Firm vs Predator: Getting The Most Out of Shareholder Activism
Article written by guest contributor Louis Noirault
On September 9th, the hedge fund, Elliot Management, issued a letter criticizing the strategic decision and the under-average performance of AT&T[1]. Elliot Management had just acquired a $3.20 billion stake in the telecommunications firm. Shareholder activism has drawn attention in recent years, understandably so since it increased by 5.5% last year[2]. An “activist campaign” consists in the acquisition by an institutional investor of a large number of shares in a company, which gives him a significant influence on the strategy pursued by the firm. The activist will, for instance, try to appoint a director of his liking on the board to bring changes to the firm it targets. Some hedge funds, such as Elliot Management but also Pershing Square Capital have even specialized in this practice.
Typically, the ultimate objective the activist will seek to achieve is the sale of the targeted firms, since they usually sell at a premium[3]. Individual shareholders, who do not enjoy the same leverage over the firm, often feel that the activist campaign is only pursuing short-term interests and is therefore detrimental to their long-term investment in the corporation[4]. This leads to a proliferation of proxy contests for the appointment of directors, confrontational public campaigns and, of course, litigations[5]. Such adversarial interventions happen in more than 20% of activist campaigns[6].
Overall, this developing activity is putting strain on the corporate framework which was originally conceived for an atomized body of shareholders, an idea referred to as Berle and Means’ paradigm[7]. Different propositions have emerged to ensure that activist campaigns lead to the best strategy for firms and that the most incompatible with other shareholders’ interests are abandoned. The focus is on the Delaware jurisdiction since it is the state of incorporation of 66% of Fortune 500 companies[8] .
Anabtawi and Stout, in a paper published by the Stanford Law Review, have proposed to give activist shareholders a fiduciary duty to serve the best interest of the corporation and its shareholders[9]. Such a reform would help to solve the issue of alignment (or non-alignment) of activists’ interests with other shareholders. If they are not contradictory, as is suggested by the most comprehensive empirical research on the matter[10], then this duty would mostly serve to reassure individual shareholders that the corporation is not straying far from their interest. In case of blatant disrespect of other shareholders interests, such as the refusal to even consider alternatives to the sale of the firm, this duty would act as an additional safeguard. The current Delaware General Corporation Law does not give a fiduciary duty to shareholders who have less than 50% of a class of shares of a publicly-traded company. Yet, most activists are way under this threshold.
An instance in which this duty would have helped is in the re PLX Technology Inc. [11] case. Shareholders targetted the activist-appointed director to claim a breach of his duty towards them. It seems that the law would benefit by increased clarity if it allowed suing the activist directly — since it is not always clear whether an activist appointee on the board is fulfilling his duty towards the corporation and its body of shareholders when he is serving the interest of a specific activist.
In addition to this new bulwark against blatant predatory behaviors, Gilson and his co-authors have proposed a revamping of the board of director. The so-called “Board 3.0”[12] would resolve the problem of informational asymmetry between activist shareholders and the board of director. The former, having a large stake in the corporation, have a rational interest in getting well-informed on potential strategies while board members often have another activity and get less information. Therefore activist-backed strategies are a credible challenge to board decisions. The new board structure proposed by Gilson and his co-authors would include “strategy review committee”[13] in charge of assessing the strategic options available to the company and ensuring that the one proposed by the activist is not a second-best. The success of this proposition would, however, rely on the independence of the directors on this committee from activists.
Both these propositions would help to restore the trust of individual shareholders in the strategic decisions of the board when an activist campaign is under progress. While the possibility of their implementation in the state of Delaware is difficult to assess, it should be deemed possible given that such legislation would likely foster the attractiveness of the state for new incorporations. It may even lead other states to follow the example if it proves successful. In the case of AT&T, this new form of corporate governance could help the CEO Randall Stephenson to defend his idea of the $85 billion deal with Time Warner against the criticism of Elliot Management — if it is actually a better strategy according to independent experts hired by the board.
Image Sourced from: https://corpgov.law.harvard.edu/2015/04/07/shareholder-activism-who-what-when-and-how/
[1] Sprangler, Todd. September 17th, 2019. “AT&T CEO Defends WarnerMedia Strategy, Addresses Activist Investor’s Letter” Variety.
[2] Melissa Sawyer, Lauren S. Boehmke, and Nathaniel R. Ludewig. Friday, April 5, 2019 . “Review and Analysis of 2018 U.S. Shareholder Activism”Sullivan & Cromwell LLP
[3] Anabtawi, Iman, and Lynn Stout. "Fiduciary duties for activist shareholders." Stan. L. Rev. 60 (2007): 1291.
[4] Ibid. Op. Cit. p. 1290
[5] Bebchuk, Lucian A., Alon Brav, and Wei Jiang. The long-term effects of hedge fund activism. No. w21227. National Bureau of Economic Research (2015):
[6] Ibid. Op. Cit. p. 61
[7] See Berle, Adolf. Means, Gardiner. “The Modern Corporation and Private Property." New York (1932)
[8] See the figures on this official Delaware government website https://corp.delaware.gov/aboutagency/
[9] Anabtawi and Stout, Op. Cit.
[10] Bebchuck et al., Op. Cit.
[11] re PLX Technology Inc. Stockholders Litigation, CA No. 9880-VCL, 10/16/2018
[12] Gilson, Ronald J., and Jeffrey N. Gordon. "Board 3.0--An Introduction." The Business Lawyer, Spring 2019 (Forthcoming); Columbia Law and Economics Working Paper No. 602; Stanford Law and Economics Olin Working Paper Forthcoming No. 531. (2019).
[13] Ibid. Op. Cit. p.11