Thursday, August 18, 2011

Shareholder Activism Webinar on Board Corporate Governance

12:30 - 2:00 PM EST

Join an experienced faculty as they explore the following questions that every company concerned being targeted by activist investors should ask of its Board, including:

- Is the Board lacking sufficient industry expertise?
- Is the Board lacking the necessary competencies among its members?
- Is the Board sufficiently independent?
- Do the Board members have little or no stake in the company?
- Can the Board's compensation be perceived as excessive?
- Are the Board's chairman and CEO roles combined?
- Is there an unusually low turnover among Board members?
- Does the Board have a record of failing to heed the will of its shareholders?
- Does the Board have a record of facilitating its own entrenchment?
- Does the Board have a record of failing to hold management accountable?


Chris Cernich - Director of M&A and Proxy Contest Research, Institutional Shareholder Services Inc. (ISS), oversees analyses and vote recommendations for high profile and contentious mergers and proxy fights globally. Prior to joining ISS, Chris was Director of Mergers & Acquisitions and Quantitative Analysis at Proxy Governance, Inc., another proxy advisory firm. His previous management experience includes eight years in corporate finance and strategy at the Ford Motor Company. Chris is also the chief author of two studies sponsored by the IRRC Institute: "The Effectiveness of Hybrid Boards" (2009), which examined the impact of shareholder activism on corporate financial performance and "Compensation Peer Groups at Companies With High Pay" (2010), which examines systemic bias in compensation benchmarking processes at S&P 500 companies. Chris holds an MBA from the University of Michigan in Finance and Strategy.

Keith E. Gottfried – Partner, Blank Rome LLP, advises clients with respect to public company matters, including mergers and acquisitions, securities regulation, corporate governance, shareholder activism, and NYSE and Nasdaq compliance. Keith also advises clients in connection with proxy contests and other contests for corporate control as well as vulnerability assessments and the implementation of stockholder rights plans and other types of defensive strategies.

Paul Schulman — Senior Vice President, MacKenzie Partners, Inc., primarily advises clients on shareholder engagement and proxy solicitation strategies in proxy contests, mergers & acquisitions, corporate financings and restructurings. He also counsels clients on governance and compensation issues and activist issues. Over the course of his career, Paul has worked on over 100 contested solicitations, representing companies, limited partnerships, shareholder groups, activist institutions and hedge funds.

Click here to register online.

Posted by David Schatz

Tuesday, August 9, 2011

Mock Proxy Battle Conference - Seating is Limited and Filling Up Fast!!

Interactive Case Study on Shareholder Activism


Main Event August 31, 2011
Capital One Headquarters, McLean, VA


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A licensed educational product from Hedge Fund Solutions, LLC

Join us on August 31, 2011 for what's being billed as the fight of the decade!!
This is an Interactive Case Study on shareholder activism (Download the Case Study). This case, which is fictional, presents a dilemma facing many boards of directors and managers at publicly traded companies today.
The case describes the efforts of two activist investors (Yuri N. Trubl and D. Mandy More) who have formed an investment group and call themselves The Committee For Value Improvement and Shareholder Accountability. The Committee is attempting to obtain three board seats on WidgeCo's eleven member board and want to persuade the other board members to divest an underperforming business unit and use the proceeds from the transaction to repurchase some of the Company's shares outstanding. WidgeCo's board is not sure whether to concede, fight or attempt to seek middle ground.
Each participant will play the role of a board member and will consider analyses presented by management, the dissident investors, institutional shareholders, company advisors and others. In the end, based on the information presented, each board member will recommend to the others how to proceed.
To simulate an activist campaign at a mid-sized public company plagued with business and governance issues. Participants will gain a greater understanding of the causes, effects and complexities of shareholder activism, and wrestle with key fiduciary issues as if they were directors of a public firm.
WidgeCo (WIDG) a manufacturer of specialized widgets for the defense, shipping, electronics and food service industries is challenged by flat sales, a declining stock price, an underperforming, overpriced and not-yet integrated acquisition that is the brainchild of the CEO's recently hired heir apparent, and a number of governance issues.
For additional information about the conference and to register (NOTE: Seating is limited to 80 total participants and places are filling up fast!) go to

Monday, August 8, 2011

Free Activist Investing Research (Week Ending August 5, 2011)

Click here to download Hedge Fund Solutions' activist investing research  for the week ending August 5, 2011.  

Sign up to receive this free research every Monday afternoon.

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Thursday, August 4, 2011

Guest Contributor: Activist Investor Phil Goldstein Says "CSX Opinion is Not About Swaps"

Phil Goldstein - Bulldog Investors
I think that for most activist shareholders the most significant takeaway from the Second Circuit's CSX opinion is not about swap contracts.  See Blog Post on CSX Decision

More important is that it reduces the fear that mere communication between like minded shareholders can subject them to a lawsuit alleging that they formed an undisclosed 13d group. The Court significantly narrowed the ability of an issuer (or the SEC) to allege that such a group exists.  Merely alleging "concerted action" is not enough.  Instead, applying the statute literally requires that coordinated  purchases must be alleged (and proven). It said:

As we have noted, the statute and the implementing rule are both concerned with groups formed for the purpose of acquiring shares of an issuer. See 15 U.S.C. § 78m(d)(3); 17 C.F.R. § 240.13d-5(b)(1). The District Court recognized that whether a group exists under section 13(d)(3) “turns on ‘whether there is sufficient direct or circumstantial evidence to support the inference of a formal or informal understanding between [members] for the purpose of acquiring, holding, or disposing of securities.’” CSX I, 562 F. Supp. 2d at 552 (quoting Hallwood Realty Partners, L.P. v. Gotham Partners, L.P., 286F.3d 613, 617 (2d Cir. 2002) (emphasis added).

Endeavoring to meet the statutory standard, the District Court found that TCI and 3G formed a group, within the meaning of section 13(d)(3), “with respect to CSX securities,” and that this group was formed no later than February 13, 2007. See id. at 555. Then, after identifying the Defendants’ “activities and motives throughout the relevant period,” id. at 553, the Court stated, “These circumstances . . . all suggest that the parties’ activities from at least as early as February 13, 2007, were products of concerted action . . . .” Id. at 554 (emphasis added).

These findings are insufficient for proper appellate review. Although the District Court found the existence of a group “with respect to CSX securities,” the Court did not explicitly find a group formed for the purpose of acquiring CSX securities. Even if many of the parties’ “activities” were the result of group action, two or more entities do not become a group within the meaning of section 13(d)(3) unless they “act as a . . . group for the purpose of acquiring . . . securities of an issuer.” 15 U.S.C. § 78m(d)(3).


[A] precise finding, adequately supported by specific evidence, of whether a group existed for purposes of acquiring CSX shares outright during the relevant period needs to be made in order to facilitate appellate review."

Presumably, the same requirement would apply to a group formed for the purpose of either selling or of holding shares.  However, it is unlikely that a group would ever be formed for either of those purposes after the shares were independently acquired (which is presumably why the Circuit Court focused on acquisitions.) The bottom line is that general allegations of shareholders acting "in concert" are no longer sufficient to survive a motion to dismiss IMO.  There must be a specific allegation that their purchases were coordinated.

Judge Winter, in his concurrence, was even more emphatic about the requirement to prove a plan to coordinate purchases by the group members.  He said:

The district court’s finding of a group also suffers from a second error. That finding was that “the parties activities from at least as early as February 13, 2007, were products of concerted action.” Id. However, Rule 13d-5(b)(1) applies only to groups formed “for the purpose of acquiring, holding, voting or disposing” of “securities” of the target firm. The Rule does not encompass all “concerted action” with an aim to change a target firm’s policies even while retaining an option to wage a proxy fight or engage in some other control transaction at a later time. Indeed, the Rule does not encompass “concerted action” with a change of control aim that does not involve one or more of the specified acts.


There is no evidence that 3G’s purchases at this time were more than the result of this sharing of information, which hardly amounts to an agreement to buy CSX shares.

Thus, two large stockholders that independently acquired their positions can discuss their investment and the company with each other and possible actions they might take separately or together to enhance shareholder value but the existence of such discussions alone is insufficient to support a finding of the formation of a 13d group.  In almost all cases such shareholders independently determine how they will vote their shares so there is no reason to form a group for voting them.  Unless they actually agree to do something together that suggests a voting agreement, e.g. to fund a proxy solicitation, there is no group.

Guest Contributor Phil Goldstein

Question Over Cash-Settled Derivatives Remains Unresolved, Requirement for Disclosing 13D Group Activity Narrowed

In a proxy fight that begun in late 2007, hedge funds TCI (The Children's Investment Fund Management) and 3G Capital Partners nominated five candidates to the board of railroad company CSX. Owning 9% of the stock and 11% more through long cash-settled derivatives, TCI and 3G Capital Partners were successful in getting four of their five nominees elected to the board. In the process, however, CSX sued the hedge funds for violating the Williams Act, arguing that they failed to report their cash-settled derivatives as beneficial ownership and that they were acting as a group before TCI filed its Schedule 13D statement, among other things. 

On June 11, 2008, Judge Kaplan of the lower court found that investors were deemed to constitute a group under broad circumstances: should investors merely meet to discuss, they would trigger a group filing requirement in the event that they own collectively more than 5% of a company's outstanding shares. 

A July 18, 2011 majority-opinion on CSX v. TCI by the U.S. Second Circuit Court of Appeals reversed this notion and accordingly narrowed the extent to which shareholders could be considered a group for Section 13(d) of the Williams Act, a 1968 amendment to the Exchange Act of 1934. The Second Circuit found that proof that shareholders were acquiring shares in concert was needed before they could be deemed a group. Subsequently, the Second Circuit remanded the case. Thus the Second Circuit's opinion represents a favorable shift for activist hedge funds--which will now have less reservations in communicating investments with other shareholders--as far as group filing requirements go.

As far as resolving the issue of whether or not cash-settled derivatives would count as beneficial ownership--this remains very much a work in progress. Both the lower court and now the Second Circuit side-stepped the issue. Judge Kaplan in the lower court took a broad view of cash-settled derivatives counting as beneficial ownership, finding that one should consider "all of the facts and circumstances to identify situations in which one has even the ability to influence voting, purchase, or sale decisions of its counterparties". Despite this broad view, Judge Kaplan ultimately never made a rule on his judgement and thus did not "sterilize" the shares derived from from the cash-settled derivatives (ie. they could be used for voting purposes). The Second Court also did not make a rule on the issue due to "disagreement within the panel".

In a separate concurrence, however, Judge Winter was clear about his opinion on cash-settled derivates. He found that "without an agreement between the long and short parties permitting the long party ultimately to acquire the hedge stock or to control the short party's voting of it, such swaps are not a means of indirectly facilitating a control transaction". According to corporate law firm Schulte Roth, which represented TCI in the proxy fight and ongoing litigation, "given Judge Winter's thoughtful analysis of the beneficial ownership question, it can be expected that, in the absence of guidance from Congress or the SEC, future courts confronted with this issue will take guidance from the Winter concurrence, and consider his analysis in the context of subsequent cases".

Posted by David Schatz

U.S. Court of Appeals Denies Proxy Access in July 22, 2011 Decision

In a U.S. Court of Appeals ruling on July 22, 2011, proxy access was denied in favor of the case presented by the U.S. Chamber of Commerce and Business Round Table.


July 21, 2010 - The Dodd-Frank Wall Street Reform and Consumer Protection Act is passed. Tucked away in the omnibus bill under Title IX (Investor Protections and Improvements to the Regulation of Securities), Subtitle G (Strengthening Corporate Governance), Sec. 971 (proxy access) is a rule that gives the SEC the authority to issue a rule on proxy access (giving shareholders the right to nominate directors in corporate proxy statements as opposed to having to mail their own proxy statements).

August 25, 2010 - The SEC votes 3-2 along party lines to allow proxy access (Rule 14a-11). A shareholder, or group of shareholders, is eligible to use proxy access if they have owned 3% or more of a given company's shares continuously for at least the past 3 years. Companies under a $75M market capitalization are exempt for three years. Moreover, under the proxy access rule, shareholders can only nominate no more than one or what is 25% of the number of company director (whichever is greater). A final limitation is that proxy access cannot be used "for the purpose of changing control of the company".

September 29, 2010 - The U.S. Chamber of Commerce and Business Roundtable files a legal challenge to the SEC's final proxy access rules and requests a stay of those rules (as well a repeal). The petitioners argued that the SEC's judgment was "unlawful under the Investment Company Act, Securities Exchange Act, and Administrative Procedure Act… The Proxy Access Rules are arbitrary and capricious…, do not promote efficiency, competition, and capital formation…"

October 4, 2010 - The SEC stays proxy access, finding that "[a]mong other things, a stay avoids potentially unnecessary costs, regulatory uncertainty, and disruption that could occur if the rules were to become effective during the pendency of a challenge to their validity".

July 22, 2011 - The U.S. Court of Appeals for the District of Columbia overturns the SEC's decision, thus denying proxy access. The three Republican-appointed judges who made the ruling write in the decision,  "We agree with the petitions and hold the [SEC] acted arbitrarily and capriciously for having failed once again… adequately to assess the economic effects of a new rule. Here the [SEC] inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters" .

According to Los Angeles Times, "[t]he court decision leaves the door open for the SEC to do more analysis and enact a revised rule".

Tom Donohue, President of the Chamber of Commerce, commented that the decision is "a strong message that regulators need to meet their statutory requirement to clearly prove that the benefits of regulation outweigh the costs".

Posted by David Schatz, Hedge Fund Solutions

Meister Nets $500M For Corvex Hedge Fund

According to FinAlternatives, Carl Icahn's former right-hand man is half-way to his goal of raising $1 billion.
Keith Meister's Corvex Capital has netted almost $500 million in assets since its launch in March, HFMWeek reports. The New York-based event-driven fund was seeded to the tune of half that amount by Soros Fund Management and hopes to raise at least $1 billion by the end of the year.
Corvex charges 1.5% for management and 20% for performance. The fund features quarterly redemptions after a one-year soft lockup—early exiters will pay a 3% redemption fee—with 60 days notice and a 25% gate. Goldman Sachs and JPMorgan Chase are prime brokers...
Click here to read more.