Market trends, no matter how subtle the movement, are constantly shaping the way activism takes place around the globe. Currently, trends are showcasing the return of activists’ interests to large-caps and the market in the UK and Europe, where opportunity for profit presents itself.
We spoke with Aneliya S. Crawford, a partner in the Shareholder Activism and M&A and Securities Groups at Schulte Roth & Zabel, widely regarded as the dominant global law firm for shareholder activism and activist investing. As such, Crawford advises some of the most active and influential activist investors in the space.
Crawford brings to each matter vast experience. Serving activists, “occasional” activists, investment advisers and issuers, she provides cutting-edge advice on navigating a maze of applicable laws.
Christopher P. Skroupa: Where do you see current trends leading the market, and how are they shaping activism?
Aneliya S. Crawford: Most of the current trends lead in the direction of more nuanced and complex interactions between shareholders and companies. The return to large-caps we have seen this year has meant, on the activist side, more robust and detailed analyses of the companies, with deeper focus on the operational side and often with the added perspective of industry experts as consultants to the activist. CEOs have become the focus of campaigns as a corollary to the rise of operational activism and ever bolder and more creative activist campaigns.
On the defense side, these large targets have been more reluctant to settle and, despite talk of a new era of engagement, companies have more often opted to fight and even to be the first to publicize an engagement with an activist. This is especially true among large-caps, where there is a seemingly principled rejection of the fact that a storied company would find itself the target of an activist.
Another trend in recent years – the expansion of activism on a global scale – has added another interesting layer of nuance and complexity. Both activists and companies draw on the latest developments in other jurisdictions to generate new ideas, developing a greater comfort level working in very different contexts.
Institutional investors also have become a more influential factor. Institutional investors have fleshed out their voting guidelines, published letters with specific calls for action, and taken a public stance on governance issues.
They have also ramped up their engagement programs with companies. In our work with institutional investors, we see increased attention to the permissible parameters and nature of discussions that these investors can have, staying within their investment mandates and complying with their own fiduciary duties. The evolving role of institutional investors is adding a new layer of complexity in activism.
Skroupa: Why are activists’ interests returning to large-caps? And why are they heading towards the UK and European market?
Crawford: I think it is a combination of many factors. Activists’ success has further emboldened them while also providing access to more capital to deploy on strategies that require multi-billion dollar investments. Some of the barriers to effective campaigns at large-caps have been removed as well.
For example, there has been a noticeable evolution in the perception of activism, and with this change the perceived stigma feared by the most highly qualified directors and executives of joining the slates of activists has vanished. Reputable activists today are able to attract the caliber of nominees and advisors that not only rival the company’s pools, but that would have been reluctant to join an activist just a few years ago.
In addition, some of the most well-capitalized funds, which traditionally prefer behind-the-scenes negotiations, are hitting a wall with large-caps and finding themselves forced into contests to effect the changes they believe necessary.
The increased interest in US-based funds in the UK and Europe is, in my mind, rooted in the same factors – the success of US activism, the resulting larger war chests, the removal of the stigma of being an engaged and, if necessary, aggressive investor or working with one. There is a greater level of confidence that the activist victories and profitable engagements here in the US can be replicated abroad despite different shareholder bases, different regulatory environments and a different culture of shareholder/company interactions.
The value propositions are attractive enough where activists are willing to deploy capital to understand the differences in challenging a UK or European target. On the other side of the coin, there is a growing awareness by companies and advisors of the groundwork laid and the channels opened for effective activism in the UK and Europe.
Skroupa: How do large proxy fights differ from smaller ones? What’s the added pressure for the legal adviser?
Crawford: Large-cap contests more often spill into issues that go beyond pure-play activism, issues that require deep and specialized understanding of a very broad range of legal areas that span across antitrust regulations, tax, fund compliance issues, employee benefits and executive compensation.
There is also a greater willingness to resort to litigation to resolve issues in contests at large-cap targets. The trend towards more litigation in activist contests permeates situations at small-caps, mid-caps and large-caps, but with the latter, because of the higher stakes and increased complexity, there is more appetite to resort to litigation if needed.
Of course, the stakes in a large-cap contest are also higher. A large contest receives far greater scrutiny and requires deliberate thought every step of the way. Any misstep can have an enormous impact as the issues are more complex. This is partially because activists that tackle a large-cap target are typically very sophisticated and well-versed in activist strategies, and can therefore focus on the most creative, complex and difficult approaches.
In fairness, the complexity is also attributable in part to the large-cap targets themselves, which have the deep resources and large adviser teams necessary to devise more unexpected defense strategies and to identify tactics that can play in their favor.
Large-caps also tend to have a larger retail base. Sophisticated activists differentiate between the different layers within a shareholder base and are able to create the most strategic, impactful ways to communicate to each segment about the topics that matter most to them. You would engage an institutional investor on different topics than you would a retail investor, and a US investor would think about and vote on issues differently than a UK investor. Companies with large retail bases have spurred the robust social media campaigns, which have become quite prominent in recent large-cap contests.
Skroupa: How would the outcome of a large fight affect the market, from either side, in your opinion?
Crawford: In my experience, the activists who undertake large fights are not preoccupied with the immediate reaction of the market. The goal is a more lasting stock performance improvement and creating sustainable long-term value for shareholders.
The reality is that, more often than not, companies targeted by a thoughtful, well-informed activist with a good thesis end up taking some if not all of the actions proposed by the activist. Often enough that happens regardless of the ultimate outcome of a fight.
There may be a debate about who deserves credit, especially if the activist gained some representation on the board, or whether the companies would have made the changes absent pressure, or how quickly or how well the changes were implemented. From my experience, value generally tends to improve and the market tends to reflect this.
Currently, Crawford is representing Trian Partners in its proxy fight against Procter & Gamble, which is valued at $222 billion, the largest company ever to face a proxy fight. During her career, Crawford has led nearly 200 activist campaigns across the globe, representing shareholders in connection with their investments in a broad range of strategies, ranging from behind-the-scenes negotiations through settlement agreements and proxy contests.
Crawford’s clients include leading hedge funds and other large investors, as well as corporate clients in matters concerning shareholder activism, proxy contests, mergers and acquisitions, hostile takeovers and corporate governance. She also represents public and private companies in mergers and acquisitions, and asset and stock purchase transactions.
Crawford will be a featured moderator in the The Role of Institutional Investors in Activist Campaigns at the Global Shareholder Engagement & Activism Summit in Toronto, Canada on Sept. 28-29.