A publicly disclosed activist letter to the target company’s board or management intends to engage a wider audience than those to whom it is addressed. Essentially, the activist is talking at management but to potential shareholder allies. Given the new standards for proxy solicitation, the necessity of direct engagement with current management as an indirect means to reach shareholders is no longer necessary; however, some activists still perceive value in the tactic of making public the communications between the activist and management. In fact, activists saw victories in 56.4% of proxy fights that included the public disclosure tactic relative to 53.3% for all proxy fights.
Historically, the high cost and strict regulation on submitting proxy materials limited the information an activist could spread in advance of a campaign. In the early 1990s, the SEC amended its solicitation regulations and allowed activists to reach out directly to shareholders to publicly oppose management’s director nominees. The SEC further lowered the barriers to activist solicitation with the adoption of rules that had the practical effect of allowing an activist to publicly threaten a proxy fight without having to first file a proxy statement. The advent of the internet, and the SEC’s policy of “access-equals-delivery,” now permits activists to satisfy proxy filing requirements by sending a single paragraph email with notice to shareholders that its solicitation proxy materials are available online.
It is unsurprising that these conditions led to an increase in number of proxy fights initiated by activists, which FactSet SharkRepellent tracked as 63 proxy fights in 2001 to 94 in 2014 with a high watermark of 133 in 2009. The tactic of publicly disclosing the letter sent to the board or management remains relatively constant. From 2001-2014, SharkRepellent identified 760 proxy fight campaigns where the activist publicly disclosed the letter sent to the board or management. The uptick in the percent of campaigns that included a public disclosure coincided with beginning of the activist era, but in 2009, the high watermark for activism, the tactic was used in only 52% of campaigns – the lowest value for any year in the activist era. The aggregate statistics do not suggest a change in activist tactics but that the use of the public disclosure tactic is a preference among individual activists. Among Shark Watch 50 activists, Icahn Associates (78%) uses the tactic prominently, Starboard Value (69%) is close to the average for the activist era (64% since 2006), and Western Investment (39%) is below average among its activist peers.
Icahn Associates has publicly disclosed a letter in 26 of 33 proxy fight campaigns and 51 of 124 total activist campaigns. Of those 26 campaigns, 15 were for board representation and nine for board control as the primary activism goal. Icahn’s success rate of getting board seats was eight campaigns for board representation and three campaigns for board control, but only one campaign for board control resulted in Icahn displacing the majority of the board of directors. Icahn settled in 11 of the campaigns and withdrew eight for other value considerations prior to the proxy reaching a vote.
Starboard has publicly disclosed a letter in 38 of 55 proxy fight campaigns and 65 of 119 total activist campaigns. Of those 38 campaigns, 22 were for board representation and 14 for board control. Starboard won board seats in 23 of the campaigns, settled 21, and withdrew five campaigns prior to the proxy vote.
Western publicly disclosed its letter to the board or management in only 19 of 48 proxy fight campaigns and 22 of 63 total campaigns. Of those 48 (19 with public disclosure) campaigns, 36 (13) were for board representation and seven (three) for board control. Of those 19 campaigns with public disclosure of the letter to management, the campaign resulted in board seats for Western in only two campaigns. Western settled in three campaigns for value other than board representation and withdrew four campaigns: three for failing to submit its own nominees in time under the proxy regulations and one due to a merger.
Perhaps the public disclosure is related to the confidence the activist has in campaign’s success given the slightly higher success rate; 101 of the 173 campaigns that SharkRepellent labelled the dissident the outright winner included the tactic. It could also be part of the activist plan to force the company to settle and avoid the cost on both sides of taking the proxy fight through to a vote. Of the 443 proxy fights that settled prior to the vote, 298 included the public disclosure of the letter to management.
Public disclosure could also be a part of a general strategy to gain publicity for either the activist or the specific campaign. Starboard’s highly public campaign against Darden Restaurants included the public disclosure of letters to management in addition to a 300-page white paper criticizing the Darden management on everything from marketing efforts to how to properly cook pasta. Starboard and other SharkWatch 50 activists regularly make headlines on their campaigns and are unlikely to need extra notoriety, but 71% of proxy fight campaigns by SharkWatch 50 activists still included the public disclosure of the letter to management while only 55% of non-SharkWatch 50 activist campaigns disclosed the letter.
The tactic could also be a way to show the true intent of the activist in situations where the campaign is being undermined by suggestions the motives for the campaign will not maximize shareholder value; however, the letter was disclosed in 78% of situations where ISS supported the dissident and only 67% of situations where ISS supported management.
While the motives are not entirely clear, and the strategy not entirely uniform, the tactic of publicly disclosing the letter to management is an indicator that the campaign will ultimately be a success, even if the proxy fight is only a threat to force a settlement or withdrawn for other value considerations.