“First Timers” and Active Investment Funds Dominate Shareholder Activism as the “Big Three” Remain Management-Friendly (Part II)
Five hundred eighty-one companies worldwide faced activist proposals in the first two quarters of 2019 (“H1”), also known as the “proxy season,” in which 80 percent of all public company annual meetings occur. (Activist Insight, Activist Insight Monthly June 2019). While shareholder activism in 2019 decreased relative to 2018, in general shareholder activism has been on the rise over the last decade. As the three largest asset managers in the United States, BlackRock, State Street, and Vanguard (the “Big Three”), are not to blame for this increase, this post explores who the most active shareholders are and the extent to which their goals were realized in the 2019 proxy season.
Activist investors seeking good returns and greater accountability from companies have invested massive amounts of capital alongside their public demands for change. The top ten activist investors by market value of activist positions launched in 2013-2018 collectively spent more than $82.8 billion. (Lazard). Elliott led the pack during this time with a valuation of its activist positions totaling $17.4 billion, followed by Value Act, though relatively inactive in H1 of 2019, with activist positions valued at $11.7 billion during 2013-2018, and the remaining activist investors’ market positions totaling $10 billion or less for the total timeframe. (Lazard). Comparatively, in H1 2019, Elliott held its position as the leading activist in terms of capital deployed, with $3.4 billion and a total of $17.4 billion in new and existing activist positions. (Lazard). During this time, Elliott deployed 6 new campaigns targeting eBay, QEP, SAP, Bayer, Intertrust, and Allergan. (Lazard). In terms of number of new campaigns, Starboard was the most prolific in H1 2019, deploying $1.2 billion in new capital to target GCP Applied Technologies, Cerner, Bristol-Myers Squibb, KAR, eBay, Zayo, Papa Johns, and Dollar Tree (Lazard).
These activist shareholders are not the only players in the market. The 2018 proxy season saw an influx of campaigns by “First Timers,” investment and private equity funds taking part in activist investing for the first time, with such funds initiating 31 percent of campaigns. (Lazard). Although the number of total First Timer campaigns fell from 40 in 2018 to 24 in 2019, new activist investors still led over a quarter of the new campaigns this year. (Lazard). These First Timers include: KCGI, Velan Capital, L.P., and Impactive Capital. (Lazard). Other activist shareholders initiating campaigns in the 2019 season include traditional active management funds such as Fidelity and T.Rowe Price and private equity funds such as Veritas Capital and Sycamore Partners. (Lazard).
In the 2019 proxy season, activists, old and new, rarely pursued their resolutions all the way to a vote. Only four U.S. contested board seats came to a vote at companies with market caps greater than $500 million in the first two quarters of 2019, down from seven in the first half of 2018. Further, activists were only successful in one vote for four board sears at Mack-Cali. (Lazard). Activists’ recent successes have been mainly through settlements as boards become more selective in which fights get to a vote. In the first half of this year, activists won 129 board seats from 72 different settlements for all companies targeted globally, including at Bed Bath & Beyond, Legg Mason, and eBay. (Activist Insight). That being said, the number of settlements for board seats was also down from 104 in the first half of 2018. (Activist Insight). The decline in success was even more prevalent for campaigns targeting companies with more than $500 million in market capitalization, as only 81 board seats were won through settlements with these companies in 2019 as compared to 161 in 2018. (Lazard).
Despite high-profile campaigns, the number of fights related to environmental issues has fallen. Of the 575 shareholder proposals voted on in the 2018-2019 proxy season, only 31 were related to environmental topics, compared to 47 in previous season. (Activist Insight). Only one of these environmental proposals – one demanding that Rite Aid Corporation issue a sustainability report – was supported by the majority of shareholders. (Activist Insight).
Anti-deal Mergers & Acquisitions (“M&A”) activist proposals have increased. For companies with over $500 million in market capitalization that were targeted by activist campaigns in H1 2019, 46 percent of the campaigns had M&A-related objectives. (Lazard). Comparatively, between 2014 and 2018, campaigns with M&A themes arose in only one-third of all activist shareholder demands. (Lazard). The growth of M&A-related campaigns in 2019 as compared to prior years can be characterized by activist opposition to large transactions. For example, one of the most notable M&A-related campaigns in 2019 opposed United Technologies’ announcement of a merger with Raytheon following the already planned spin-off of its Otis and Carrier businesses. (Lazard). Both Third Point and Pershing Square, two major activists in the 2019 market, criticized the merger and publicly stated they would vote against approving the deal. (Lazard). In another notable deal, Icahn launched a campaign in opposition of Occidental’s proposed acquisition of Anadarko for being “hugely overpriced.” (Lazard). Overall, in H1 2019, 18 U.S.-based companies were subject to deal opposition, an increase from 16 in the same timeframe of 2018. (Lazard; Activist Insight). However, the number of campaigns pushing for an M&A deal decreased significantly from 50 in the first half of 2018 to 37 thus far in 2019. (Activist Insight).
Nearly half of the campaign demands made by shareholders within the last year focused on improving shareholders’ rights, an increase from 30 percent in the previous year. (Activist Insight). Shareholder demands focusing on social issues also increased from 42 to 47 proposals, as emphasis on board diversity has heightened scrutiny on human capital management. (Activist Insight). Courteney Keatinge, Glass Lewis’ Environmental, Social, and Governance Research Senior Director explained that the “#MeToo” movement and California board gender diversity law, Senate Bill 826, may be the cause of this increase. (Russ Banham, CFO). Enver Fitch, the Environmental and Social Research Associate Vice President at Institutional Shareholder Services, also noted that political issues, particularly campaign finance, are on the rise with shareholders as the 2020 U.S. elections loom in the future. (Activist Insight).
The changing landscape of activist shareholder campaigns and the complexity of the issues and players will lead to interesting case studies to come. Key issues to watch will be the on-going power struggle between corporate management and their shareholders, the role the Big Three may or may not play with their new ESG policy adoptions, how First Timers and traditional activist funds will shape future campaign contests, and what role the public will have on management as activist pressures expand beyond the boardroom.