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Elliott’s Stake In Softbank
CNBC's David Faber takes a closer look at the Activism in 2017 and what to expect in 2018. With Ken Squire, 13D Monitor founder.
Toshiba (TOSYY) has set Feb. 1 as the reference date for an extraordinary general meeting (EGM) requested last December by major shareholders Effissimo Capital Management and Chinook Holdings. The company said the exact date of the meeting is undecided but that it should be held within three months from Feb. 1. Sources say the meeting is expected to take place in March, while Toshiba said the date will be announced immediately after it has been decided. Effissimo has questioned voting rights exercised at the annual shareholders meeting in July last year and wants an investigation. Chinook views the medium-term management plan revised by Toshiba in November 2020 as problematic. It expressed concern over the shift to large investments in mergers and acquisitions and is requesting clarification.
On Jan. 15, Citigroup posted fourth-quarter results that beat analysts' estimates for profit as it released reserves for loan losses. Citigroup said earnings declined by 7% to $4.63 billion, or $2.08 a share, compared with the $1.34 a share expected by analysts surveyed by Refinitiv. Companywide revenue declined by 10% to $16.5 billion, below the estimate of $16.7 billion. Citigroup has been hobbled by relatively poor performance compared with competitors. The results have frustrated investors including ValueAct. The bank released $1.5 billion in reserves for credit losses, a move that was higher than predicted by analysts. That compared with a reserve build of $436 million in the third quarter and $253 million a year earlier. As a result, credit costs in the period were more than $2 billion less than a year earlier. Outgoing CEO Mike Corbat said. "As a sign of the strength and durability of our diversified franchise, our revenues were flat to 2019, despite the massive economic impact of Covid-19." Citigroup shares fell 1.8% on Jan. 15 in premarket trading. Citigroup made history when it announced Jane Fraser was taking over as CEO, making it the first major bank to be managed by a woman. Fraser is slated to address investors and analysts for the first time on Jan. 15. Shareholders want to hear how Fraser, a former McKinsey partner who oversaw Citi's Latin American operations before becoming president in 2019, will improve returns at the company. Citigroup has said it expected fourth-quarter trading revenues to rise by 15% from a year earlier, while investment banking fees should rise by 10% to 15%.
Carl Icahn's CVR Energy Inc. (CVI) is pushing for a shakeup at Delek US Holdings Inc. (DK) while denying that a takeover bid is under consideration. CVR CEO David L. Lamp said his company wants Delek to sell its retail business and cease operations at two refineries that are at competitive disadvantage, with no prospect of consistently generating cash. He continued that Delek should accept the replacement of three directors with CVR nominees at the next shareholders meeting. "Delek desperately needs new strategic direction," Lamp stated in a letter to Delek Chairman Uzi Yemin. "We would like to work collaboratively with you to replace three of your nominees at Delek's upcoming 2021 Annual Meeting." CVR's campaign coincides with investors increasingly pressuring struggling energy companies to trim costs, reduce capital spending, and boost profits. Lamp said Delek's stock is "undervalued," and Delek responded that it welcomes discussions with investors, and that a board committee "will evaluate any nominees from CVR if and when they are received." CVR is Delek's biggest shareholder with a stake of about 15%, according to Lamp's letter. Icahn controls more than 70% of CVR, and he posted a revision to a March 2020 filing where a potential takeover of Delek was raised, echoing Lamp's letter. Delek stock climbed 5.5% on Thursday, extending its gain to 87% since Icahn's initial filing on March 19, 2020, versus a 58% appreciation in the S&P 500 over the same period. Lamp also articulated in his letter that CVR has no interest in a takeover of Delek. The letter additionally urges Delek to sell its retail business "at current high prices while retaining wholesale marketing," and to halt refining operations at the Krotz Springs and El Dorado refineries and transition them to terminals, renewable diesel production, or to other operations. Also advised is for Delek to discontinue non-core supply and trading activities and all other operations that add no value to its core refining business. CVR further calls on Delek to streamline its corporate structure and reduce general and administrative expense significantly, and to stop "dropping down core refining assets into Delek Logistics Partners LP at value-destroying prices."
Ovintiv (OVV) shareholder Kimmeridge Energy Management says it is prepared to nominate directors to the oil company's board if it fails to take steps to improve its performance and restore investor confidence. Kimmeridge says the company is falling behind its peers due to misguided spending, expensive acquisitions, poor governance, and inadequate environmental stewardship. The private equity firm, which owns a 2.4% stake in Ovintiv, also wants the company to better align executive compensation with performance, sell non-core assets, and shift spending to the Permian Basin, among other measures. Kimmeridge says Ovintiv's total shareholder returns during CEO Doug Suttles' tenure, which began in 2013, have been negative 85% while his compensation has climbed from $6.7 million in 2014 to $12.6 million in 2019. Kimmeridge threatened in November that it could launch a proxy fight, as it first went public with some of its concerns around Ovintiv's executive pay.
GameStop (GME) has recorded its best winning streak ever after investor and Chewy (CHWY) co-founder Ryan Cohen joined its board. Cohen's investment vehicle, RC Ventures, is the second largest shareholder in the video-game seller. RC Ventures has been engaging the Grapevine, Texas-based retailer on undertaking a strategic review, lowering costs, and diversifying its online offerings. GameStop also has added two of Cohen's colleagues at Chewy to its board. Cohen helped build up online pet retailer Chewy, which was acquired by PetSmart for $3.35 billion two years before it went public in 2019 and saw its market value surge. Over the last four days, GameStop's market value has risen by $1.2 billion. The stock rose as much as 23% Thursday to hit a high of $38.55. Many traders are betting that GameStop will undergo a renaissance or will be sold.
Health system consultancy Evolent Health Inc. (EVH) will sell part of its business to Bright Health Management Inc. Evolent will sell wholly owned subsidiary True Health New Mexico Inc., which it formed after acquiring certain assets in 2018, for $22 million plus risk-based capital. The deal comes after Evolent entered into a cooperation agreement with investor Engaged Capital LLC in December. As part of that deal, the company’s board of directors formed a new strategy committee to strengthen operations and cut costs. Craig Barbarosh, a partner with Katten Munchin Rosenman LLP and board director for multiple companies, joined the committee and board as part of that arrangement. The deal with Engaged, Evolent's largest shareholder with a 10% stake, materialized after Engaged said in August it wanted the company to explore improvements to its core business including a potential sale. In July, Evolent had entered a deal to sell assets from subsidiary Passport Health Plan to Molina Healthcare Inc. (MOH). Evolent had acquired insurance provider Passport in May 2019 for $70 million and a 30% equity stake. Evolent was then sued over the acquisition in a class-action lawsuit alleging securities law violations. Evolent reported $264.6 million in revenue for the third quarter of 2020, up 20.2% from $220.1 million in revenue for the third quarter of 2019. Of that, revenue from True Health premiums totaled just $29.5 million for Q3 of 2020, down from $43.8 million for Q3 of 2019. This week Evolent saw more change to its board, with Bruce Felt’s departure and Kim Keck’s appointment, both effective Monday per Securities and Exchange Commission filings.
Driver Opportunity Partners will nominate managing member Abbott Cooper for election as a director at First United's (FUNC) next annual meeting. First United shared the development in a filing, saying it was notified by Driver a few days before. Driver, which has been pushing First United to sell, unsuccessfully tried to have three nominees elected to the company's board at last year's annual meeting. First United filed a lawsuit against Driver in May in U.S. District Court for the District of Maryland, claiming the investor violated Maryland law as it amassed a 5% stake in the company. Driver filed a lawsuit against First United on Sept. 4, alleging that they lied to investors and abused the regulatory process to quash dissent and win a proxy battle.
Within days of adding Ryan Cohen, an investor and Chewy Inc. (CHWY) co-founder, to GameStop Corp.'s (GME) board, GameStop experienced an unprecedented stock increase. A rush of short covering and day trading caused the company's shares to rise by 94% on Jan. 13. Traders betting on Cohen's plans to revitalize the chain similar to how he handled Chewy contributed to the now three-day rally with the stock, in contrast to years of underperformance. GameStop shares climbed by as much as 118% in the three days since news of Cohen's addition to the board, and reached the highest price since November 2015. Short interest in GameStop remains near recent highs, with 138% of shares available for trading currently sold short, data compiled by S3 Partners shows. Cohen's spot on the board, along with two other former Chewy colleagues, was praised by financial analysts. Telsey's Joseph Feldman said in a Jan. 12 note that the three individuals will "make GameStop a more digitally focused retailer," while Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, asserted, "This is much like the chicken and egg question—did long buying lead to short covering/squeeze or short covering/squeeze lead to long buying?" Overall call volume was outpacing put volume by a rate of 2-to-1 by noon Eastern time on Jan. 13. Total call volume increased to more than four times its 20-day average, led by the January $40 calls. Those contracts are set to expire on Jan. 15.
Finance chiefs, bankers, and deal advisers say their economic outlook is improving as Covid-19 vaccines are distributed across the United States, while finance leaders are preparing for major regulatory changes. According to mergers and acquisitions executives, the second half of 2020 saw an uptick in corporate deal-making following a spring slump, and this could persist throughout 2021 as stock valuations stay high and confidence among senior executives continues to improve. "We're relatively optimistic about this year," said Bank of America Corp.'s (BAC) Steven Baronoff, who recommended that CFOs should concentrate on deals that make sense in the long term, rather than offer short-term gains in earnings. "Shareholders...more than ever before are looking for that," he explained. The incoming Biden administration could influence M&A in the year ahead, as the new president can appoint heads of agencies that vet mergers or enforce antitrust laws. Cravath, Swaine & Moore's Faiza Saeed said companies should be ready to show how potential deals could impact local communities, noting that "it's going to be important to be able to tell a story that it's good for the community in which you operate, and good for job creation." Meanwhile, investors, whose activism was mostly sidelined during the pandemic, could make a comeback in deal-making. Joele Frank, founder of the financial communications firm that bears her name, said she has witnessed more companies evaluating how they would defend their strategies from investor criticism.
St. James's Place (STJPF) is preparing to shed 200 jobs following an internal review of its "strategic priorities" initiated at the start of 2020. The review covered development of technology within the company. CEO Andrew Croft notified staff that "over the coming months we'll be simplifying where we can, removing duplication of work, and stopping those tasks we no longer require. And unfortunately, this also means a loss of around 200 roles from across the SJP business." Croft added that "wherever possible in the process we'll look to redeploy people to roles where their skills are aligned. And where this isn't possible we'll provide support, guidance, and people to talk to." He explained that the job cuts were a "very tough decision to make" but were necessary for the company to "continue to be successful in the months, years, and decades ahead." The cuts were apparently not associated with complaints made by shareholder PrimeStone Capital in late 2020, with the internal review starting months before PrimeStone's open letter. PrimeStone in October warned of a "bloated organizational structure" while urging an overhaul of costs to improve investor returns. Since then PrimeStone, which owns 1.2% of SJP's stock, has lauded the company for "productive and constructive dialogue" around its costs and operating model.
Analysts and investors say Twitter's (TWTR) recent decision to suspend President Donald Trump's account will test a truce made last year between CEO Jack Dorsey and the company's top shareholders. In early 2020, Dorsey faced calls from Elliott Management Corp. to step down, which he resisted by giving Elliott and its ally Silver Lake Partners seats on Twitter's board. Twitter shares had risen more than 70% by the time it suspended Trump, but the stock has dropped 9% this week amid investor concerns that the decision could alienate some of his followers from the media platform and trigger a new push by lawmakers to regulate it. An agreement that prevents Elliott and Silver Lake from seeking to influence Twitter's content moderation and user policy expires this spring. Elliott's founder, Paul Singer, is a major financial backer of Trump's Republican Party. The hedge fund took a 4% stake in Twitter when the stock was hovering around $30, and is still in the black with the shares now trading at around $47. Silver Lake invested $1 billion in Twitter's convertible bonds that give it the equivalent of a 3% stake. Analysts and investors said the impact of the ban on Dorsey's standing with investors will hinge on whether the move weighs on the company's longer-term growth prospects. Many said, however, that they expected most Twitter users to remain on the platform and top shareholders to stick with the company. The reaction of advertisers, from whom Twitter derives the bulk of its revenue, will be key. Many are drawn to the platform because of its high user engagement and are fearful of being mired in controversy. Advertisers often pull their ads in times of political or cultural turmoil, such as the aftermath of George Floyd's death in May. Twitter has acknowledged this risk, warning investors in October that the U.S. election could affect its ad sales. Some investors said Dorsey could argue he was left with no choice but to suspend Trump after his rally of supporters in Washington, D.C., seeking to overturn the outcome of the U.S. election led to the storming of the U.S. Capitol. Other internet giants, such as Facebook Inc. (FB) and Google owner Alphabet Inc. (GOOGL), also cracked down on content produced by Trump and his supporters.
HYK Partners is looking to partner with minority shareholders in an effort to secure more influence over the logistics business of Hanjin Group. The private equity firm has a 9.79% stake in Hanjin Transportation, making it the second-largest shareholder of the business. In December, HYK Partners demanded a seat on the board and separation of ownership and management. HYK Partners is now looking to attract support from domestic as well as foreign investors through a recently launched website. Several minority investors already have entrusted their voting rights to HYK Partners. National Pension Service, which owns 6.2% of Hanjin Transportation, recently stood against the owners of Hanjin when the pension fund voted against Korean Air's acquisition plan. Support from the pension fund and other shareholders would likely be enough to force Hanjin Group ownership to give HYK Partners a board seat. The move comes as Emily Lee Cho, vice president of Hanjin Transportation, has been gaining more control of the company.
Intel (INTC) CEO Bob Swan is stepping down from the top post, effective Feb. 15, and will be succeeded by VMWare (VMW) CEO Pat Gelsinger. Swan has served as the chipmaker's CEO since January 2019 after serving as interim CEO for seven months. During his tenure, Intel has been hit hard by its industry rivals. This summer the company stated that its latest generation chips would be delayed while AMD's (AMD) were already shipping inside laptops. Apple (AAPL) announced in the fall that it will use its own proprietary chips in its Mac computers, breaking a 15-year partnership with Intel for its chip supplies. Dan Loeb's Third Point hedge fund recently took a nearly $1 billion stake in Intel and promptly called for its board of directors to explore "strategic alternatives." Third Point urged Intel to divest from "failed acquisitions" and criticized Intel for its "loss of manufacturing leadership." Third Point recently took about a $1 billion stake in Intel. After the news of Swan’s departure, Loeb said he was "a class act" and that he "did the right thing for all stakeholders stepping aside for Gelsinger."
IsZo Capital Management LP has issued a letter to shareholders regarding its ongoing court case against Nam Tai Property Inc. (NTP). IsZo, a long-term Nam Tai shareholder with an 11% stake, filed the lawsuit in October 2020 after the company announced a $170 million private placement. This placement distributed 16 million common shares to Kaisa Group Holdings Ltd.'s subsidiary Greater Sail Ltd. (Kaisa-Greater Sail) and more than 2.6 million common shares to West Ridge Investment Company Ltd. The suit contends that Kaisa allies currently in control of Nam Tai initiated this transaction because IsZo had obtained enough support to convene a shareholder meeting where investors could vote to reconstitute the company's board. The Eastern Caribbean Supreme Court has granted IsZo's request for an injunction designed to protect shareholders as the legality of the transaction is contested. Nam Tai has since agreed to provide certain undertakings to the court imposing restrictions similar to an injunction for the duration of the litigation process. IsZo aims to invalidate the private placement and have the Special Meeting convened that approximately 40% of shareholders demanded. The court is expected to conclude the trial in February. West Ridge has agreed to be bound by the court's ruling with respect to the private placement and will not defend the legal proceedings. IsZo intends to demonstrate to the court that Nam Tai's private placement represents an egregious entrenchment maneuver intended to strengthen Kaisa's grip on the company. IsZo has put forth a slate of six director candidates that would look to install a China-based management team, improve corporate governance, and improve capital allocation.
GS Group, one of South Korea's top conglomerates, is facing investor outrage over a proposed $3 billion merger of two retail units. GS Group is South Korea's eighth-largest conglomerate by assets and an offshoot of the family behind the LG group. In November, it announced a plan to combine GS Retail with GS Shop, its home shopping affiliate, in July 2021 to strengthen their retail business in the face of stiff domestic competition. The group's proposed merger ratio of 4.22 shares of GS Retail for one share of GS Shop has angered investors. Investors have also bristled over a restructuring plan by LG Corp. Last month, hedge fund Whitebox Advisors launched a campaign to halt a spin-off of several affiliates that it said was aimed at helping a member of the founding family start his own business rather than creating value for shareholders. Minority shareholders of GS Shop say the merger ratio undervalues the country's biggest home shopping network, which averages more than Won100 billion in annual net profit and has about Won600 billion in cash and cash-equivalent assets. Analysts say investors face an uphill battle to block the deal at the shareholder meeting scheduled for May. Foreign investors own 26% of GS Shop, less than the group's holding company. State-run National Pension Service, which has a 5% stake, has said it will vote on the deal according to its stewardship code, which stresses the importance of its fiduciary duty.
State Street Global Advisors has updated its voting policies with regard to board and workforce diversity. According to State Street's annual letter on its proxy voting agenda, the firm this year will vote against the chair of the nominating and governance committee at companies in the S&P 500 and FTSE 100 that do not disclose the racial and ethnic composition of their boards. Next year, State Street will vote against the chair of the compensation committee at companies in the S&P 500 that do not disclose their EEO-1 Survey responses. EEO-1 Survey responses are likely to result in expanded human capital management disclosure in annual reports on Form 10-K. Also in 2022, the firm will vote against the chair of the nominating and governance committee at companies in the S&P 500 and FTSE 100 that do not have at least one director from an underrepresented community on their boards. CEO Cyrus Taraporevala's annual letter reiterated State Street's support for climate risk disclosure using the Taskforce on Climate-related Financial Disclosures framework.
Last year was one of the best years over the past decade for Elliott Management, according to a letter by the New York-based hedge fund to investors. The Paul Singer-run firm said its investments rose 12.7% in 2020. Elliott's international and onshore funds delivered the same returns to achieve their best year since 2012 and 2016, respectively. Assets under management grew to $45.2 billion from roughly $41 billion at the end of June. Singer took at least 16 new positions last year, including at Twitter (TWTR) and Softbank Group (SFTBY), with an eye toward engaging companies. Elliott was profitable every month last year, even during the broader market selloff in March. The S&P 500 returned 16% over 2020.
Ryan Cohen has gained three board seats at GameStop (GME), driving the stock up as much as 17% on Monday. Cohen’s RC Ventures, which has a 13% stake in the company, had pressed for a strategic review to cut more costs. Cohen also wants GameStop to increase the variety of products and services it offers online. GameStop reported a 4.8% rise in holiday same-store sales. Along with Cohen, Alan Attal and Jim Grube are joining the GameStop board. Both men worked with Cohen at Chewy (CHWY), the company he founded.
Japanese dealmaking resurged in the second half of 2020, and analysts expect that pent-up demand and high liquidity could make 2021 a record year for Japanese mergers and acquisitions (M&A). Japan has dominated outbound M&A deals in Asia for the past three years, and this is likely to continue. Companies are also focusing inward as they restructure assets and evaluate domestic competition. More Japanese firms are offloading non-core assets and weighing acquisitions of domestic competitors to gain market share in industries with high fragmentation. Companies have also picked up the pace in unwinding "parent-child" listings, where both the parent company and its subsidiary are publicly traded, which are common in Japan but not in other developed markets. These types of deals made up the four largest acquisitions announced in Japan in 2020. While activity is returning, large overseas purchases will likely remain rare if Japanese executives are unable to travel for due diligence and in-person meetings. Hostile bids for domestic rivals have gradually become normalized in recent years as corporate governance reforms promoting shareholder value take root. In 2020 Mitsui Fudosan Co. intervened to help baseball stadium operator Tokyo Dome Corp. resist pressure from investor Oasis Management Co. Private equity has been eying Japan for years, and companies have begun to see the funds as a viable option for their non-core assets. While 2020 dented private-equity activity, that only means funds are sitting on substantial amounts of dry powder for new transactions.
Eminence Capital has criticized the planned takeover of Pluralsight Inc. (PS) by Vista Equity Partners. Eminence, which owns 5% of Pluralsight, argued that the proposed $3.5 billion deal was the product of a rushed process designed to sell the company as quickly as possible. Eminence said it was outraged by the disclosures around the deal and planned to vote against the transaction unless the price was “materially” improved. Vista agreed in December to acquire Pluralsight at a 6.7% premium to the previous trading day’s close. The deal already has the support of shareholders that own the majority of the voting rights in Pluralsight, the company said at the time. The transaction, however, also requires the support of most of the other investors who aren’t party to a tax agreement that dates back to Pluralsight’s initial public offering in 2018. Pluralsight said in December that the Vista buyout would allow it to move faster and be more agile to deliver on its strategic vision. Pluralsight said in regulatory filings that nine out of the potential 14 suitors had signed confidentiality agreements, but only Vista submitted a final bid. A board committee also negotiated a 70% reduction in the amount owed in the event of a change of control related to its tax agreement to $127 million as part of the process. Last month, another Pluralsight investor, Akaris Global Partners, also came out against the deal, arguing that the purchase price undervalued the company. Eminence has also made a formal books and records request to get additional details around the sale process.
Intel Corp. (INTC) has announced plans to ramp up the production of a new data center chip in the first quarter. The company also said that a new generation of chipmaking technology will become a key part of its output this year. Intel has struggled with delays in ramping up its current 10-nanometer semiconductor manufacturing process and its next-generation 7-nanometer process, which have allowed rivals like Advanced Micro Devices Inc. (AMD) to gain market share. Intel also faces pressure from Third Point LLC to re-evaluate its manufacturing strategy. Intel plans to announce whether it plans to outsource production for some of its 2023 products on an earnings call on Jan. 21. Meanwhile, Intel on Monday said its “Ice Lake” server chips made on its 10-nanometer process would start ramping up production this quarter. Overall, Intel said it expects the 10-nanometer chips to eclipse its older generation of 14-nanometer chips in terms of production volumes sometime this year. The company on Monday also gave details about a chip that its Mobileye autonomous driving subsidiary is working on for a lidar sensor, a laser-based device that helps vehicles obtain a three-dimensional view of the road. The lidar chip will be made in one of Intel's factories in New Mexico and will integrate both active and passive components onto a single chip, which was not possible outside chip factories.
13D Monitor founder and President Kenneth Squire notes that investor activism was down in 2020, with less 13D and under-the-threshold (UTT)-activism, and less capital invested in new campaigns. The average market capitalization for total activism was at its highest in the past four years at $21.04 billion, versus $9.87 billion in 2019, $20.47 billion in 2018, and $13.05 billion in 2017. The number of 13D filings has decreased each year since 2017, with just 48 new activist 13D filings in 2020. Although the number of 13D campaigns fell, the average market capitalization rose, as did the amount invested in new 13D campaigns. Yet 2020 significantly trailed the $4.1 billion average market cap and $19 billion total invested in 2017. The number of UTT campaigns in 2020 was fairly consistent with the year before, although the major development in 2020 was the boom in megacap activism, with market capitalization of companies nearly doubling in 2020. There were six campaigns last year at firms with more than $150 billion in market capitalizations, which exceeds the total megacap activism over the past three years combined. Nevertheless, the dollars invested in new campaigns slipped, indicating that activists are now used to taking much smaller positions in their campaigns. Apart from Elliott Management, every major activist investor launched fewer campaigns last year than the year before, and the 13D filer base was much less diverse in 2020 with 33 different filers compared to 49 in 2019. Squire thinks this is sensible, because when a strategy temporarily loses favor, overall only the investors who employ it as a core strategy will continue using it. Industries engaged by activists showed remarkable consistency between 2019 and 2020. The four leading industries constituted 63% of all activism in 2019 and 56% in 2020. Those industries remained the same between those years and were ranked consistently, with Consumer Discretionary in first place, Healthcare in second, Information Technology in third, and Industrials in fourth and tied with Financials in 2019. The remaining industries exhibited no actual material change between years.
Some in Malaysia are calling for steps to enhance corporate governance during virtual annual general meetings (AGMs). Minority Shareholders Watch Group (MSWG) CEO Devanesan Evanson said virtual AGMs are susceptible to abuse, as virtual questions can be ignored to the exasperation of the shareholder. KPMG Management and Risk Consulting Sdn Bhd executive director Kasturi Nathan disputed this claim, adding that abuse can also occur in physical general meetings. Devanesan said the “gold standard practice” advocated in the Malaysian code on corporate governance (Practice 12.3) would be a hybrid AGM, wherein a physical AGM occurs alongside a virtual one to facilitate remote shareholder participation. Kasturi said some have highlighted the fact that shareholder activism may be diminished under that type of protocol. Some have suggested improving virtual AGMs by having an independent moderator to help facilitate the meetings. Devanesan and Katsuri agreed that this would solve many issues. Katsuri added that there were instances where the virtual general meeting technology provider also acted as the scrutineer, raising questions about independence. One industry observer said while the number of participants at meetings had dipped slightly since virtual AGMs were implemented, the quality of shareholders attending had improved. Devanesan pointed out that physical AGMs allow for greater shareholder activism, as shareholders can raise questions directly to the board in the presence of other attending shareholders.
Shareholders of Nigerian oil firm Lekoil (LEKOF) have voted to expand the company's board to seven members. Investors approved a proposal by Metallon to appoint the investment company's CEO and two others to the board of Lekoil. Metallon starting investing in London-listed Lekoil in March and now holds a 15.1% stake in the company, making the firm its largest shareholder. Metallon said expanding the company's board will improve corporate governance and increase scrutiny of its finances. “Today's EGM result has delivered a clear mandate for change, in line with Metallon's primary objective of a strengthened board, greater oversight, and stronger governance at Lekoil, in order to unlock greater shareholder value for all,” Metallon CEO Thomas Richardson said in a statement after the vote. The enlarged board will appoint a replacement for Lekoil Chairman Mark Simmonds, who said he would stand down with immediate effect.
Veraison Capital has sold more than half of its stake in Irish-Swiss food group Aryzta (ARZTY). Last spring, the Zurich-based investor built a 9.81% stake in the company. Veraison then joined forces with Cobas Asset Management to push Aryzta to sell assets and lower its debt load. Veraison and Cobas orchestrated a boardroom coup that led to the appointment of Swiss food industry veteran Urs Jordi as chairman. Veraison's sale took place on the same day that the boardroom overhaul was completed at Aryzta's annual general meeting last month. Veraison doubled its money on the transaction, and now holds 4.46% of Aryzta.
Dan Loeb's Third Point LLC launched a campaign at Intel Corp. (INTC) on Dec. 29, demanding that the company retain advisers and consider divestitures. In a letter to Chairman Omar Ishrak, Third Point argued that Intel is falling behind its rivals and should retain an investment adviser, evaluate strategic alternatives, and consider a shift to outsource manufacturing of some products. Third Point also suggested it sought to have productive discussions with Intel's board, adding that it was preserving “the option to submit nominees” for board election at Intel's 2021 annual meeting. Intel's shares were up roughly 11% as of Jan. 7 from their price before Loeb's reveal, suggesting that the market anticipates positive change from the company. The Deal identified Intel as an impending activist engagement in November after its shares dropped about 10% following third-quarter earnings, which featured weaker-than-expected results from the company's data center segment. The Deal suggested that an activist could push Intel to reconsider its in-house chip fabrication efforts, which many of its peers have outsourced. Moreover, other semiconductor companies have been targeted by insurgents with this objective in mind in recent months. Intel, which in October announced plans to sell its Nand memory and storage business to SK Hynix Inc. for $9 billion, said Dec. 29 it looks “forward to engaging” with Third Point toward the goal of enhancing shareholder value. UBS analyst Timothy Arcuri in a Sunday note said Intel could consider establishing a manufacturing joint venture with a top foundry. Arcuri added that Intel has previously indicated it will provide more information about its outsourcing initiatives “around its January earnings call” on Jan. 21.
F5 (FFIV) Networks will acquire cloud computing startup Volterra Inc. for $440 million in cash and $60 million in future consideration, taking its total spending on acquisitions to more than $2 billion in the last two years. F5 has been moving aggressively into software and services, expanding beyond its traditional networking hardware business. The company announced a $670 million deal for Nginx, the company behind the widely used web and application server technology, in March 2019; and completed its $1 billion purchase of Shape Security in January of this year. F5 says it will use the Volterra technology as the basis for developing its own edge platform for large companies and service providers. Elliott Management previously took a stake in F5 and spoke to its management about ways to boost its stock, questioning the company's acquisitions of Shape and Nginx. Those deals also contributed to a decline in F5’s operating profit margin, slipping to 30% as of the fourth quarter, from 36% previously. Announcing the Volterra deal, F5 said it expects the acquisition to accelerate its revenue growth, and raised its guidance. The company previewed its financial results for its fiscal first quarter, ended Dec. 31, saying it expects revenue between $623 million and $626 million, up 10%, driven by 70% software revenue growth.
CNBC reports that Intel (INTC) CEO Bob Swan held a Zoom call Monday with Third Point's Dan Loeb. Swan and Loeb are expected to meet again in the coming days. Intel's stock rose Dec. 29 after Third Point made a public push for strategic alternatives.
Researchers estimate that Institutional Shareholder Services and Glass Lewis sway 6% to 33% of any given investor vote. Proposed legal reforms of the proxy advisory industry range from creating rules for proxy advisers along the lines of those governing credit rating agencies, imposing fiduciary duties on advisors or mandating testing and disclosure of the value of their recommendations, to moving to pro-rata voting. But a simpler idea would be to take advantage of technological disruption in the form of a voting visibility database. Such a website would be managed autonomously and would capture intended voting positions of active funds ahead of shareholder votes. Index funds could use the data to inform their voting. There would be no need for any legal changes. A voting visibility database would help offset the influence of proxy advisory firms, and in turn, improve the quality of shareholder voting.
Assessing 2020 performance will be a key factor that will impact the 2021 compensation season. Preset financial goals for 2020 may no longer provide a meaningful measure of company performance due to the impact of the pandemic. Directors may need to exercise discretion and rely on subjective judgments regarding individual and company performance. Companies will need to provide clear, detailed disclosure of their 2020 compensation decisions, and early, proactive shareholder outreach will be very important for those anticipating a challenging say-on-pay vote in 2021. Due to the increased focus on environmental, social, and governance (ESG) matters through shareholder proposals and requests for disclosure, companies will need to consider including relevant ESG objectives among their incentive compensation performance goals. Moreover, companies continue to face the threat of shareholder activism and unwanted takeover attempts during the pandemic. As a result, companies will need to review and maybe strengthen compensation-related arrangements that maintain stability while facing an activist challenge or a change in control.
Market uncertainty has exacerbated the trend of investor engagement around the world. The U.K. and other countries have been adopting mechanisms that provide fertile ground for claims that can lead to an increase in litigation for multinational public companies. In the U.S., courts have narrowed the scope for bringing foreign claims. As a result, shareholders are seeking alternative jurisdictions, and countries have responded by developing their own legislation to accommodate such actions. The U.K. has now become a preferred destination for collective shareholder litigation. Companies will need to be aware of the risk of investor actions and track the jurisdictions in which they may face claims.
Last month Nasdaq filed a proposal with the Securities and Exchange Commission (SEC) to adopt new listing rules that would focus on promoting diversity. The rules would require companies to have, or explain why they do not have, at least two diverse directors, including one who identifies as a woman and one who identifies as either an underrepresented minority or LGBTQ+. Nasdaq’s efforts to promote diversity on boards has received broad support, especially for its "comply or explain" approach. The Council of Institutional Investors (CII) supported the proposal, saying that diverse boards can boost financial performance, but that quotas may lead to "check-the-box" diversity. New York City Comptroller Scott Stringer also voiced support for Nasdaq’s plan, writing that the proposed rules would "provide investors with vital information to inform investment and proxy voting decisions." At the same time, Stringer recommended that the proposal go further by requiring companies to identify their directors as individuals, not in aggregate, and that the proposed director matrix requirement be widened to include their skills, experience, and attributes. Stringer last year led a campaign that resulted in 34 S&P 100 companies agreeing to release the composition of their workforce by race, ethnicity, and gender through their annual EEO-1 report data. On the corporate side, companies including Microsoft (MSFT) and Facebook (FB) have expressed support for the proposal. David Bell, co-chair of the corporate governance practice at Fenwick & West, argues that the statistical data sought might create privacy concerns for some directors. Bell suggests this potential issue could be avoided by modifying the board diversity matrix. The CFA Institute said it generally supports Nasdaq's plan but encourages it to consider whether the proposed diversity definition could be improved by adding factors such as disability and veteran status.
Activist campaigns are likely to pick up again in 2021, this time with a greater focus on environmental, social, and governance (ESG) performance, risk management, and crisis response. With respect to proxy proposals, Okapi Partners data shows that more than 850 shareholder proposals related to ESG issues were filed and 71 passed during 2020. Many investors, not just activists, view ESG factors as vital elements of a company’s performance. Cybersecurity risks are also likely to play a role as recent high-profile breaches have drawn attention to their destructive impact. Global losses from cyber-crime in 2020 have been estimated at nearly $1 trillion, up from $600 billion in 2018. According to a survey by PwC, only 32% of corporate directors think their board understands their company's cyber-security vulnerabilities very well. With the benefit of hindsight, activist investors in 2021 may challenge how well management and the board responded to the Covid-19 crisis. Companies will need to boost shareholder engagement and assess their own vulnerabilities in light of these developments.
For shareholders that have voiced strong objections to virtual shareholder meetings (VSM) over the years, their experiences in 2020 confirmed for them that such meetings are an inadequate replacement for in-person meetings. There was a general sense that companies had much tighter control over the structure and flow of the Q&A sessions than at in-person meetings. Shareholders expressed concern about companies generating questions themselves; the inability to ask follow-up questions; loss of opportunity to make eye contact with board members, company executives, and other investors; and companies paraphrasing and rewording their questions. Some meetings wrapped up in 10 minutes, but some lasted several hours and had hundreds of participants. Companies made quick decisions to go virtual due to the pandemic, but this created confusion and unanticipated challenges for shareholders. Overall, shareholder proponents reported that they were able to present their proposals without difficulty. Companies using VSM platforms for the first time in 2020 reported a positive experience.
Most analysts and investors agree the markets will pick up as vaccinations make it possible for life to return to normal, but not before the second half of the year. Bill Ackman, CEO of Pershing Square Capital Management, goes so far as to suggest major companies could see their share prices rise higher than before the virus hit, because they could have an even bigger market share. He believes the virus will continue to be “a fright and a disaster” for the first three or four months of the year. Then, with the accelerating distribution of Covid-19 vaccines and the release of pent-up “animal spirits,” Ackman suggests businesses and their consumers will be raring to travel and spend as we head into summer and beyond. All of which, added Ackman, is even better news for well-capitalized major organizations where the pandemic has driven many of their smaller competitors out of business. Jason Donville, CEO at Donville Kent Asset Management, agreed that vaccines plus pent-up demand would lead to a period of “super-growth” in the early summer. Tudor Investment Corp. CEO Paul Tudor Jones believes retail stocks will come good in the second half of 2021, while a continued combination of financial stimulus, low-interest rates, and the vaccine shot will boost shares across the board. Ray Dalio’s Bridgewater Associates endured an even worse 2020 than many of its rivals after admitting it kept missing opportunities to reposition. Dalio doesn’t doubt the economy will recover, but warns of the longer-term fall-out for companies of reduced productivity. Dalio said longer-term recovery from the Covid-19 crisis is more likely to be impacted by an imperfect storm of the United States' worsening inequality, political polarization, and mounting debt, all of which he says are at extreme levels not seen since just before the Great Depression. The evolution, Dalio says, is that of “three big forces underway”: gaps in wealth and politics, the production of debt and money by central banks, and the rise of China as a new world power. “If we don't have broad productivity and employment, we're going to have a continuation of the worsening, greater polarity," said Dalio.
Companies are focusing more on corporate governance due to the European Union's Sustainability-Related Disclosure Regulation, which takes effect March 2021. Investee companies will need to follow good governance practices, as a baseline, in order to be classified as a “sustainable investment.” Certain entities will be obliged to maintain distinct compliance functions. Corporates are already facing greater pressure from stakeholders to increase gender and ethnic diversity at the board level. L&G (LGGNF) has stated that, beginning in 2022, it will vote against companies with boards that lack ethnic diversity. Market trends suggest that sustainable classifications will become increasingly important for companies to retain access to capital markets and other financing. The disclosures required under the Sustainability-Related Disclosure Regulation may lead to enhanced stakeholder awareness. More proactive financial market participants may look to initiate greater stakeholder engagement over a company's approach to sustainability.
2020 brought several noteworthy developments in corporate governance and mergers and acquisitions (M&A). Market volatility in the early days of the pandemic forced investors to review their strategies, with some activist funds pausing their campaigns and others trying to take advantage of the significant drop of stock prices in March. A number of companies implemented poison pills to preserve valuable tax assets and deter opportunistic stock sweeps. Environmental, social, and governance (ESG) considerations continued to remain a focal point for boards as they have been dealing with major impacts of the pandemic on their employees, customers, and communities in which they operate. 2020 also saw a proliferation of special-purpose acquisition companies (SPACs) and billions of dollars of proceeds flooded into these blank-check companies. The ESG landscape is evolving rapidly. Stakeholders are requiring greater transparency and accountability from companies on ESG factors, and this unprecedented level of engagement is creating both risks and opportunities that boards and management cannot ignore. In recent updates to their proxy voting policies, ISS and Glass Lewis signaled that they would pay more attention to board diversity, board independence, and material risk oversight failures, among other issues. Shareholders will differentiate companies based on adherence to these guidelines. The United States' transition to a new administration in 2021 could have a significant effect on U.S. policies and the global economy. Cross-border M&A deals, particularly involving critical infrastructure, technology, and data collection, will see more regulatory scrutiny as tighter rules come into effect in Europe.
The number of women directors at companies included in the Bloomberg Law Silicon Valley 150 List (SV 150) continued to increase at a faster rate than at companies included in the Standard & Poor's 100 Index (S&P 100) in 2020, according to the latest annual corporate governance survey by Fenwick & West. Companies with at least one woman director rose from 91.3% to 98.0% for the SV 150 compared to the prior proxy season. While the majority of companies in the SV 150 met California's new statute on gender diversity for corporate boards, the majority will need to add women to meet the requirement for 2021. A small percentage of companies adopted dual-class voting stock structures, but there was more traction among the mid-to-larger SV 150 companies. SV 150 companies in 2020 were less likely to have a combined chair and CEO than S&P 100 companies, with 38.1% and 62.8% having combined the roles, respectively. The number of virtual meetings for SV 150 companies more than doubled and more than quadrupled for S&P 100 companies largely due to the Covid-19 pandemic. However, stockholder participation does not appear to be negatively impacted when measured by the average percentage of shares represented at the meeting.
There has been real progress toward restoring a more long-term, sustainable orientation at companies since Wachtell, Lipton, Rosen & Katz issued "Will a New Paradigm for Corporate Governance Bring Peace to the Thirty Years' War?" Investors have increasingly viewed short-termism and activism as having adverse effects on corporate performance. In the 2015 paper, the firm questioned whether the growing recognition would mitigate or reverse the pressure felt in C-suites and boardrooms to maximize near-term value for shareholders. At the request of the World Economic Forum, Wachtell proposed a new paradigm of corporate governance and investor stewardship that would incorporate the best current thinking about ESG, sustainable investment strategies, and principles of stakeholder governance. Institutional investors and asset managers have increased support for ESG and stakeholder governance since the publication of the paper. And in August 2019, the Business Roundtable embraced stakeholder governance. Much has changed since 2015, including the adoption of the 2020 Davos Manifesto, but it remains to be seen whether the principles of the new governance paradigm will continue to gain traction and have a long-term impact on the economy and society.
Both Carl Icahn and Jeremy Grantham said the week of Jan. 4 that equities are overpriced and due for a steep selloff. The same week, investors staged another buying frenzy that pushed the S&P 500, Dow, and Nasdaq to fresh records on Jan. 7. Between them, Icahn and Grantham have 120 years of investing experience. Icahn owns 90% of Icahn Enterprises and holds billions in shares of companies such as Cheniere Energy (LNG), Newell Brands (NWL), and Xerox Holdings (XRX). Though Icahn moved his operations from Manhattan to Miami in late 2019, he remains as busy as ever. Grantham is the co-founder and chief investment strategist at Grantham, Mayo, Van Otterloo, the $65 billion asset management stalwart.
Companies were generally able to successfully hold virtual annual meetings and allow investors to participate during the 2020 proxy season. However, some companies experienced technical issues or had difficulty scheduling their virtual meetings. The Securities and Exchange Commission (SEC) issued guidance for virtual meetings in April 2020, noting that companies should clearly disclose logistical details, and both Institutional Shareholder Services and Glass Lewis issued guidance supportive of virtual meetings during the Covid-19 pandemic. According to Broadridge Financial Solutions, 97% of companies hosting a virtual annual meeting on its platform allowed live questions from shareholders, and 11% of companies allowed shareholders to submit questions before the meeting. In addition, 25% of companies with shareholder proposals allowed shareholders to submit questions before the virtual meeting. Some investors remain concerned about a lack of transparency surrounding those meetings. The CII and others called virtual meetings a “poor substitute” for in-person meetings in a July 2020 letter to the SEC, and more recently, a multi-stakeholder working group co-led by the Society for Corporate Governance recommended practices for conducting virtual shareholder meetings and providing related disclosures.
According to Gatemore Capital Management CIO Liad Meidar, investor activism has reached a "golden age" in the U.K. Though Covid-19 stopped many campaigns in their tracks last year, activism has started to pick up again in the U.K., with shareholders pushing for change at companies including St. James's Place (STJPF) and Countryside Properties (CSP). Speculation tends to center on break-up plays such as Unilever (UL) and engineering conglomerate Smiths, but chasing these companies does nothing to ameliorate activists' reputation for short-termism. Taking issue with failings of environmental, social, and corporate governance, however, suggests a desire to bring about enduring improvement and thus is more likely to earn the backing of institutional investors. Sectors rarely subject to activism, such as airlines and minerals, could, therefore, be engaged in 2021. So might the corporate governance outliers and the founder-run businesses such as retailer Boohoo (BHOOY), though those carry a risk of unravelling if a tight-knit management structure is unpicked.
Hyundai Motor Co. (HYMTF) stock soared as much as 24% on Friday, its biggest intraday gain in over two decades, after the company said it might make cars or at least parts for a future-forward vehicle with Apple Inc. (AAPL). Much like other auto companies, Hyundai has struggled to push ahead with a transformation to electric and autonomous vehicles. In 2018, it unveiled a $7 billion plan to push ahead with development for fuel-cell models without addressing dismal earnings at the time. In the quarter ended September last year, the company posted an operating loss of 313.8 billion Korean won ($277.8 million) and apologized to shareholders and investors “for having repeated quality cost issues over three quarters since 2018.” Elliott took on the conglomerate in April 2018 with a stake worth approximately $1 billion across group companies, including Hyundai Motor and sister Kia Motors Corp. The fund's requests included returning more than 12 trillion won in cash to shareholders and establishing an efficient holding company structure. There was much contention around the numbers Hyundai was using to value the businesses and future cash flows. Elliott pointed out that Hyundai Motor had a poor investment record and a history of putting money into non-core projects, but the company barely budged. With victory seeming too far away, Elliott sold out with a $430 million loss, according to local media reports in January last year. On the eve of a shareholder proposal that was slapped down, the investor said that several investors that had “suffered years of underperformance” also wanted change. By the time Elliott walked away, the stock had dropped almost 20%; it's up over 80% since then. Hyundai is an odd choice for the Apple deal, which would apparently cover production, electric vehicles, and battery technology.