Activist shareholder

Short description: Shareholder using equity to pressure management

An activist shareholder is a shareholder who uses an equity stake in a corporation to put pressure on its management.[1] A fairly small stake (less than 10% of outstanding shares) may be enough to launch a successful campaign. In comparison, a full takeover bid is a much more costly and difficult undertaking. The goals of activist shareholders range from financial (increase of shareholder value through changes in corporate policy, cost cutting, etc.) to non-financial (disinvestment from particular countries, etc.).[2] Shareholder activists can address self-dealing by corporate insiders, although large stockholders can also engage in self-dealing to themselves at the expense of smaller minority shareholders.[3]: 241

According to research firm Insightia, a total of 967 listed companies globally were publicly subjected to activist demands in 2022, up from 913 in 2021.[4] Shareholder activism can take any of several forms: proxy battles, publicity campaigns, shareholder resolutions, litigation, and negotiations with management. Daniel Loeb, head of Third Point Management, is notable for his use of sharply written letters directed towards the CEOs of his target companies.

Activism may help to address the principal-agent problem where the management (agents) do not adequately respond to the wishes of the principals (investors) of publicly traded companies. In the 2010s, investments in the activist asset class grew, with activists receiving coverage by the media[5] and positive attention from investors.[6] Activists have typically engaged in adversarial campaigns, but have also in some cases been able to acquire board seats with a formal proxy context.[7]

Shareholder activists are making their mark on mergers and acquisitions as well – a 2015 survey of corporate development leaders found that 60% of respondents saw shareholder activism affecting transaction activity in their industry.[8] Increasingly, however, the non-financial form of shareholder activism is affecting companies in a range of sectors. Shareholders, often with a comparatively small stake in a company, are seeking to influence the company's environmental and social performance.[9]

Some of the recent activist investment funds include: California Public Employees' Retirement System (CalPERS),[10] Icahn Management LP, Santa Monica Partners Opportunity Fund LP, State Board of Administration of Florida (SBA),[11][12][13][14] and Relational Investors, LLC.

Due to the Internet, smaller shareholders have also gained an outlet to voice their opinions. In 2005, small MCI Inc. shareholders created an online petition to protest the MCI/Verizon merger.

## Contents

* 1 History
* 2 Notable investors
* 2.1 Outreach strategies
* 2.2 Statistics
* 2.3 Proxy advisory
* 2.4 Funding
* 3 Offensive versus defensive
* 4 Laws
* 4.1 Proxy access
* 4.2 Voting
* 5 Performance
* 6 Research
* 7 Retail involvement
* 8 Political and labor involvement
* 8.1 Socially responsible investing
* 9 See also
* 10 References
* 11 Further reading

## History

Corporations in 18th-century Europe were privileged and relatively uncommon, but in the United States became much more common, starting with 300 in the 1790s and expanding by around 26,000 between 1790 and the 1860s, resulting in about 15 times the corporations in Great Britain by 1830.[3] These early corporations contained various provisions for corporate governance, including restricted charters, bylaws, prudent-mean voting rules,[15] dividend payments, and press coverage.[3]

From 1900 to 1950, about 1.22 "offensive" activist initiatives occurred per year, with more occurring in the 1940s and 1950s.[3] Notable investors included Cyrus S. Eaton, Phoenix Securities Corporation, Benjamin Graham, J. Paul Getty, and Malcolm Chace.[3] Activism was likely limited by the lack of ownership dispersion, meaning that many corporations had large shareholders with sizable blocks (10 to 20% of total shares) who already exerted significant control over the corporation.[3]

## Notable investors

Notable activist investors include: Isaac Le Maire (1558–1624),[16] Carl Icahn,[17] Nelson Peltz (Trian),[17] Bill Ackman (Pershing Square),[17] Daniel Loeb (Third Point),[17] Barry Rosenstein,[17] Larry Robbins (Glenview),[18]: 19 David Einhorn, Gregg Hymowitz (EnTrust Global),[19] Christer Gardell (Cevian Capital), and Ryan Cohen.[20]

During the 1980s, activist investors such as Carl Icahn and T. Boone Pickens gained international notoriety[citation needed] and were often perceived as "corporate raiders" for acquiring an equity stake in publicly owned companies, like Icahn's investment in B.F. Goodrich, and then forcing companies to take action to improve value or rid themselves of rebel intruders like Icahn by buying back the raider's investment at a fat premium, often at the expense of the other shareholders.[citation needed] More recently, activist investor Phillip Goldstein suggested that the role of the activist investor has moved from green mail to one of being a catalyst to unlock value in an underlying security, and says that the public perception of activist investors as "corporate raiders" has dissipated.[21]

In 2019, notable activist investors included Starboard Value, Ancora,[22] Icahn, Elliot Management, and Third Point (Loeb).[18] In 2019, mutual funds such as Wellington Management Company had begun to show signs of activism.[23]

### Outreach strategies

Activist investors advertise their message out in various ways including postal mail, websites, and social media.[18]

### Statistics

As of 2018, there had been an average of 272 activist campaigns per year in the United States, including 47 proxy contests.[18] About 47% of targeted companies were outside of the United States.[24]

### Proxy advisory

As of 2020, passive investors such as index funds by Vanguard as well as non-activist but still active management investors such as mutual funds play a significant role in corporate governance. These firms use proxy advisory firms such as Institutional Shareholder Services to receive recommendations on how to vote on shareholder proposals.

### Funding

Activist investors are often hedge funds funded by accredited investors and institutions. In 2019, institutions were demanding more upfront explanation of the activist ideas before funding, and in some cases requiring that the funds be placed into special purpose vehicles specifically for the project.[25] Activist hedge funds, which are hedge funds that "take concentrated positions in the equity of public corporations and actively engage with corporate managers" can address the principal-agent problem and limit self-dealing by providing management with high-powered incentives to increase value.[26]: 104

## Offensive versus defensive

Shareholder activism can be categorized as "offensive" or "defensive"; in the latter case, an existing shareholder attempts to correct some deficiency, while offensive activists build a position with the intention to agitate for change.[3]: 256 Shareholders can also initiative a derivative suit to force action by the corporation. Shareholders can also engage in a securities class action but these are typically not associated with activism.

## Laws

In the United States, acquisition of over 5% of beneficial ownership in a company with the intention to influence leadership must be accompanied by a Schedule 13D filing; investors who do not intend to become activists may file a Schedule 13G instead.[27]

### Proxy access

Historically, investors were required to mail separate ballots when trying to nominate someone of their own to the board, but beginning in 2015, proxy access rules began to spread driven by initiatives from major institutional investors, and as of 2018, 71% of S&P 500 companies had a proxy access rule.[28]

### Voting

Votes for the board may be "straight" or "cumulative". In straight voting (aka statutory voting), shareholders get one vote per share on all ballot questions (e.g., candidates for the board of directors or shareholder proposals). In cumulative voting, a shareholder receives a general vote for however many number of ballot questions there are. The votes can then be all cast for (or against) a single ballot question, which makes it easier for minority shareholders to elect candidates.[29] There has also been a movement toward "majority" voting, where a candidate must receive the majority of votes.[30] Most large corporations are incorporated in Delaware due to the well-developed Delaware General Corporation Law; in Delaware, cumulative voting is optional, but exceptions exist; for example, a California-based but Delaware-registered corporation may be "pseudo-foreign" under California law and therefore have to comply with California law.[30]

## Performance

Taking an activist approach to public investing may produce returns in excess of those likely to be achieved passively. A 2012 study by Activist Insight showed that the mean annual net return of over 40 activist-focused hedge funds had consistently outperformed the MSCI world index in the years following the global financial crisis in 2008.[31] Activist investing was the top-performing strategy among hedge funds in 2013, with such firms returning, on average, 16.6% while other hedge funds returned 9.5%.[32]

## Research

Shareholder activism directed at both European and American companies has been surging.[33] A 1996 study found that larger firms with higher institutional holdings made firms more likely to be targeted by activist investors.[34] Researchers also try to understand what makes company a desirable target for an activist investor.[35] Lately,[when?] both scholars and practitioners started using machine learning methodologies to predict both targets and activists.[36]

## Retail involvement

Any shareholder, including a non-institutional retail investors, may submit a shareholder proposal in the United States, and between 1934 and the mid-1980s these shareholders typically submitted proposals.[37] One estimate placed institutional owners at 68% of shares and retail at 32% of shares, but 98% of institutional owners vote and only 28% of retail owners vote.[37] Institutional shareholders, however, often vote automatically upon the advice of proxy advisory firms; allowing retail shareholders to vote based upon a guideline ("standing voting instructions") has been proposed to increase their involvement.[38]

Various websites have been created to facilitate retail involvement,[39] including Moxy Vote, Shareowners.org, United States Proxy Exchange and ProxyDemocracy.org, but over time these generally shut down.[37]

## Political and labor involvement

Labor unions, including through pension funds such as CalPERS coalitions such as the Change to Win Federation often engage in shareholder proposals.[40] The Shareholder Rights Group is a coalition of shareholder proposal advocates.[41]

### Socially responsible investing

Organizations such as the Interfaith Center on Corporate Responsibility (ICCR), As You Sow and Ceres use shareholder resolutions, and other means of pressure, to address issues such as sustainability and human rights.

For an analysis of the hundreds of annual shareholder resolutions, see Proxy Preview.[42]

## See also

* Board of directors
* Corporate governance
* Corporate raid

* Corporate social responsibility

* Proxy statement

* Shareholder rebellion
* Socially responsible investing

## References

1. ↑ Reasonable Investor(s), Boston University Law Review, available at: http://ssrn.com/abstract=2579510
2. ↑ "Activist Investor Definition". https://www.carriedin.com/activist-investor.
3. ↑ 3.0 3.1 3.2 3.3 3.4 3.5 3.6 Wright, Robert E.; Sylla, Richard (2011), Koppell, Jonathan G S, ed., "Corporate Governance and Stockholder/Stakeholder Activism in the United States, 1790–1860: New Data and Perspectives" (in en), Origins of Shareholder Advocacy (Palgrave Macmillan US): pp. 231–251, doi:10.1057/9780230116665_11, ISBN 978-1-349-29072-7
4. ↑ "Insightia". insightia.com. http://www.insightia.com/22stats. Retrieved 18 January 2023.
5. ↑ Grossman, Richard; Arcano, Stephen. "Navigating Today's Shareholder Activism Landscape". Transaction Advisors. ISSN 2329-9134. https://www.transactionadvisors.com/insights/navigating-today’s-shareholder-activism-landscape.
6. ↑ Golden, Peter; Richter, Philip; Schwenkel, Robert; Shine, David; Sorkin, John; Weinstein, Gail. "Shareholder Activism in M&A". Transaction Advisors. ISSN 2329-9134. https://www.transactionadvisors.com/insights/shareholder-activism-ma.
7. ↑ Gerber, Marc. "US Corporate Governance: Have We Crossed the Rubicon". Transaction Advisors. ISSN 2329-9134. https://www.transactionadvisors.com/insights/us-corporate-governance-have-we-crossed-rubicon.
8. ↑ Ruggeri, Chris; Kirschner, Ken; Blanchard, Tony. "Corporate Development Strategy: Thriving in your Business Ecosystem". Transaction Advisors. ISSN 2329-9134. https://www.transactionadvisors.com/insights/corporate-development-strategy.
9. ↑ Cundill, Gary (2017). "Non-financial shareholder activism: a process model for influencing corporate environmental and social performance.". International Journal of Management Reviews 20 (2): 606–626. doi:10.1111/ijmr.12157.
10. ↑ Forbes: "Calpers Votes Against Jamie Dimon, Again" "Calpers Votes Against Jamie Dimon, Again". https://www.forbes.com/sites/halahtouryalai/2013/05/20/calpers-votes-against-jamie-dimon-again/. . Retrieved 28 June 2013.
11. ↑ Eric, Finseth (2011). "Shareholder Activism by Public Pension. Funds and the Rights of Dissenting. Employees under the First Amendment". Harvard Journal of Law & Public Policy 34 (1): 289–366. http://www.harvard-jlpp.com/wp-content/uploads/2011/08/FinsethFinal.pdf. Retrieved 28 June 2013.
12. ↑ ProxyDemocracy.org: "FLORIDA SBA" "ProxyDemocracy | Florida SBA". http://www.proxydemocracy.org/data/funds/81. Retrieved 28 June 2013.
13. ↑ State Board of Administration: "SBA Corporate Governance Principles & Proxy Voting Guidelines" [1][yes|permanent dead link|dead link}}] Retrieved 28 June 2013.
14. ↑ Harvard Law School Forum on Corporate Governance and Financial Regulation: "Florida SBA Supports Proxy Access and Advisory Firm Transparency" "Florida SBA Supports Proxy Access and Advisory Firm Transparency". April 2011. http://blogs.law.harvard.edu/corpgov/2011/04/01/florida-sba-supports-proxy-access-and-advisory-firm-transparency/. Retrieved 28 June 2013.
15. ↑ Dunlavy, Colleen A. (21 February 2007) (in en). Social Conceptions of the Corporation: Insights from the History of Shareholder Voting Rights. Rochester, NY.
16. ↑ Frentrop, Paul (2009). The First Known Shareholder Activist: The Colorful Life and Times of Isaac le Maire (1559–1624), in Frentrop/Jonker/Davis 2009, 11–26
17. ↑ 17.0 17.1 17.2 17.3 17.4 Carried Interest: "Activist Investors" . Retrieved 6 May 2015.
18. ↑ 18.0 18.1 18.2 18.3 "Review and Analysis of 2018 U.S. Shareholder Activism". Sullivan & Cromwell. https://www.sullcrom.com/files/upload/SC-Publication-SandC-MnA-2018-US-Shareholder-Activism-Analysis.pdf.
19. ↑ Chung, Juliet; Benoit, David (14 July 2017). "The Man Behind Activist Investors' Biggest Bets". WSJ. https://www.wsj.com/articles/the-man-behind-activist-investors-biggest-bets-1500037200.
20. ↑ Trentmann, Nina; Maurer, Mark (24 February 2021). "GameStop CFO Was Forced Out as Activist Investor Pushes New Strategy". WSJ. https://www.wsj.com/articles/gamestop-cfo-was-forced-out-as-activist-investor-pushes-new-strategy-11614214793.
21. ↑ "Phil Goldstein: The Bulldog's passion for value investing". 21 January 2011. http://www.opalesque.tv/youtube/Phil_Goldstein/1.
22. ↑ "Ancora gets its activism together" (in en). 21 April 2019. https://www.crainscleveland.com/finance/ancora-gets-its-activism-together.
23. ↑ "Mutual funds start to put their mouth where their money is" (in en). Reuters. 15 March 2019. https://www.reuters.com/article/us-usa-companies-funds-analysis-idUSKCN1QW1C8.
24. ↑ "The Activist Investing Annual Review 2019". Schulte Roth & Zabel. https://www.srz.com/resources/the-activist-investing-annual-review-2019.html.
25. ↑ "Karmic reckoning? Investors in activist hedge funds agitate for change" (in en). Reuters. 30 July 2019. https://www.reuters.com/article/us-usa-hedgefunds-investors-focus-idUSKCN1UP17T.
26. ↑ Hirst, Scott; Bebchuk, Lucian; Cohen, Alma (1 July 2017). "The Agency Problems of Institutional Investors". Journal of Economic Perspectives 31 (3): 89. doi:10.1257/jep.31.3.89. https://scholarship.law.bu.edu/faculty_scholarship/340. Retrieved 5 November 2020.
27. ↑ Reiff, Nathan. "13F Instead of 13D: Activists Make Smaller Purchases" (in en). https://www.investopedia.com/news/13f-instead-13d-activists-make-smaller-purchases/.
28. ↑ Gregory, Holly J.; Grapsas, Rebecca; Holl, Claire; LLP, Sidley Austin; on (February 2019). "The Latest on Proxy Access" (in en-US). https://corpgov.law.harvard.edu/2019/02/01/the-latest-on-proxy-access/.
29. ↑ Coyle, John F. (25 January 2016) (in en). Altering Rules, Cumulative Voting, and Venture Capital. Rochester, NY.
30. ↑ 30.0 30.1 "Majority Voting for Directors | Insights" (in en). https://www.jonesday.com/en/insights/2006/10/majority-voting-for-directors.
31. ↑ Activist Insight: "New Shareholder Activist Index Reveals Rewards of Activist Investing" "Archived copy". http://www.activistinsight.com/press/Activist Insight Press Release - Activism Outperforms - Nov 2012.pdf. . Retrieved 12 December 2012.
32. ↑ Wood, John; Dysart, Theodore. "Assessing the Merits of an Activist Investor's Point of View". Transaction Advisors. ISSN 2329-9134. https://www.transactionadvisors.com/insights/assessing-merits-activist-investor’s-point-view.
33. ↑ "20 Places You Should be Sharing Your Content". 14 June 2018. https://www.searchenginejournal.com/places-to-share-your-content/234905/.
34. ↑ Smith, Michael P. (1996). "Shareholder Activism by Institutional Investors: Evidence from CalPERS". The Journal of Finance 51: 227–252. doi:10.1111/j.1540-6261.1996.tb05208.x.
35. ↑ Logsdon, Jeanne M.; Van Buren, Harry J. (2008). "Justice and Large Corporations". Business & Society 47 (4): 523–548. doi:10.1177/0007650308316524.
36. ↑ "Shareholder Activism: Wir sagen voraus wen es trifft!". https://www.nordantech.com/en/blog/data-science/activism-vorhersagen.
37. ↑ 37.0 37.1 37.2 Miller, Robin (1 May 2016). "Shareholder Advocacy In Corporate Elections: Case Studies In Proxy Voting Websites For Retail Investors". International Development, Community and Environment (IDCE). https://commons.clarku.edu/idce_masters_papers/52. Retrieved 19 March 2020.
38. ↑ Fisch, Jill E. (2017) (in en). Standing Voting Instructions: Empowering the Excluded Retail Investor. Rochester, NY.
39. ↑ Levick, Richard (25 April 2011). "The Floodgates Are Open: Shareholder Activists Intensify Social Media Utilization" (in en). https://www.forbes.com/sites/richardlevick/2011/04/25/the-floodgates-are-open-shareholder-activists-intensify-social-media-utilization/.
40. ↑ Morgenson, Gretchen (24 March 2017). "Want Change? Shareholders Have a Tool for That" (in en-US). The New York Times. ISSN 0362-4331. https://www.nytimes.com/2017/03/24/business/proxy-climate-change-executive-pay.html.
41. ↑ "SEC rulemaking threatens to disrupt ESG investment ecosystem and undermine shareholder rights" (in en). 7 January 2020. https://www.responsible-investor.com/articles/sec-rulemaking-threatens-to-disrupt-esg-investment-ecosystem-and-undermine-shareholder-rights.
42. ↑ "Proxy Preview". As You Sow. https://www.proxypreview.org/.

## Further reading

* Icahn calls for Time Warner breakup, buyback / CNNMoney.com
* Third Point Management's letter to Star Gas CEO, Irik Sevin
* Qwest Withdraws from Bidding – Denver Business Journal / MCIpetition.com
* Academic Literature Summary (archived 27 December 2013)
* The Rise of Activist Investing and How to Respond
* A&M Activist Alert
* Predicting Shareholder Activist Targets, Nordantech.com

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