Activists vs Management – Wachtell Weighs In


New York – As proxy season approaches, the New York Times is reporting on the most recent salvo in the activist investor – corporate war.  The law firm Wachtell Lipton Rosen and Katz has asked the SEC to amend takeover rules to limit activist investors’ ability to rapidly and secretly acquire significant holdings of shares in corporations.

In the US, any shareholder must report their holdings of shares once they accumulate 5% of the outstanding shares in a corporation. The shareholder is compelled to file a 13D form with the SEC. Wachtell is petitioning to have the reporting period for the 13D shortened and for the inclusion of derivatives in the estimation of overall ownership. The concern of corporations is that hedge funds and other investors can acquire a large amount of stock prior to having to file with the SEC. Additionally, there are limited rules for counting derivatives in ownership estimates, that do not capture all of the impact of the derivatives on ownership.

The poster child of lack of controls being exercised is the acquisition of JC Penny shares by Pershing and Vornado Trust in the fall of 2010, where the two funds acquired roughly 27% of the shares in JCP before filing a 13D.  Pershing also acquired 10.9% of Fortune Brands before filing a 13D in around the same timeframe.

On the research front, there are a number of firms that specifically address activist shareholder information, including (but not limited to): Catalyst Investment Research, 13D Monitor, 13D Research and The Activist Investor. While these are firms that explicitly cover the ground on the 13D filings and activist investors, there are also a number of research providers that cover this waterfront through proxy analysis, governance or as a variable in other research approaches.

The Times notes that other law firms have been invited to join the petition, but declined. They moot that may of the firms have substantial capital markets-based practices. But this explanation may miss the point. Corporations have defenses at their disposal to combat activist investors, many of which were implemented in the 1980s M&A boom. The poison pill is the best known defense that a corporation can include in its charter to provide a measure of defense.

It seems likely that the SEC will consider a move to make investors report more quickly. What will be more difficult will be to include the shares tied up in derivative transactions.  What we can estimate easily is the number of shares that are tied up in options programs. What we can’t is the extent to which those share may be exercised by the holder.

The real question seems to be whether activist investors are actually a problem or whether they are performing a valuable service to markets as a whole. This has a lot more to do with what they do once they become an insider, than the process by which they became an insider.



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