Monthly Archives: May 2015

May 28, 2015

Corralling & Curtailing Merger Litigation: Lessons Learned From Past Reforms

Here’s an excerpt from this blog by Lane Powell’s Doug Greene:

What’s the harm with taking a shot at as many fixes as possible?

Even if someone could see the big picture well enough to judge that these problems aren’t sufficient to outweigh the benefits of fee-shifting and minimum-stake bylaws, I would still hesitate to advocate their widespread adoption, because governments and shareholder advocacy groups would step in to regulate under-regulation caused by reduced shareholder litigation. That would create an uncertain governance environment, and quite probably a worse one for companies. Fear of an inferior alternative was my basic concern about the prospect that the Supreme Court in Halliburton Co. v. Erica P. John Fund, Inc. would overrule Basic v. Levinson and effectively abolish securities class actions.

Beyond the concern about an inferior replacement system, I worry about doing away with the benefits shareholders and plaintiffs’ lawyers provide, albeit at a cost. Shareholders and plaintiffs’ lawyers are mostly-rational economic actors who play key roles in our system of disclosure and governance; the threat of liability, or even the hassle of being sued, promotes good disclosure and governance decisions. Even notorious officer and director liability decisions, such as the landmark 1985 Delaware Supreme Court decision in Smith v. Van Gorkom, are unfortunate for the defendants involved but do improve governance and disclosure.

May 27, 2015

Status Check: Case Seeking to Reverse Rural/Metro Progresses

For RBC v Jervis, the opening brief of RBC seeking reversal of Rural/Metro was filed last week in the Delaware Chancery Court. According to the scheduling order:

1. RBC’s Opening Brief may be up to 70 pages long and is due on or before May 19, 2015

2. Plaintiffs Answering/Opening Brief may be up to 85 pages long and is due on or before July 20, 2015

3. RBC’s Reply/Answering Brief may be up to 45 pages long and is due on or before August 31, 2015

4. Plaintiffs Reply Brief may be up to 20 pages long and is due on or before September 11, 2015

5. Oral argument has been scheduled for September 30, 2015

May 20, 2015

What Activist Investors Can Learn from Trian & DuPont

A few days ago, I blogged about these law firm memos describing the end result of Trian’s attempt on DuPont. Here’s an excerpt of this blog from “The Activist Investor” looking at it from the activist’s perspective:

Eye on the prize – Trian actually won: Most accounts that pick winners and losers deem Dupont the winner. Yet, as of this week, Trian gained around $200 million on its shares, which includes a 6% loss after Dupont announced the outcome last week. That’s about 15% on its investment, not what Trian wants (it pegs Dupont at $125/share, up from $70 today) but only a “loss” if we think in terms of BoD seats.

Don’t count on ISS and Glass Lewis: The major proxy advisors supported Trian. A handful of major institutional investors ignored this, and individual investors don’t know or care. These two groups decided the vote.

Avoid situations with large individual investor holdings: Individual investors own over 30% of Dupont shares. Reportedly, most voted against Trian. In most situations, companies start with the trust of these shareholders, and have decided advantages in communicating with them.

Institutions may not trust activist investors: Several major institutions voted against Trian, including BlackRock, Vanguard, State Street, and CalPERS. These sophisticated firms can discern how Dupont underperformed its peers. Trian also wanted only four out of twelve BoD positions, so it didn’t ask for much. It seems at least a few institutions continue to view activist investors as short-term opportunists.

Simplify the thesis: Trian took on a complicated job. It needed to persuade shareholders that Dupont has underperformed, and that its plan to break up the company would rectify that underperformance. Dupont did beat the S&P 500 (but not its peers), and argued credibly that its conglomerate structure makes sense. The endless SEC filings, letters, white papers, presentations, and news releases only led shareholders deeper into the weeds. A complex thesis makes suspicious institutional investors more skeptical, and confuses low-information individual investors with short attention spans.

A good settlement is worth it: Trian could have accepted a couple of BoD positions, not including Nelson Peltz. Trian needed Peltz to gain a BoD seat. Other investors likely would not care whether Trian wins four seats and includes Peltz, or settles for two that do not. Either are better than no seats, as the 6% share price decline demonstrates.

Smaller companies know less: Big corporations like Dupont can retain the best advisors, and have knowledgable directors that can deal cleverly with activist investors. Smaller companies lack these resources, and make for a fairer contest.

Most of all, the vote at Dupont does not represent a significant milestone in activist investing. No turning point here, no more or less than other activist situations involving iconic companies and impatient investors. As long as portfolio companies have entrenched, lazy, deceitful, or inept management and BoDs, we activist investors will continue to “win” and “lose” proxy contests, and BoD seats, and debates over balance sheets, operations, and strategy.

May 19, 2015

Cornerstone: No Automatic Disloyalty Inference” for Disinterested Directors in Controller Transactions

Here’s an excerpt from this Fried Frank memo (also see these other memos about the case):

In a move consistent with the Delaware courts’ recent general inclination for early dismissal of M&A-related litigation, the Delaware Supreme Court recently reversed the Chancery Court’s 2014 holding in Cornerstone. As a result of the Supreme Court decision, where a plaintiff seeks monetary damages for alleged breaches of fiduciary duty by disinterested, independent directors who are protected by an exculpatory charter provision, the plaintiff must sufficiently plead non-exculpated claims (i.e., claims for duty of loyalty violations) in order to survive a motion to dismiss—regardless of the judicial standard of review that applies to the board’s conduct.

May 18, 2015

DuPont Announces Victory in Trian Proxy Fight

Here’s the news from this Sullivan & Cromwell memo (also see this Jones Day memo):

On May 13, 2015, E. I. du Pont de Nemours and Company, a major chemical company with a market cap of approximately $68 billion, defeated a proxy campaign run by Trian Fund Management, L.P., the activist fund led by Nelson Peltz that owns approximately 2.7% of DuPont. Trian was seeking four seats on DuPont’s board of directors. DuPont announced this morning that all 12 of its incumbent directors were reelected at DuPont’s annual meeting of shareholders. Although the two most influential proxy advisory firms, Institutional Shareholder Services Inc. and Glass Lewis & Co., both supported Trian’s slate of director nominees, DuPont’s three largest institutional shareholders, The Vanguard Group, Blackrock, Inc. and State Street Corporation, all voted in favor of DuPont’s slate.

DuPont’s victory shows that boards and management teams who present a clear case that their business strategy will create superior value over a near- to medium-term time horizon can prevail over activist investors and over the proxy advisory firms’ tendency to recommend in favor of at least some of an activist’s nominees. As at DuPont, this can sometimes be accomplished through better articulation of the projected long-term effects of a company’s existing strategy.

DuPont’s win reinforces that activists, even those as influential as Peltz, will face challenges if they target companies with strong boards and management teams that have outperformed the market. DuPont’s victory may encourage outperforming large-cap companies to fight for a complete victory in activist situations rather than agreeing to settle with the activist. However, in order to take that approach and ultimately be successful, the company must have proactive and consistent engagement with its institutional shareholders, who increasingly make voting decisions in proxy contests independently from the proxy advisory firms and who are demonstrating a willingness to support companies that take investor engagement seriously and have proven responsive to shareholder concerns. It is also important to note that DuPont has an unusually large retail shareholder base, accounting for approximately 33% of its shares, and that retail investors have historically been supportive of management in proxy contests.

While the lessons from the DuPont/Trian proxy contest are indeed significant, it is always important to avoid generalizations since all proxy contests involve idiosyncratic factors and investors vote on a case-by-case basis.

May 15, 2015

Fake SEC Filings: Avon’s “Unreal” Tender Offer

If you also read my blog over on, then you know I dig fake SEC filings. As noted in this blog last year on the topic, they tend to be one of my most popular types of blogs. So yesterday was Christmas for me as this fake Schedule TO about a $8 billion takeover bid caused a stir and caused Avon’s stock to tank (see this DealBook piece).

This latest incident is a cautionary tale for investors as it’s not the first fake takeover announcement. My favorite dates back to 2001, as noted in this piece, when a fake “blank check” company calling itself “Toks Inc.” filed a Form SB-2 with the SEC announcing plans to take over General Motors, General Electric, AT&T, Hughes Electronics, AT&T Wireless, AOL Time Warner and Marriot International – for roughly $2 trillion in “Toks” stock. The promoter – Ade O. Ogunjobi – didn’t give up even when the SEC issued a “Stop Order” to prevent the registration statement from going effective and suing him for selling unregistered securities, later launching a website to promote his wild ambitions and plans to then hold press conferences to announce his plans for these major US companies he was to take over!

Hard to believe, but those SEC filings by Toks are still on EDGAR. Here’s my blog on “Fake Filings: How Do They Sneak a Form ID Past the SEC?” (scroll down)…

May 14, 2015

How Nelson Peltz Works

Nelson Peltz certainly is in the news after losing his battle with DuPont. Here’s an excerpt from this interesting blog by “The Activist Investor”:

Peltz started small, and got bigger. For the first five years, the market cap of his activist investments averaged $5 billion, with companies as small as Cheesecake Factory ($1.5 billion). That average excludes Kraft, with a $56 billion market cap. Since then, the market cap of his activist investments averaged $52 billion, which includes PepsiCo at $125 billion. He starts with smaller investments that he holds for awhile without any activist intent. He then adds to the position as the activist strategy takes shape. Dupont first showed up on Trian’s roster on June 30, 2013 with $300 million. He now has $1.8 billion in shares.

Trian has Form 13D filings on 8 of the 16 companies, so it eventually gets to at least 5% of outstanding shares. There, he has credibility with other shareholders, and influence with management. With almost $10 billion in assets, and the need to research and work on a limited number of companies, he invests in companies with an average market cap of $52 billion.

Michael Levin – the force behind “The Activist Investor” – subsequently sent around this note from one of his readers:

In your blog post, you pose the question as to why Peltz would want to go on the board of DuPont. While I think your comments regarding this are correct, I would suggest that there is more to it and that this would be applicable to any board role that he [or anyone – MRL] seeks. Peltz, like the best private equity guys, deeply understands the value creation process unlike the vast majority of individuals who serve on corporate boards. In that sense, he can bring, as do the other more successful activists, a level of both general value creation skill/focus and as importantly, discipline, to the board that is undoubtedly absent from not only the boards of companies that he targets but also, in my view, from the majority of public company boards.

I have restructured a number of underperforming company boards. One criteria I always seek is an individual who comes from the private equity (or even mezzanine lender) world in order to ensure that this general value creation mindset and skill is present in at least one other director besides myself. For the same reason, I believe Peltz seeks a board seat at target companies even when he may not have the experience with chemicals that he has with food. That said, the degree of analysis and research that Trian does on target companies does equip Peltz, Garden and any other nominee they may have with an in-depth and value creation oriented grasp of the company that is lacking in the incumbent board members (until they read a Trian white paper).

May 13, 2015

Delaware Senate Passes Fee-Shifting Bill (Now on to the House)

Here’s news from this Delaware Online article:

Lawmakers in the Delaware Senate voted 16-5 on Tuesday to approve legislation that would ban corporations from adopting bylaws that impose corporate legal costs on shareholders who file unsuccessful lawsuits. The fee-shifting legislation has been controversial, attracting opposition from the U.S. Chamber of Commerce. The Chamber says the legislation protects frivolous shareholder litigation and threatens Delaware’s business-friendly image. “Companies that incorporate in Delaware have valued the state’s clear and fair corporate law principles,” said Lisa A. Rickard, president of the U.S. Chamber Institute for Legal Reform. “But they are increasingly becoming victims of ‘extortion through litigation.'” More than nine of every 10 corporate mergers or acquisitions are challenged in court.

The Delaware State Chamber of Commerce remained neutral on the legislation, which is sponsored by Delaware Sen. Bryan Townsend, a Newark Democrat and a practicing corporate lawyer at Morris James in Wilmington. In May 2014, the Delaware Supreme Court upheld a bylaw adopted by a private non-stock corporation, ATP Tour Inc., that shifted legal costs onto the loser in shareholder litigation. Delaware lawyers, concerned that stock corporations could seek similar bylaws, recommended that the General Assembly change the law to ban such bylaws.

The legislation now heads to the Delaware House of Representatives.

Meanwhile, here’s two blogs by Allen Matkins’ Keith Bishop:

It’s Time To Put A Stop To Fee-Shifting (But Not In the Way You Might Think)
Here’s One Way To Recover Attorneys’ Fees Without Adopting A Fee Shifting Bylaw

May 12, 2015

Fund Blacklists Directors Who Support Poison Pills

Here’s an excerpt from this Reuters article:

A major funds company is putting directors on notice: if you adopt poison pill anti-takeover measures without shareholder approval, you will be blacklisted. Since October, Dimensional Fund Advisors, the eighth largest U.S. mutual fund firm with $398 billion in assets, has been sending warning letters to companies whose stock it owns and who have adopted the measures without shareholder approval.

In the letters, the Austin, Texas-based money manager warns that it will vote against directors who approved those measures – not just at the company with the poison pills, but at every company they serve – unless they remove those pills or put them up for shareholder vote. The campaign, which hasn’t been previously reported, will eventually target 250 companies. DFA is worried that companies too often use the measures to deter acquirers and shareholder activists who could benefit shareholders, said Joseph Chi, the firm’s co-head of portfolio management.

DFA appears to be the first major fund group to blacklist individual directors across its portfolios for such conduct. That may be a sign parts of the funds industry are taking a tougher line against boards who don’t do what the funds want. Some of the largest U.S. fund managers have also recently been pressuring companies to make it easier for shareholders to nominate board candidates.

May 11, 2015

Opposing a Deal (But Voting For It)

Here’s an excerpt from this BloombergView piece:

Are activists an important check on shareholder complacency? Left to their own devices, would big institutional shareholders be insufficiently protective of their own interests? Well I don’t know but here is a story about how T. Rowe Price consistently opposed the 2013 leveraged buyout of Dell, of which it was a big shareholder, but somehow voted for the deal. Like, as far as I can tell, by accident. Like the guy in charge of telling everyone what a bad deal it was never talked to the guy in charge of hitting the vote button. “We are aware of a discrepancy in the communication of our voting instruction on the Dell buyout,” says T. Rowe. What?

This is immediately relevant because T. Rowe is a plaintiff in an appraisal lawsuit, and the appraisal statute requires that you “neither voted in favor of the merger or consolidation nor consented thereto in writing.” So T. Rowe would seem to be out of luck in its appraisal demand, though it has a pretty amusing reading of the statute to mean the opposite of what it says, which happens to be supported by case law. But the broader issue is: How do you vote the wrong way on a merger? What does this story say about the need for activist investors? About T. Rowe’s concerns about high-frequency trading? About the efficiency of our public equity markets?