This Wachtell memo discusses the recent proxy contest over the merger of EQT Corporation & Rice Energy – which involved efforts by Jana Partners & other activist hedge funds to derail the transaction – and shares the lessons that can be learned from that fight about how to respond to “deal activism.”
The memo covers a number of topics, including the importance of broad shareholder engagement efforts, & the need to focus on the long-term investor and the company’s value creation strategy. This excerpt addresses the need to stay “on message” throughout the process:
In all deals, but especially those subject to activist challenge, a strong rollout, and staying on message throughout the process, is critical. In the course of an activist assault it is often difficult not to be distracted by the wide variety of criticisms the activists may raise, and the wide variety of “experts” whose presentations often oversimplify the many complicated and subtle judgments involved. In this often chaotic context, it is critical to maintain focus on the benefits of the deal and the credibility of the board and management. EQT introduced the transaction with a detailed investor presentation and conference call.
In the face of a barrage of disparagement by activists, much of it ad hominem, EQT maintained its composure and continued to focus the market on the deal. EQT’s Board also wisely made real, public commitments to underscore the strength of its focus on the interests of shareholders and its intention to address valuation issues. The ISS and Glass-Lewis recommendations are still important, and the Lead Independent Director and CEO personally and effectively presenting to those firms were key factors in EQT’s success in obtaining their recommendations. The merger’s opponents also made presentations, but ultimately failed to persuade the proxy advisory firms, and then withdrew the challenge shortly following the advisory firms’ recommendations in favor of the deal.
Procter & Gamble Co. apparently lost to activist investor Nelson Peltz in the biggest proxy battle ever over a board seat, according to results released Wednesday night by an independent firm. The Cincinnati-based maker of consumer goods such as Pampers diapers (NYSE: PG) had projected victory during the Oct. 10 annual meeting of shareholders at P&G’s downtown headquarters, so the official tally reported Nov. 15 by the outside firm is sure to shock some shareholders.
Peltz, who as CEO of Trian Fund Management oversees P&G stock worth $3.5 billion, had refused to concede the election, claiming the vote was too close to call. The margin of victory by the New York hedge fund apparently was tiny. Shareholders reportedly approved the candidacy of Peltz by 42,780 votes, or 0.0016 percent.
P&G could challenge the results. Both P&G and Trian are entitled to have their solicitors visually inspect the ballots cast by shareholders. That could take three to four weeks, which means a final result might not be disclosed until mid-December. P&G said it would respect the will of shareholders, but wants to ensure that every vote has been counted accurately. Peltz wasn’t available for comment, but his hedge fund recommended that P&G seat him now.
“Trian strongly urges P&G to accept the Inspector’s tabulation and not waste further time and shareholder money contesting the outcome of the annual meeting,” Trian stated Wednesday. “Shareholders have voted, and they have indicated that they want Nelson Peltz to join the board.” Procter & Gamble CEO David Taylor wasn’t available for comment, a spokesman said. “The results are still preliminary and are subject to a review and challenge period during which both parties will have the opportunity to review the results for any discrepancies,” the P&G spokesman noted in a statement. “P&G will disclose the final results after receiving the independent inspector of elections’ final certified report, which we expect in the weeks ahead.”
P&G based last month’s claim it had won on estimates provided by the company’s proxy solicitors, D.F. King & Co.and MacKenzie Partners. IVS Associates, a Delaware-based firm that specializes in independent tabulation and certification of voting results, shared the actual vote count with P&G and Trian after the stock market closed at 4 p.m. Nov. 15.
P&G said last month that Peltz had lost the election by less than 1 percent of the votes cast. A total of more than 2.6 billion shares were voted in the election, representing more than 75 percent of those entitled to vote, according to P&G. Peltz had campaigned for a board seat on the promise to boost the value of P&G stock through aggressive cost-cutting, and he advocated restructuring P&G as a holding company. P&G CEO David Taylor had argued that the Peltz approach would result in higher costs, lower efficiency, reduced profits and an added layer of management complexity P&G stock closed at $88.23 on Nov. 15, down less than 1 percent from the previous close of $88.87. The value of shares has ranged from $81.18 to an all-time high of $94.67 over the past 52 weeks.
Shareholder activism has evolved quite a bit over the years, and so have the tactics used by companies to respond to it. In the early days, companies relied on 80s-style antitakeover defenses designed to “stiff-arm” activists. Companies quickly discovered that those tactics simply didn’t work in the new environment. So, their approach shifted to efforts to preempt activism – or appease activists – by “thinking like an activist” and addressing the vulnerabilities that activists might exploit.
This Camberview Partners memo reviews this history, and argues that companies wanting to mount an effective defense against activists need to shift their focus toward their institutional investors. Here’s an excerpt:
Rather than “think like an activist,” the right approach for companies is to “think like a shareholder representative”: engage with investors, understand and incorporate their perspectives, and educate them on why the company is pursuing a particular strategy, particularly before an activist appears.
Ongoing dialogue enables companies to build credibility with key decision-makers within both the investment and governance teams at institutions, even if there are topics where these disparate teams are not in complete agreement. Even in situations where there is a large and supportive base of retail investors, it is these key decision-makers who will make the ultimate difference between winning and losing.
The memo points out that sweeping changes in the investor landscape have made this investor-centric approach essential. In recent years, a few asset managers have amassed enough voting power in most major companies to effectively determine the outcome of an activist campaign – and are more willing than ever to exercise their vote.
Tune in tomorrow for the webcast – “M&A Stories: Practical Guidance (Enjoyably Digested)” – to hear Withersworldwide’s Ridge Barker, Ropes & Gray’s Jane Goldstein, Morgan Lewis’ Keith Gottfried and our own John Jenkins share M&A “war stories” designed to both educate and entertain.
Here are the 15 stories that will be told during this program:
1. Dig Your Well Before You Are Thirsty
2. Diligence Isn’t Just About Looking for Problems, But for Opportunities Too
3. Expect the Unexpected
4. Keep Your Eye on the Ball
5. Keep Your Friends Close (And Your Enemies Closer)
6. Strategic Deals Require Creativity & Patience
7. The Speech the Director Never Delivered
8. Another Rat’s Nest
9. Don’t Attempt to Win the Championship Football Game With an All-Star Basketball Team
10. What Does Collegiality Really Mean?
11. The Board Book’s Tale: Bankers, Stick to the Numbers!
12. Preparing for Battle
13. Driving a Deal Is Not Unlike Filming a Movie
14. Assumptions Make an *%$ Out of You & Me
15. A Deal So Nice, We Did it Twice
This November-December issue of the Deal Lawyers print newsletter was just posted – & also sent to the printers – and includes articles on:
– Setting the Record Straight: Regulation G Doesn’t Apply to M&A Forecasts
– Structuring Asset Deals: “Traditional” vs. “Our Watch, Your Watch” Constructs
– Controlling Stockholders: Forging Ahead With “Entire Fairness” (Or Playing It Safer)
– PRC Acquirors: How M&A Agreements Handle Risks & Challenges
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
This Nixon Peabody blog says that in an increasingly competitive middle-market M&A environment, PE funds are looking at the little guys to provide big returns. Here’s an excerpt:
As the private equity industry matures and competition for middle-market acquisition targets becomes super heated, some private equity firms are moving downstream into the lower brackets of the middle market in search of additional opportunities and higher returns. Though not without risks, the lower middle market provides opportunities for outsized returns to those private equity investors willing to roll up their sleeves and take a hands-on approach to operational improvements.
First and foremost, the lower middle market simply offers a greater number of potential targets. There are approximately 350,000 companies with annual revenues between $5 million and $100 million, while there are only 25,000 companies with annual revenues between $100 million and $500 million, and only a few thousand companies with annual revenues in excess of $500 million. The lower end of the middle market also has the most new entrants. New companies are constantly being formed, maturing, and looking for growth capital.
While the lower-middle market presents significant opportunities, the blog also notes that it presents some significant challenges as well. Target companies often lack infrastructure, operational experience, and experienced management. That means PE investors in the lower end of the market have to be willing to roll up their sleeves and take on significant management & operational responsibilties.
This “Forbes” interview with Skadden’s Rich Grossman discusses the implications of an increasingly popular activist tactic – targeting CEOs for removal from the board through proxy contests. Here’s an excerpt from Rich’s comments:
I think most practitioners and governance experts would agree that one of the most important responsibilities of a board is the selection of the CEO, and the removal of the CEO from the board sends a very strong message, especially a board made up of a majority of independent directors.
While shareholders do not have the right to directly remove board-selected officers, if a CEO gets removed from the board in a contest, it’s a vote of no confidence. In those circumstances, I can’t imagine a board not looking at the situation and saying, “should we rethink our decision regarding the CEO?” It certainly makes for an awkward situation.
Why are CEOs being targeted? The approach ISS takes toward proxy contests seeking minority board representation is a big part of the reason:
Under the current ISS analytical framework, recommendations are made depending on whether the dissident is seeking a minority or a majority position on the board, with the standard for a dissident seeking minority representation being significantly easier to meet than if control is sought. The ISS minority contest standard — what I’ll call the “what’s the harm” standard — for replacing directors seems to apply regardless of whether the CEO is targeted.
There’s a lot to chew on in the GOP’s tax reform legislation, but many dealmakers may choke on this morsel – in its current form, the legislation would limit the amount of interest that a business could deduct to 30% of its adjusted taxable income. This Bloomberg article discusses the potential consequences of that cap for M&A transactions. Here’s an excerpt:
Private equity titans, beware: The tax bill House Republicans unveiled on Thursday could have seriously negative implications for buyout firms.
The legislation includes a provision that would cap interest deductibility at 30 percent of adjusted taxable income, a dramatic shift from the 100 percent allowed now. While the shift would be a concern for any company that issues loans and bonds, it would be particularly worrisome for private equity firms that rely on large levels of debt to finance their transactions. These borrowings — and the way they are treated for tax purposes — are crucial in helping firms achieve their targeted annual returns of 20 percent or more.
Many M&A professionals have anticipated that a reduction in corporate rates might prompt a boom in deals – but limiting the deductibility of interest on debt incurred to pay for those deals could dampen those expectations.
In the short term, the article notes that one potential consequence of the deductibility cap might be a shift in private equity investment toward more capital intensive businesses. The proposed legislation would temporarily allow capital expenditures on machinery & equipment to be expensed immediately, instead of depreciated over time. That provision would be phased out after five years – but that coincides with many private equity funds’ typical investment horizon.
This Weil Gotshal blog gives a heads-up to US private fund sponsors – the EU’s new “General Data Protection Regulation” may well apply to you. This excerpt explains:
One of the most significant changes under the GDPR is to extend the jurisdictional application of the new law to non-EU fund sponsors holding or using data about individuals located in the EU, even in the absence of any EU presence. Accordingly, non-EU based private fund sponsors which are not caught by the current regime would be well advised to consider whether the forthcoming changes in laws will bring them within the scope of the GDPR.
Where the extra-jurisdictional provisions do apply, non-EU based sponsors are required to comply with the entirety of the GDPR or face potential fines up to the greater of €20m and 4% of worldwide revenue for the most serious infractions.
The blog points out that full compliance with the GDPR is pretty burdensome. Entities to which it applies will be required to rapidly report data breaches to EU authorities, provide disclosures about data usage to individual EU investors, comply with various rights granted to individuals, appoint an EU representative & maintain detailed internal records.
The blog also addresses the circumstances that may trigger the GDPR’s applicability to US sponsors, and also flags some of the practical impediments that EU regulators may face in attempting to enforce compliance against a non-EU sponsor.