for change by such active investors typically do not increase the longer-run efficiency and values of the targeted companies, more recent studies have provided evidence of success, both in terms of increasing the market value of such companies and achieving at least some of the investors’ expressed objectives.

…continue reading: Is Carl Icahn Good for Long-Term Shareholders?

In the paper, On the Optimality of Shareholder Control: Evidence from the Dodd-Frank Financial Reform Act, which was recently made publicly available on SSRN, we use three events involving the adoption of the SEC’s “proxy access” rule in 2010 as natural experiments to test the effects of allocating more direct control to shareholders on firm value. Of particular importance, all three events contained information that was plausibly surprising to the market. We use information about proposed changes to specific aspects of the rule, along with variation in stock ownership by known activist institutional investors, to identify the impact of shocks to control rights on shareholder value.

…continue reading: On the Optimality of Shareholder Control

In our paper, Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge, which was recently made publicly available on SSRN, we use a natural experiment to assess the shareholder wealth implications of shareholder proxy access. We study stock returns on October 4, 2010, when the SEC unexpectedly delayed proxy access for U.S. public companies. The October 4 announcement makes a particularly useful event for empirical work because it was both material and unexpected. We identify firms most likely to be affected by proxy access as those with significant ownership by institutions with a history of attempts to change corporate policy (“activist institutions”).

…continue reading: Does Shareholder Proxy Access Improve Firm Value?