Some Lessons from DuPont-Trian
The ISS Report on the DuPont-Trian proxy contest calls attention to a number of
important insights into ISS policies and practices and those of many of its
institutional investor clients. Concomitantly, these policies illustrate
the realities of the sharp increase in activist activity and the steps
corporations can, and should, take to deal with the activist phenomena.
ISS and major institutional investors will be responsive to and support
well-presented attacks on business strategy and operations by activist hedge
funds on generally well managed major corporations, even those with an
outstanding CEO and board of directors.
Trian Fund Management and its founder, Nelson Peltz, have clearly established
credibility and acceptability. So too other well regarded funds like
ValueAct. They have become respected members of the financial
community.
An activist who attempts to work behind the scenes with a corporation to advise
and achieve changes will have more credibility than one who surfaces with an
attack.
In most cases a corporation will be well advised to meet with the activist and
discuss the activist’s criticisms and proposals, which are frequently presented
in the form of a well-researched whitepaper. If the activist’s
recommendations are not unreasonable, careful consideration should be given to adopting
some or all, thereby avoiding a public dispute. In situations where the
activist seeks board representation to pursue its objectives, depending on the
circumstances it may be the best course of action to consider agreeing to board
representation on condition of an appropriate standstill agreement.
Major institutional investors like BlackRock and Vanguard want direct contact
with the independent directors of corporations. Waiting to establish
investor-director contact until under an activist attack is too late.
Meaningful director evaluation has also become a key objective of institutional
investors and a corporation is well advised to have it and talk to its
investors about it. Regular board renewal and refreshment can be important
evidence that meaningful director evaluation is occurring. In the DuPont
situation, ISS did not accept DuPont’s argument that the addition of two “super
star” directors to its board, after the attack started, obviated any reason to
add Mr. Peltz and one of his nominees.
If a corporation disputes an activist’s counter whitepaper it needs to make a
compelling case; failure to do so will result in ISS following its policy of
generally supporting a dissident short slate. ISS’s question, “Have the
dissidents made a compelling case that change is warranted?” becomes “Has the
corporation made a compelling case that change is not warranted?” Note
the not so subtle shift of the burden.
Finally, in some cases even winning a drawn out proxy battle can be more
damaging to a corporation than a reasonable settlement with acceptable board
representation. Martin Lipton
Posts
