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