Monday, March 28, 2011

SEC Proposes to Maintain Existing Security-Based Swap Reporting Requirements

As reported earlier by Schulte Roth, on March 17, 2011, the SEC proposed to readopt relevant portions of Rules 13d-3 and 16a-1. The action serves to preserve existing rules for reporting security-based swaps as beneficial ownership.

The SEC issued its proposed action in order to address the ambiguity of Dodd-Frank Section 766, which adds Section 13(o) to the Exchange Act. Section 766 stipulates that "a person shall be deemed to acquire beneficial ownership of an equity security based on the purchase or sale of a security-based swap, only to the extent that the Commission, by rule, determines… that [the transaction] provides incidents of ownership comparable to direct ownership of the equity security". Use of the word "only" might be misconstrued to mean that, without the SEC's judgment, security-based swaps would not amount to any beneficial ownership. The proposed rule clarifies that security-based swaps may still represent beneficial ownership without the SEC's rulemaking.

In light of the proposed rule, Schulte Roth clarifies that security-based swaps may confer beneficial ownership in the following instances: 

"(i) where a security-based swap, by its terms or otherwise, gives a person voting or investment power over the underlying security…;
(ii) where a security-based swap is used with the purpose or effect of divesting or preventing the vesting of beneficial ownership as part of a plan or scheme to evade the beneficial ownership reporting requirements…; and
(iii) where a security-based swap, by its terms or otherwise, gives a person the right to acquire the underlying security within 60 days or the persons holds such right to acquire with the purpose [or effect] of changing or influencing control of the issuer".

In the release, the SEC also states that its "staff is engaged in a separate project to develop proposals to modernize reporting under Exchange Act Sections 13(d) and 13(g)" (emphasis added). It is safe to assume that this statement is welcomed by Wachtell Lipton, which just a few weeks ago filed a petition to the SEC "requesting that the Commission initiate a rulemaking project regarding… beneficial ownership reporting rules". In an earlier post, we had mentioned that the corporate law firm is seeking to modernize Schedule 13(d) rules by broadening the definition of beneficial ownership, as well by changing timing requirements of the filing.

Activist investors' use of security-based swaps in so-called "stealth acquisitions" have come under sharp criticism by the law firm. While, for now, the SEC is likely to maintain the current beneficial ownership reporting requirements as it relates to security-based swaps, the regulatory environment concerning shareholder activism is still very much evolving.

To read the Schulte Roth alert, click here.
To read the SEC's proposed action, click here.
To read Wachtell Lipton's petition, click here.

Image Extracted from Schulte Roth's official website.

Posted by David Schatz

Monday, March 21, 2011

The Conference Board on "Poison Pills in 2011"

Throughout the past decade, the number of corporations with poison pills in effect has dropped from over 2,200 in 2001 to less than 900 at the start of 2011. This trend is largely due to the emergence of activist investors and proxy advisory firms. While the legal validity of poison pills has been reinforced by recent Delaware cases in 2010 and 2011, public companies are nevertheless more vulnerable than ever to corporate governance activism.

The Conference Board has released a report, written by Andrew Bab and Sean Neenan from the law firm Debevoise & Plimpton, that details these cases and advises companies as to how they should respond to the changing legal and corporate governance environment. Below is a summary of The Conference Board's report.

Versata v. Selectica
Versata challenged Selectica's implementation of a poison pill with an unusually low trigger of 4.99%. Selectica had created the pill in order to protect its $160 million worth of net operating loss carryforwards (NOLs)--an asset that would be impaired if the company were to experience an "ownership change", as defined by Section 382 of the Internal Revenue Code. In one instance, "ownership change" is said to occur if more than half of a company's outstanding shares changes hands between 5%+ owners in a rolling three-year period.

Aiming to "bring accountability" and "expose… illegal behavior", Versata intentionally bought over 4.99% of Selectica. The NOL poison pill was triggered and reloaded--in the process, Versata's ownership fell to 3.3%.

Decision: The Delaware Supreme Court approves Selectica's NOL poison pill on October 2010.

For more on the case, click on our previous blog post here.

eBay v. Newmark (Craigslist)
Craigslist implemented a poison pill with a 15% trigger in order to protect its corporate culture, which was concerned with the community over profit-maximization. eBay challenged Craigslist on the grounds that the company breached its fiduciary duty.

Decision: The Delaware Court of Chancery rescinds the poison pill on September 2010 for failing to meet Unocal standard.

Yucaipa v. Riggio
Ronald Burkle of Yucaipa challenged Barnes and Noble's (BKS) implementation of a poison pill with a 20% trigger, arguing that the defense was both unreasonable and prejudice given Riggio's ~30% ownership. BKS argued that it had created the poison pill in response to a perceived threat of a takeover from Burkle.

Decision: The Delaware Court of Chancery approves the poison pill on August 11, 2010.

For more on the case, click on our previous blog post here.

Air Products v. Airgas, Inc.
Air Products (APD) had made several friendly and hostile bids for its competitor, Airgas (ARG). APD ran a successful proxy contest that not only got 3 representatives elected to ARG's, but also moved ARG's annual shareholder's meeting earlier in the year to January through a shareholder-approved bylaw amendment. The January bylaw amendment was later reversed by The Delaware Supreme Court. APD then challenged its competitor's poison pill implementation in a case that would become a landmark decision.

Decision: The Delaware Court of Chancery approves ARG's poison pill on February 15, 2011. The Court argues that the poison pill was a response to "substantive coercion" by an acquirer whose "inadequate" hostile bid posed a considerable risk to a target company. The Court also argued that APD still had a reasonable chance of winning another proxy contest.

Defining Beneficial Ownership
With the proliferation of stealth acquisitions and derivative ownership, a more specific definition of beneficial ownership becomes increasingly relevant. As of now, most poison pills do not have derivative-driven language.

ISS Changes Vote Recommendations Pertaining to Poison Pills
Although Delaware court decisions continue to primarily strengthen the validity of poison pills, proxy advisory firms have acted in the opposite direction. More specifically, ISS has changed its voting guidelines to become more stringent in handling poison pill issues:

In response to the changing legal and corporate governance environment, The Conference Board recommends that corporate boards consider…

- implementing a shareholder rights plan that meets the standards of most proxy advisors;
- establishing a more expansive definition of beneficial ownership that includes a calculation of derivative positions;
- not creating an NOL poison pill that exceeds "the earlier of the pills' third year anniversary and the exhaustion of the NOLs";
- maintaining a business plan that is regularly updated;
- "abstaining from certain defensive tactics… [that] could cause the ire of ISS and attract activist shareholders"; and
- adopting advance notice bylaws.

For a copy of the report, click here.

Posted by David Schatz

All images extracted from the referenced Conference Board report.

Sunday, March 13, 2011

Live Webcast (March 22, 2011) to Address the Current Proxy Season

Brian V. Breheny
Partner, Mergers and Acquisitions, Securities Regulation, Corporate Finance and Corporate Governance
Skadden, Arps, Slate, Meagher & Flom LLP

Brian came recently to Skadden from the Division of Corporate Finance at the U.S. Securities and Exchange Commission.

Ronald Orol
Financial Regulation Reporter

Ronald Orol joined MarketWatch from The Deal and is a member of the financial team based in Washington, D.C., covering the intersection of politics and the financial system. Ronald published "Extreme Value Hedging: How Activist Investors are Taking on the World," a book about the rise of activist investors that are shaking up companies in the U.S., Europe and Asia.

William Crane
Georgeson Inc.

William Crane advises leading domestic and international corporations on strategies for both hostile and friendly acquisitions and has been involved in close to 300 contested solicitations since 1981.

Posted by David Schatz

Thursday, March 10, 2011

The New Era of Corporate Governance Activism

(1) With say-on-pay and golden parachute rules in effect, (2) an environment favorable to change (especially, concerning executive compensation), (3) looming SEC approval of proxy access, and (4) the release of Bebchuk's study indicating the negative impact of a classified board on firm value, it should come as no surprise that many of the shareholder activists of 2011 have been refocusing their campaigns on corporate governance catalysts. Thus far in 2011, the movement for corporate governance change has been far reaching--effecting firms of all different types of market capitalizations in a wide variety of industries. Furthermore, we expect the situation to get even more epochal over the next few months and years. In a recent study by Institutional Shareholder Services Inc. (ISS), the proxy advisor states, "engagement has emerged as a central governance process for public companies in America". While many of these "engagement[s]", to be sure, have resulted in friendly settlement agreements, others have come in the form of more hostile proxy contests. From Drapkin calling Mentor Graphics "just a sleepy company run like a country club" to the CEO of Ameron stating that it will fight activist investor Barington Capital "to the death", there certainly has been no shortage of feelings.

Mention should also be made to the "eventful" nature of corporate governance activism in 2011. In fact, at the time that this article was being prepared, we had to remove one proxy contest from the list (Fairholme vs. St. Joe Co.) on the grounds that it was no longer "ongoing". Ramius, which is in the process of being spun off as a new independent investment management firm (Starboard Value LP), also promptly gained board concessions. Indeed, several of the activists highlighted below have been successful in regards to getting some type of proposal approved by the Board. And while many of these investors have been seeking to unlock value through a variety of catalysts, they all have similarly pressed management at their respective target companies (listed below) for corporate governance changes.

EMS Technologies (ELMG); Annual Meeting: May 12, 2011
Annually elected 10 member board

Activist Investor: MMI Investments (7.7% beneficial ownership)

Activist Concerns:
- business is overly complex and too small for the public market
- company has not been taking advantage of thriving M&A environment
- dead hand provision to poison pill (the provision was removed on 1/4/11)
- lackluster stock performance
- current board lacks genuine corporate credentials
- wasteful $150 million worth of acquisitions

Major Devopments
- MMI nominates 4 individuals to the board.
- ELMG announces on 2/2/11 that they have retained BofA Merrill Lynch to serve as a financial advisor for exploring strategic alternatives.
- ELMG removes dead hand provision to poison pill on 1/4/11.
- MMI pushes ELMG to sell the entire company.

ELMG Shareholder Presentation
MMI Preliminary Proxy Statement
ELMG Preliminary Proxy Statement

For a complimentary copy of Hedge Fund Solutions research on ELMG contact

Ameron International Corporation (AMN); Annual Meeting: March 30, 2011
Staggered 7 member board

Activist Investor: Barington Capital (1.3% beneficial ownership)

Activist Concerns:
- pay-for-performance disconnect and excessive executive compensation
- low insider stock ownership
- excessive anti-takeover defenses
- underperforming peers and market for the last 1-, 2-, and 3-year periods

Major Development:
- Barington nominates 1 individual to board.

Mentor Graphics (MENT); Annual Meeting: May 12, 2011
Annually elected 8 member board

Activist Investor: Carl Icahn (14.7% beneficial
Activist Investor: Casablanca Capital (5.48% beneficial ownership)

Activist Concerns:
- lack of cost containment
- poor corporate governance decisions (eg. moving annual meeting of shareholders)
- operational inefficiencies

Major Developments:
- Icahn makes hostile $17 per share offer.
- Casablanca nominates 3 individuals to Board.
- Icahn nominates 3 individuals to Board.

Immersion Corp. (IMMR); Annual Meeting: Around early June 2011
7 member board

Activist Investor: Ramius Capital* (8.8% beneficial ownership)
Activist Investor: Dialectic Capital (5.2% beneficial ownership)

Activist Concerns:
- poor long-term stock and operating performance
- refusal to engage with large shareholders
- unfriendly changes in corporate governance

Major Developments:
- Dialectic Capital nominates 2 individuals.
- Ramius nominates slate.

Ramius Letter to IMMR Board
Dialectic Capital Notice of Intent to Nominate Directors

Zoran Corp (ZRAN); Annual Meeting: Around June 2011
Annually elected board

Activist Investor: Ramius Capital* (9.3% beneficial ownership)

Activist Concerns:
- underperforming peers and market
- deterioration of sales and earnings
- "reactionary" merger with CSR pllc.
- "usurp[s] the will of the shareholders"
- questionable business strategy (eg. inefficiency of R&D spending)

Major Developments:
- Ramius receives enough written consents to remove the CEO and two directors. In their stead, Ramius elects Jeffrey Smith, Jon Castor, and Dale Fuller.
- Ramius nominates 6 individuals to the board.
- Glass Lewis & Co. recommends voting AGAINST ZRAN Chairman and FOR Ramius' nominee, and is skeptical of ZRAN's "reactionary" proposed merger.
- ISS recommends voting AGAINST three of ZRAN's nominees and FOR three of Ramius' nominees.
- "Zoran is proposing to merge with CSR in an all stock transaction which offers Zoran stockholders… a premium of approximately 39.9% to the closing price of Zoran… as of February 18, 2011" (Each Zoran share will be exchanged for 1.85 ordinary shares of CSR pllc. CSR acquisition of Zoran subject to shareholder approval.)

Posted by David Schatz

Tuesday, March 8, 2011

Wachtell Lipton Files Petition with the SEC to Change Section 13(d) Rules

Corporate law firm Wachtell Lipton announced yesterday that it filed a petition with the SEC seeking to change Section 13(d) rules of the Securities Exchange Act of 1934. Under current law, an investor who has accumulated in excess of 5% of a public company's outstanding stock has within 10 days to file a Schedule 13D with the SEC. The SEC requires that investors include "any [registered] equity security" acquired "directly or indirectly" in the calculation of beneficial ownership. Activist investors have been using the 10-day window as a time to gain additional shares above the 5% threshold before the Board can recognize, and therefore act on, such acquisitions. Additionally, the focus on defining beneficial ownership as including only "any [registered] equity security" has led to the emergence of "stealth acquisitions" and cash-settled swaps. These trends have resulted in greater momentum for shareholder activism.

Several law firms are seeking to change that. Earlier this year, Fried Frank sent a memo to its clients describing a reloadable poison pill that would essentially bar activist investors from accumulating over 5% within the current 10-day window and would expand the definition of beneficial ownership to include cash-settled swaps. Near the end of the memo, the firm mentions, "If the SEC amends the 13d rules to close the ten-day purchasing window and to include derivatives within its definition of ownership, then this rights plan would no longer be necessary". Now Wachtell Lipton is pushing for such an amendment.

Wachtell Lipton's petition is particularly weighty in that it is aimed directly at changing the language of the Securities and Exchange Act of 1934 Section 13(d)--a cornerstone of legal stipulations regarding activism. Specifically, the firm is proposing that the SEC "moderniz[e]" Schedule 13(d) by:
  1. Requiring 5% beneficial ownership disclosure within one day;
  2. Adopting "a 'cooling-off period' between the acquisition of 5% beneficial ownership until two business days after the initial Schedule 13D filing is made during which acquirers would be prohibited from acquiring additional beneficial ownership"; and
  3. Adopting a "broad definition" of beneficial ownership "encompassing ownership of any derivative instrument which includes the opportunity, directly or indirectly, to profit or share in any profit derived from any increase in the value of the subject security".
Wachtell Lipton believes that its proposed "modernization" of Section 13(d) will enable regulators and investors "to keep pace with market realities and abuses [from] maneuvers by activist investors both in the U.S. and abroad". The law firm further argues that activists' "maneuvers" have been "contrary to the purposes of the Williams Act".

Many shareholder activists take exception to such pointed criticisms and target law firms, like Wachtell Lipton, for their own "maneuvers". More than three years ago, Carl Icahn launched United Shareholders of America in order to roll back decades of some of the more corporate-friendly legislation, as well as to empower shareholders through new laws. Just recently, in regards to the Fried Frank poison pill, Bill Ackman of Pershing Square stated, "In order for us to do what we do, we have to buy a big enough stake to justify the time and the energy and the money that we're going to spend to try to help make the company more valuable".

Since the SEC has been empowered with new authorities under Dodd-Frank, the Wachtell Lipton case marks a noteworthy instance of firms petitioning the regulator for corporate change. In this instance, in a sense, activism has moved away from the boardroom and towards the SEC.

- For Section 13 of the Securities and Exchange Act of 1934, click here.

Read our previous blog post "SEC Eyes Faster Disclosure for Activist Funds"

Posted by David Schatz

Ramius Spins Off Activist Hedge Fund into Starboard Value LP

On March 4, 2011, Cowen's Ramius announced that it is in the process of spinning off its shareholder activist business into a new independent hedge fund, called Starboard Value LP. The spin off is expected to be completed by March 31, 2011 and will allow Starboard to focus more on its core investment strategy and better attract capital. The hedge fund will be managed by CEO and CIO Jeff Smith, Mark Mitchell, and Peter Feld. At the same time, Ramius--which will own a significant minority interest in the stand-alone hedge fund--will continue to provide "operations, fund legal, fund accounting, technology, and marketing support" services, according to Jeff Smith. The shareholder activist has generated substantial alpha thus far and is currently involved in several proxy fights.

President and CEO of Ramius, Thomas Strauss, stated that the activist will be in an even "better position, managed as a stand-alone entity, to attract additional capital from institutional investors seeking an experienced, accomplished, and professional team with a  proven methodology using shareholder activism".

Jeff Smith, CEO and CIO Starboard Value 
Jeff Smith is currently a Partner Managing Director and CIO of Ramius Value and Opportunity Fund. Smith will become the CEO and CIO of Starboard Value LP.

Mark Mitchell is currently a Partner Managing Director and co-leader of Ramius Value and Opportunity Fund. Mitchell will become a co-leader of Starboard Value LP.

Peter Feld is a Managing Director at Ramius LLC. Feld will become a co-leader of Starboard Value LP.

Posted by David Schatz

Tuesday, March 1, 2011

Hedge Funds and Proxy Advisors Professionalize Shareholder Activism in France

The emergence of hedge funds and proxy advisors has, in the United States, profoundly changed domestic shareholder activism. Not so long ago, the investment strategy was performed primarily by labor unions and public pension funds to advance corporate governance best practices. Today, the 2 decade-long+ proliferation of lightly-regulated hedge funds and proxy advisors has given way to a more dynamic and complex form of activist investing. (Click here to receive a copy of The Shareholder Activism Report and access to the supplementary online Resource Portal, which further details the evolution of the investment strategy.)

And now the development is taking place again--this time, in France.

The Conference Board recently released a report titled "The Professionalization of Shareholder Activism in France", which demonstrates "the rise of proxy-voting advisory firms and the search for innovative investment strategies by hedge funds". The authors, Carine Girard and Stephen Gates, note that just a few years ago, activist announcement returns had little impact on stock price. This was primarily due to the passive strategies of institutional investors. Regulatory changes since then--such as, declining legal thresholds for submission of shareholder proposals, requirements to disclose exercise of voting rights, and establishment of a record date system--has paved the way for a more active breed of investors, hedge funds.

In order to raise shareholder support, activist hedge funds have increasingly teamed up with pension funds in their campaigns. One example in Europe has been CalPERS' financial and voting support for Knight Vinke, a corporate governance activist investor. The emergence of proxy advisors (RiskMetrics/Deminor, Proxinvest, Association Francaise de Gestion) has also expanded shareholder franchise through encouraging voting.

The report also details how activist investing has developed a more systematic modus operandi, involving (1) target selection, (2) private engagement, (3) public engagement, and (4) hostility. And, "[u]nlike the dynamic in the U.S. and the UK, in France, the proxy battle remains [the main form of dialogue between shareholders and the Board]". The proxy campaigns in France have involved everything from ousting a CEO, improving corporate governance, exploring strategic alternatives to initiating corporate restructuring.

To download a copy of the report, click here.

Posted by David Schatz