Jun 12, 2023 - Economy

Activist investors see success rate jump after new SEC rule

Data: Insightia; Chart: Axios Visuals

Activist investors have seen their success rate improve, a jump driven by several factors, including a new SEC policy on shareholder voting, proxy season data show.

Driving the news: The SEC's Universal Proxy Card (UPC) simplified shareholder votes at annual meetings, a change that sparked concern from corporate executives that the new policy makes it easier for activist investors to penetrate corporate boards.

Yes, but: Proxy solicitors and other advisers interviewed by Axios say UPC's impact this proxy season is not as significant as initially expected, and that the single ballot that the rule put in place can work both for and against companies.

Catch up quick: The SEC's new Universal Proxy Card rule went into effect starting on Sept. 1, meaning investors now use one proxy card to vote on director seats and other shareholder proposals.

  • Previously, if an investor nominated a director slate to unseat existing board members, they had to run a separate ballot. Shareholders could only mail in one proxy card.

Of note: Of the 130 board nominees put forth by activist investors so far this proxy season, 86 were placed on boards, either through shareholder votes or settlements, according to Insightia.

  • By contrast, there were a total of 372 seats proposed in 2022, and 176 won by activists, per Insightia, a research firm that focuses on activist investing and proxy voting.
  • Looked through a different lens though, the ratio of activist seats proposed and won this season is much higher this season than last — a "win" ratio of 66%, the data show, compared to 47% in 2022.
  • One win is already making an impact. Activist Carl Icahn nominated for three dissident seats on Illumina's board, and won one — a seat that ousted the $32 billion DNA sequencing company's chairman.
  • On Monday, the company confirmed its CEO was stepping down, a move Icahn had pushed for throughout his campaign.

Reality check: Under the two-card system, an investor who liked some, but not all dissident candidates, would vote the dissident card and tick the box for the nominee they wanted, and "withhold" for the rest.

  • But what happened over the years is that sometimes, that approach led to more activists getting voted onto a board than expected because any vote on a dissident card takes one away from a management nominee, a factor proxy advisers refer to as "unintended consequences."
  • "One effect is that UPC has lessened the unintended consequence of voting for less than a full slate of dissident nominees," said John Ferguson, a senior partner at Saratoga Proxy Consulting.
  • Ferguson added that he thinks UPC has generally led to more settlement agreements with activist investors and an increase in companies making bylaw changes to make it harder for activist nominees.

What they're saying: Bob Marese, president of proxy solicitation firm Mackenzie Partners:

  • "All in all, I think you can say that UPC has been a positive for both dissidents and issuers; for dissidents, because of the ease when it comes to institutional voting."
  • “And for companies because it’s diminished the unintended consequences of dissidents getting elected under the prior system of two separate proxy cards.”
  • Marese added that he believes UPC has added an urgency to settle with activists but hasn't created a groundswell of campaigns.

Zoom in: Settlements occur after an activist fund launches a campaign against a company and the two sides "settle" the matter before it goes to a shareholder vote. Settlements often see an activist get at least one board seat.

  • This proxy season has seen 45 settlements through May 31, according to Insightia.
  • While that is flat from the same year ago period, last year saw far more activist campaigns fought during the first half. U.S. campaigns fell 30% in Q1, according to Barclays.
  • "It seems like the use of UPCs led to an uptick in settlements at the beginning of the proxy season," said Cristiano Guerra, head of ISS' special situations research team. Guerra added that as the season has progressed, companies and activists are getting more accustomed to the new rules.
  • Proxy season has not ended yet, and the data could change by the end of Q2.

The bottom line: The one-ballot system means the director proxy vote now comes down to a single factor: the quality and reputation of the nominees.

  • "In the past, evaluation of an activist slate was more based on the slate overall, as opposed to each individual director,” said Patrick Gadson, a partner at law firm Vinson & Elkins, adding that the UPC has made the selection process more targeted now.
  • “If you want control, you can't just have three rockstars and two warm bodies. Now you have to have five rockstars."
Status of major U.S. activist campaigns
Erin Davis, Axios Visuals
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