A Partner and Co-Chair of Olshan Frome Wolosky’s Activist & Equity Investment Group, Andrew Freedman is one of the leading attorneys in the U.S. practicing in the area of shareholder activism and advises some of the nation’s most prolific activist investors, including Starboard Value and Elliott. He has been ranked by Chambers USA as a “Leading Lawyer” in the inaugural Corporate/M&A: Shareholder Activism category. According to Chambers USA, Freedman “really understands what his client wants and is creative in figuring out ways to get there.”
Christopher P. Skroupa: From the activist perspective, what were the major wins in engagement this past year?
Andrew Freedman: After a relatively sleepy 2016 for large cap activism, the top-tier shareholder activists came back with a vengeance in 2017, mounting high-profile campaigns against well-known, large-cap target companies. Most recently, Bill Ackman fell short in his campaign against Automatic Data Processing, but it now appears Nelson Peltz may have actually won a seat in his mega battle with Procter & Gamble. There were plenty of other notable activist success stories this year, too.
The targeting of CEOs was a particularly intriguing theme woven into the strategy of many of these campaigns. Elliott Management’s successful campaign at Arconic that led to CEO Klaus Kleinfeld’s departure, in the wake of his rogue attempt to make things personal against Paul Singer, is certainly one that stood out this year. Pressure from Mantle Ridge resulted in Hunter Harrison taking the helm at CSX, while Buffalo Wild Wings CEO Sally Smith announced she would retire after a bruising proxy fight with Marcato.
Activist investors have had a hand in appointing or replacing more than 1,000 public company board members over the past decade, and it was only a matter of time before they began to more directly target struggling CEOs as part of their agendas. Land and Buildings’ proxy fight at Taubman Centers has also proven significant despite not resulting in board seats for the activist.
By shining a spotlight on Taubman’s governance shortcomings and shoddy performance, a status quo-minded board was forced to reluctantly make governance and board changes to sway votes. This decision helped fuel a renewed interest in managerial entrenched companies with unfriendly shareholder governance structures, including REITs and dual share class companies, once thought to be untouchable. Now Elliott has emerged on the scene at Taubman urging a sale, and Land and Buildings may have the last laugh after all.
Skroupa: What made those wins significant?
Freedman: The activists’ efforts in the campaigns to hold CEOs immediately accountable to shareholders made their wins particularly significant; the wins represent a noteworthy departure from the early days of shareholder activism. Targeting a CEO for a vote of no-confidence in a director election contest or calling for the removal of a CEO as part of the activist’s platform raises the stakes in any proxy battle, making it an all-or-none gambit with little room for compromise.
So, CEO-targeting may also explain why more proxy contests went to a vote this year without a settlement. Nevertheless, any strategy to remove a CEO will continue to be perceived as highly aggressive. While there may be facts and circumstances under which this strategy is warranted, the standard will be higher for obtaining shareholder support for such a referendum on senior management.
Shifting topics, Land and Buildings’ relentless involvement at Taubman shows that activism can rattle the complacent status quo, even where there is an uphill or uncertain path to change. Significant attention from the activists will attract, and ultimately compel, a cushy board to make changes it otherwise wouldn’t have considered. Activists are beginning to flock to deeply entrenched, underperforming companies, that typically fly just under the radar.
Skroupa: How will those wins tee-up the 2018 season?
Freedman: There have been at least 10 activist campaigns throughout 2017 where the activist publicly announced its intention to target the CEO for replacement. While we cannot predict what the number will be in 2018, these campaigns may very well embolden other activists to target CEOs, especially where there is a sense of urgency to turn around a perennial underperformer. In response to this trend, we are already seeing more boards fine-tune their activism defense programs by voluntarily addressing issues pertaining to CEO compensation, succession and independence.
We are also seeing our activist clients take interest in entrenched, poorly performing REITs and dual share class companies. I would not be surprised to see several campaigns in 2018 aimed at improving such companies through a holistic overhaul of their governance. We aren’t talking about your everyday “tick-the-box” governance improvements, but rather wholesale changes in how a board approaches its responsibilities, accountability and its shareholders-at-large.
Skroupa: Regarding the activists on top, is the old guard the new guard? Who can we expect to hear from the most?
Freedman: The old guard, comprising many of the top tier activists, are grabbing headlines with high-profile launches at large-caps on what seems like a weekly basis. It felt like there were fewer large-cap fights in 2015 going into 2016, following Trian’s proxy fight at DuPont.
It was also during this period that we witnessed the emergence of a new class of activist investors, including traditionally passive investment firms, who were undertaking numerous activist campaigns in the small and mid-cap space. These newcomer activists together with a class of shrewd and dynamic, pure-play activists, like Engaged Capital, VIEX Capital, JCP Capital and Engine Capital, will continue to set their sights on small and mid-cap underperformers.
The old guard activists made a huge comeback in 2017, running campaigns against large, household-name companies and utilizing colorful, attention-grabbing solicitation strategies through the use of social media and other web-based platforms. We think the activist titans, like Starboard and Elliott, will continue to make their presence felt through the 2018 proxy season given their willingness to engage in all forms of activist campaigns both here and around the globe.
Freedman will be a panelist for the discussion Activists on Top: Is the Old Guard the New Guard? at the Shareholder Activism conference in New York, NY on Jan. 25, 2018.