Activist investors embark on fight of their lives
Activist investors generally prefer to be on the attack. So it’s odd to see them on the back foot, fighting to preserve an important arrow in their quiver. The Securities and Exchange Commission is weighing whether to curb uppity shareholders from quietly building stakes in companies. The battle should kick into high gear this week when the merger world’s top lawyers and bankers hold their annual confab in New Orleans.
It comes down to a question of disclosure. As it stands, investors planning to take an aggressive stance with a company must reveal within 10 calendar days when they accumulate a stake of at least 5 percent. In practice, the rule enables funds to buy considerably more than that before they are obliged to report their positions.
For example, Bill Ackman’s Pershing Square Capital snagged nearly 11 percent of booze-to-golf conglomerate Fortune Brands before the activist was required to inform the market last October. It happens overseas, too. LVMH Moët Hennessy Louis Vuitton also in October revealed it stealthily bought 17 percent of Hermès.
The SEC put the matter of “beneficiary ownership” atop a wish-list of priorities. Marty Lipton, the veteran Wall Street lawyer and inventor of the poison pill, is now pushing the issue, with his firm asking the watchdog to rewrite the rules in three significant ways. It wants the 10-day window shortened to one day; the types of derivatives that count toward the threshold expanded; and activists blocked for two days from buying any additional shares once they reach 5 percent.
The advocate here is significant. Lipton has a long history of defending managers and corporate boards. It’s not a big leap to think these latest proposals would carry on that tradition. Since aggressive investors tend to up-end the boardroom status quo, limiting their power would almost certainly tilt more of it to management.
The law firm frames the debate differently, presenting it under a banner of fairness. Ackman’s chief legal consigliere is slated to proffer the first public reply from the activist community during a panel discussion at Tulane University’s corporate law conference in New Orleans, whose attendees will be called on for input by the SEC.
Shareholders often benefit from activism. Take Fortune Brands. Ackman started buying shares in July 2010 at around $41. When he disclosed his stake, they rose to almost $56 and now trade at $60. The only losers were the investors who unwittingly sold to Ackman as he increased his stake from 5 percent to 11 percent.
The disclosure rules benefited Ackman. But letting such riches accrue to the market instead of the activists might chill their effect by, for example, confining their targets to only the biggest companies, where chances of success may be slimmer. That could lead to fewer activists, who on balance serve as valuable watchdogs against lazy management.
All of which isn’t to say the disclosure rules don’t need attention. The 10-day reporting lag doesn’t make much sense. But it isn’t clear the 5 percent threshold is right either.
The original trigger in 1968 was 10 percent — plus whatever an investor could buy in the ensuing 10 days. That helped protect companies from corporate raiders. Since then, boards have been handed additional safeguards, including poison pills, which limit investors seeking creeping control.
Britain requires investors to disclose stakes of 3 percent within two trading days, but also affords them a much lower threshold to convene shareholders to eject directors. Delaware courts, meanwhile, have found that stakes exceeding 20 percent don’t necessarily constitute control.
It’s just not clear when a stakeholding is big enough to warrant disclosure to balance the interests of the profit-seeking activist, managers needing time to respond and other shareholders who deserve an efficient market. There’s not much evidence the 5 percent-plus rule evolved from little more than a hunch.
The SEC would be better off going back to the drawing board to get that figure right for the modern era — and then force investors to disclose in a timelier fashion. Confining themselves to the existing regime and the desires of a board-friendly lawyer would be a disservice to investors, and not just the pushy ones.