When Starboard Value shocked corporate America by winning all 12 board seats at Darden Restaurants in a 2014 proxy fight, other companies were spooked into conceding seats to avoid embarrassment. But since then, companies have been less likely to give up seats as big shareholders took issue with easy capitulation. That’s according to Kai Liekefett, who spoke to CorpGov in a recent interview on a range of topics including media perception, the most vulnerable activism targets, and CEOs who still think they’re immune to attack. Mr. Liekefett currently leads the shareholder activism practice at Sidley Austin and has advised on more than 30 proxy contests since 2015, more than any other defense attorney in the U.S. Among them:
- Elaine Wynn in her proxy contest against Wynn Resorts
- Fujifilm in its litigation against Xerox, Carl Icahn and Darwin Deason
- AmTrust Financial in its proxy contest defense against Carl Icahn
- HomeStreet in its proxy contest defense against Roaring Blue Lion Capital
- Navigant Consulting in its proxy contest defense against Engine Capital
CorpGov: How has activism evolved in the last few years? Do activists have as much influence as they always did?
Mr. Liekefett: I would say that 2014 was the high-water mark with activists winning over 70% of proxy fights. When Starboard replaced all 12 directors at Darden Restaurants that year it sent a shockwave through corporate America. The next two years, in 2015 and 2016, there was a wave of quick settlements resulting from the fear that the activist would win anyway if a campaign led to a proxy contest.
But now the pendulum has swung back a little. In 2017 and 2018, boards prevailed in more proxy contests than activists. Big index funds like Blackrock and Vanguard didn’t like the quick settlements. They said, “you can’t just agree to put three or five people on a board without talking to your other major shareholders.” So you had a swing to a lower number of settlements.
CorpGov: Where are activists most focused these days?
Mr. Liekefett: Activism is alive and well but there have not been many public campaigns against large-cap companies in 2018. Most public fights involve target companies with a market cap of under $1 billion, and the media tends not to cover these campaigns.
This does not necessarily mean that there is less activism against large cap companies, but these activist engagements often remain private for a variety of reasons. For example, there are not many Schedule 13D filings against large cap companies because few funds can afford a 5% ownership stake in a multi-billion dollar company. Even so, the large activist funds like Starboard, Trian and Elliott have a lot of capital they must put to use. So there will be activity at the mega-cap companies as well.
CorpGov: Do you find that companies are doing more things to prepare for activists like having board directors engage directly with shareholders?
Mr. Liekefett: The large and mega-cap companies are all over activism preparation. They know it’s a good idea to develop strong relationships with their major shareholders. By contrast, smaller companies often don’t have the time, money and resources.
CorpGov: How often do activists have legitimate criticisms that can actually help companies?
Mr. Liekefett: It’s rare to see something I haven’t seen before when it comes to arguments from activists. In most cases, the board already has answers to 80% to 100% of the things that come up.
But there’s a lack of a level playing field because the public doesn’t know what the board has been considering. After all, a board is not posting minutes of its board meetings to shareholders, they don’t circulate weekly updates. There is only an announcement at the end of a long process. And remember that the board doesn’t announce it when they decide against a potential action.
Boards can’t communicate everything shareholders would like to know because public companies don’t exist in a vacuum. They have competitors and boards cannot give up their competitive advantage by sharing their strategic thought process at every juncture.
CorpGov: Are there many CEOs who still believe they are safe from the threat of an activist?
Mr. Liekefett: Yes. There are still CEOs who haven’t gotten the memo yet. A big reason is that the media covers primarily the large- and mega-cap activism campaigns, which lures many CEOs of smaller companies into thinking that activism is not an issue for a company of their size. However, it’s not just Procter & Gamble and DuPont that are attracting activists. About 80% of all proxy fights are with companies with market caps below $1 billion.
CorpGov: We have been in a bull market for several years. Does that make it harder for activists to find attractive targets?
Mr. Liekefett: As long as the market is going up they can always ride with the market. But on the other hand, it’s harder to find good, undervalued targets. But they’re still making plenty of money.
The Hypocrisy of Activist Hedge Funds (Ethical Boardroom)
Sidley’s Shareholder Activism Practice
John Jannarone, Editor-in-Chief