Should Shareholders Expect Greater Boardroom Accountability in 2019 with the Appointment of “Third Point Nominees”?
Proxy contests are one means through which shareholders can voice concerns about board action. Due to their excessively high cost, proxy contests were once somewhat rare; today, however, they are much more common due to the flourish of hedge funds. (Warren S. de Wied, Fried, Frank, Harris, Shriver & Jacobson LLP, Westlaw Practical Law). One such hedge fund contributing to these proxy contests is Third Point, LLC (“Third Point”), founded by Daniel S. Loeb in New York in 1995. (Campbell Soup Co.). This note introduces readers to current trends in activist-led proxy contests, summarizes a recent proxy fight between Third Point and Campbell Soup Co. (“Campbell”), and speculates on how this and similar contests may affect corporate accountability in 2019.
Today, activist shareholders (“Activists”) are more likely to initiate proxy fights and, when they do, companies are increasingly more likely to settle, rather than take them to a shareholder vote. (Jay Frankl and Steve Balet, Harvard Law School Forum on Corporate Governance and Financial Regulation). In 2016, there were 110 proxy fights – a 43% increase from 2012 – and, of these 110 contests, 45% were settled prior to a vote. (Id.) These settlements may be attributed to what these proxy fights are over: while Activists formerly focused their efforts on business strategy and the minutia of corporate financial statements, they are now turning their attention to unseating directors they feel are not maximizing profits or otherwise living up to shareholder expectations. (Id.) With increasing proxy access making it easier to initiate a proxy contest, Activists disappointed with current directors can propose individuals to take their place. (Id.)
The proxy contest between Third Point and Campbell Soup Co. is an example of an Activist using a hedge fund to attempt to disrupt the status quo of one corporate board -- Campbell has lagged behind its competitors for some time now and its sales are on the decline as consumers demand less-processed food options. (Scott Deveau, Mergers & Acquisitions Law Report (BNA)). Campbell has failed to keep up with these changing market demands and some shareholders, including Daniel Loeb, believe the board’s merger and acquisition strategy as well as lack of focus on core business is to blame. (Id.) Additionally, the New Jersey-based company has been without a clear leader since its previous Chief Executive Officer retired suddenly in May 2018. (Id.) Further complicating corporate governance matters is the fact that four descendants of Campbell’s first president, John T. Dorrance, collectively own 41% of the company. However, one descendant, George Strawbridge Jr., owns 3% of the company and disagrees with the rest of the family regarding the company’s future. (Id.)
Loeb and Strawbridge Jr. met in August 2018 to propose the sale of the company. (Svea Herbst-Bayliss and Greg Roumeliotis, Reuters). The two men, along with Third Point – Loeb’s hedge fund and itself the holder of 7% of Campbell’s equity –proposed an alternative slate of twelve directors to run in opposition to Campbell’s twelve incumbent directors. (Scott Deveau, Mergers & Acquisitions Law Report (BNA)). This proposal, however, was amended to propose that seven incumbent Campbell directors remain, while five be replaced by Third Point nominees. (Id.)
Just a few weeks prior to Campbell’s November 29, 2018 election, the Third Point nominees received support from proxy influence firms, Institutional Shareholder Services (“ISS”) and Glass Lewis & Co. (“Glass Lewis”). (Id.) Glass Lewis, which only gave support to three of the five Third Point nominees, said in a statement, “[i]nvestor support for these Third Point nominees would signal a demand for boardroom accountability and we believe their addition would help to restore investor confidence in the company and the board.” (Id.) The company fought back, however, calling the conflict a “wasteful and distracting proxy fight.” (Id.)
Campbell and Third Point ultimately agreed to settle the proxy fight. (Campbell Soup Co.). Rather than replacing current board members, Campbell created two additional seats for Third Point nominees Kurt Schmidt, the CEO of Blue Buffalo, and Sarah Hofstetter, comScore Inc. President. (Id.) The company, however, did not provide board seats for Strawbridge Jr. or Matthew Cohen, a Third Point employee. (Id.)
In exchange for its two board seats, Third Point agreed to a 12-month standstill provision. While the details of the standstill agreement are not yet known, these provisions generally provide that Activist directors must remain silent as to their own agenda for a specified period of time. (Jay Frankl and Steve Balet, Harvard Law School Forum on Corporate Governance and Financial Regulation). Finally, as part of the new board, Schmidt and Hofstetter will be involved in the selection process for a new CEO, to be appointed by May 2019. (Campbell Soup Co.). Fulfilling this promise, the new board appointed Mark A. Clouse President and CEO effective January 22, 2019, bringing the Campbell board to the final, imposing size of fifteen persons. (Id.).
It is still unclear whether these Third Point nominees, now Campbell directors, are a sign of a trend towards increasing board accountability. Investors can, however, rest assured that Schmidt and Hofstetter will demand accountability; yet the 12-month standstill provision likely prevents them from doing much more than voicing their opinions. Nonetheless, there is always something to be said for being in “the room where it happens.” (Hamilton, Genius).