- Big Lots, Inc. activists Macellum Asset Management and Ancora Advisors accused of greenmail
- Greenmail refers to a hostile takeover threat and forced share buyback
- Activists nominated a slate of directors, eventually settled with Big Lots, adding three new directors
- Activists pressed for and achieved change including real estate sale-leaseback
- Stock has performed extraordinarily well since activists appeared in March 2020
- Big Lots shares have since risen 295{d3c0a06d106967eb2d88993cd4332f06cdd575151f3b0ae3850e4f26c146a313} while the S&P 500 Index rose 43{d3c0a06d106967eb2d88993cd4332f06cdd575151f3b0ae3850e4f26c146a313}
- Experts say victory by plaintiff could have “chilling effect”on shareholder activism
In the 1987 film Wall Street, Sir Larry Wildman says to rival corporate raider Gordon Gekko “you’re a two-bit pirate and a greenmailer. Nothing more…Gekko! Not only will you sell your mother to make a deal, you’d send her C.O.D.” When Wildman, who is based on real-life raider Sir James Goldsmith, refers to greenmail, he’s accusing Gekko of a common tactic of the era: Threatening to take over a company and settling by selling shares back to that company at a premium, which essentially amounted to blackmail and the embodiment of 1980s greed.
Since then, enhanced company protections including specific laws against greenmail have been established. Younger observers may not even be familiar with greenmail because it is so rare these days.
But one law firm, Robbins Geller Rudman & Dowd LLP, has recently attempted to bring the topic of greenmail back from the dead. In a suit filed in Ohio by Corpus Christi Firefighters’ Retirement System against activist investors Macellum Asset Management and Ancora Advisors, the two funds are accused of greenmailing Columbus-based retailer Big Lots, Inc. and asked to return all of their trading profits to the company. (The two funds never forced the company to buy their shares but did begin selling them in open market later in 2020).
The case is odd on many levels. First, it is unclear how the Corpus Christi pension stands to gain. If there is a victory or settlement, the funds go to the company – not directly to the Corpus Christi pension or any other shareholder. With a relatively small stake in Big Lots, it’s hard to see the pension even making a significant paper profit. The Corpus Christi pension didn’t respond to a request for comment from CorpGov.
“I’m trying to figure out how anyone is made better off by this suit besides the lawyers,” Mike Lubrano, a corporate governance expert and Managing Director at Lapix Advisory Services told CorpGov in an interview. “Everyone is already better off because thoughtful shareholders exercised their shareholder rights.”
Indeed, shares of Big Lots have risen 295% since early March 2020 when the activists appeared, far outpacing the S&P 500’s 43% gain. That makes it difficult to see how any investors lost money as a result of the activist’s presence. Macellum and Ancora declined to comment to CorpGov.
The main impact the activist made was nudging the company to execute a sale-leaseback transaction which was very well received by the market. The activists also settled with the company and three new directors were added to the board.
Even Big lots doesn’t seem interested in supporting action against Macellum and Ancora. According to a person familiar with the matter, Big Lots hired an Ohio-based law firm to look at the greenmail issue and determined it would not pursue the claim. A spokesman for Big Lots declined to comment to CorpGov.
There are far broader implications beyond Big Lots if the lawsuit is successful. Some history of greenmail and the Ohio statute itself are important to understand how big the stakes are.
Back in the day, it was in fact corporate raiders like Sir James Goldsmith who prompted the creation of the Ohio statute. In 1986, he was the largest shareholder in Akron, Ohio-based Goodyear Tire and Rubber Company. He explicitly threatened a takeover and settled by selling his shares back to the company at a premium, pocketing a handsome profit.
Terence Stamp as Sir Larry Wildman, a character inspired by Sir James Goldsmith
But the campaign by Macellum and Ancora looks different from a hostile takeover. The two activists did run a campaign to replace board directors and effect positive change, but they never indicated a desire to buy the company.
The issue is that the Ohio statute appears to be written rather broadly, which opened the door for a lawsuit. The activists also sold their shares within 18 months of purchase, which gave the plaintiff ammunition since that time restriction is part of the statute.
But if proxy fights are equated with takeover bids and activists can more regularly be sued for greenmail, shareholders in Ohio and other states with such laws would likely be very afraid to campaign for change.
“There aren’t that many states with activism-deterrent statutes like this one in Ohio that mandates profit disgorgement by investors after selling stock subsequent to making a takeover bid,” Lawrence Elbaum, Partner and Co-Head of the Shareholder Activism practice at Vinson & Elkins in New York City told CorpGov. “However, if the Ohio courts equate a campaign targeting significant board and business changes to a takeover bid under this disgorgement statute, it could have a chilling effect on all forms of activism against public companies incorporated in Ohio and states with similar statutes. Most courts, however, appreciate the difference between an actual, unsolicited takeover attempt and a highly aggressive campaign for board and business reform.”
How far could the ripple effect go? It is unlikely companies would be so bold as to move to Ohio or other states with similar laws just to dodge activists. But there is a real chance that board directors who feel shielded from shareholder criticism in such states would not be held accountable.
“If this case becomes a precedent then a shareholder that has a problem with an Ohio company wouldn’t be able to do anything about it,” Mr. Lubrano said.
Another possible implication relates to how activists choose their targets. Any fear of being forced to hold shares for 18 months could be a serious deterrent to investing in Ohio companies. “In my view, any time is way too long. Why should investors pay a liquidity penalty for being good stewards of their shares and exercising their rights?,” Mr. Lubrano said.
On its website, Robbins Gellar says it “specializes in complex securities litigation on behalf of investors.” In response to a request for comment from CorpGov, Founding Partner Darren Robbins said “the Big Lots case arises out of a unique set of facts involving an Ohio corporation which triggered provisions of Ohio law specific to that state.”
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