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ValueAct Takes Stake in Disney
Investor Activism Boom
Twilio Inc. (TWLO) CEO Jeff Lawson might have breathed a sigh of relief when the leader of tech investing at Legion Partners, which had called for change at Lawson’s software company, left for another fund. But the investor — Sagar Gupta — picked up where he left off, leading his new employer, Anson Funds, to buy a stake in Twilio. Now Anson is urging the company to sell itself or divest its data and applications business, according to a letter Anson sent to Twilio’s board of directors. The stake is worth approximately $50 million, and the activist met with members of Twilio’s board earlier this month, according to the letter, which was sent Nov. 20. The hedge fund also hinted it could launch a proxy fight if Twilio did not act. Including his work for Legion and now Anson, Gupta has met with Twilio’s board and management team nine times in the past year, the letter said. Once a hot initial public offering with rapid revenue growth, Twilio has been punished on the public markets over the past couple of years as investors have shied away from loss-making companies. Twilio’s stock trades in the low $60s today, far off its highs of more than $435 in early 2021, though the stock has rebounded 25% this year. Twilio posted a $650 million net loss in the first nine months of this year, compared with a $1.03 billion loss during the same period a year earlier. Over that same period, its year-over-year revenue growth slowed to 9.9% from 40%. The push also comes after Twilio, a communication software company with an $11.4 billion market capitalization, lost the protection of its supervoting shares earlier this year. Until June, CEO Lawson’s 3.7% ownership stake at the time had voting power of nearly 22%, which insulated the company against the threat of an activist lobbying enough votes to oust directors. But that supervoting power recently expired as the share classes collapsed into one. Anson is urging Twilio to sell its data and applications business, which makes up about 12% of its revenue and helps Twilio’s users better know their customers. Anson wants it to use the proceeds to repurchase stock or buy other communications platforms.
Elliott Investment Management plans to push for changes at Crown Castle (CCI) after the investor failed to gain traction when it first took a stake in the big owner of wireless towers. Elliott reportedly has amassed a stake of more than $2 billion in Crown Castle, which has a market value of nearly $45 billion, and plans to engage with the company about ways to boost its shares. Should Elliott nominate a slate of director candidates ahead of Crown Castle’s annual shareholder meeting in the spring, the window to do so runs from Jan. 18 through Feb. 17, according to proxy materials. Crown Castle rents out its towers to major wireless carriers under long-term deals. A real-estate investment trust, it is based in Houston and owns thousands of miles of fiber-optic cable used for transporting data and powering its customers’ networks. The fiber network supports so-called small cells that deliver bandwidth much closer to customers than its bigger towers. Elliott said in July 2020 that it controlled a $1 billion economic interest in Crown Castle as it pressured the company to overhaul its approach to the fiber business, which the hedge fund said at the time was weighing on the company’s market value despite billions in investment in recent years. Elliott called Crown Castle’s fiber spending “undisciplined” and said that it diluted the company’s return on invested capital. Elliott urged Crown Castle to focus on higher-return opportunities and pushed the company to address its “long-tenured” board. Crown Castle responded by implementing a mandatory board-retirement policy and refreshing its director slate. It said it planned to stay the course with regard to its business strategy and has since continued to invest heavily in fiber. The company has since lost nearly half of its value from the 2022 high, with the stock closing Friday at $103.58. Year-to-date, shares of Crown are down almost 24%.
Crown Castle (CCI) said it is open to having discussions with Elliott Investment Management after the investor pushed for changes in the board and said the strategy followed by Chief Executive Jay Brown has been a "failure." The owner of wireless towers on Monday said that it looks forward to reviewing Elliott's materials, but noted that it remains confident in its executive leadership. "We value the views of all our shareholders as we seek to better understand their perspectives on our strategy, performance and business objectives," Crown Castle said. Elliott, which recently increased its stake in the company to over $2 billion, in a letter to Crown Castle said the company "suffers from a profound lack of oversight by the board, which has contributed to its irresponsible stewardship and flawed financial policy," and asked for a strategic and operating review of the fiber business. Elliott intends to make its case directly to shareholders with a majority slate of alternative directors at Crown Castle's annual meeting of shareholders in May 2024.
Crown Castle (CCI) shares rose 4% in Monday trading after Elliott Investment Management said it is calling for the wireless-tower owner to replace its chief executive and pursue a strategic review of its fiber business. Elliott said Monday that it would prefer to work constructively with Crown Castle, but that it is prepared and intends to nominate a majority slate of director candidates at the company's coming annual meeting.
In a Nov. 17 bench ruling, the transcript of which was publicly disclosed last week, Vice Chancellor Nathan Cook of Delaware Chancery Court awarded Politan nearly $18 million in fees for forcing Masimo (MASI) to abandon entrenchment tactics ahead of a shareholder vote on two Politan-backed candidates for Masimo’s board. Even though Politan's board nominees were elected in June after Masimo's concessions, the medical technology company tried to convince the Delaware vice chancellor that Politan's case benefited only the hedge fund. In their brief opposing Politan's fee request, Masimo's lawyers insisted that Politan's counsel were not entitled to any fees from Masimo because of Politan's own interest in the outcome of the litigation and because the hedge fund ultimately ditched the case without resolving all of its claims. Cook dismissed those arguments, noting at the Nov. 17 hearing that “I lived through this thing too.” Politan's “blow-out success” in the litigation, Cook said, benefited Masimo in a truly fundamental way: The hedge fund's case prompted Masimo to remove obstacles that might otherwise have impeded a free and fair shareholder vote on new board members backed by Politan. Preliminary rulings for Politan, the judge said, forced Masimo to make critical concessions in advance of the shareholder vote. The hedge fund also brought claims arising from the employment contract of Masimo CEO Joe Kiani, who stood to reap hundreds of millions of dollars, under a change-of-control provision, if Politan-backed candidates were elected to Masimo's board. After Cook refused to dismiss Politan's claims last February, Kiani agreed to waive his right to the lavish payout. Kiani eventually conceded any additional right to claim a payout from the board's selection of an independent lead director, announcing that he wanted to eliminate any distractions for shareholders in the proxy contest. In opposing fees for Politan, Masimo insisted that its concessions were prompted by the contest for board seats, not by Politan's lawsuit. In his Nov. 17 ruling, Cook said the company's call for him to ignore “the frankly extraordinary corporate benefits that Politan achieved in this litigation” defied both common sense and policy considerations. The timing of Masimo's concessions, the judge said, was clearly linked to developments in the litigation, belying the company's contention that it acted in response only to the proxy contest.
Germany’s billionaire Schaeffler family has increased its offer for electric vehicle specialist Vitesco Technologies (VTSCY), following increasing criticism from shareholders over the planned merger of the country’s leading automotive suppliers. Schaeffler on Monday said it had lifted its cash offer for Vitesco to €94 a share, from the €91 it bid last month, after “careful consideration of the prevailing market sentiment” valuing the company at €3.8 billion. Schaeffler already owns 49.9% of Vitesco as well as 46% of German tiremaker Continental (CTTAY). Having made its money supplying the German car industry, it has been affected by the industry’s historic switch to electric vehicles — a field in which China has quickly gained dominance. The family’s decision to take control over Vitesco, which was spun out of Continental in 2019, has ruffled the feathers of other shareholders such as hedge fund manager David Einhorn. Earlier this month, Einhorn’s fund Greenlight Capital warned Vitesco against merging with a company that is still heavily dependent on combustion engine cars. Arguing that Vitesco was worth at least €150 per share, he urged other shareholders “not to give it up at depressed prices to competitors who have missed the boat.” It followed a letter from asset manager Ninety One, which owns approximately 6% of Vitesco, that had warned the proposed deal risked “disadvantaging” minority shareholders.
Spain's Unicaja (UNI) on Friday said it would start searching for a new non-executive chairman to replace Manuel Azuaga as part of the bank's plan to revamp its corporate governance structure. Azuaga, who will also give up his position as a member of the board, will step down once a new chairman has been named, the bank said. The outgoing chairman said in a statement that with the Liberbank merger complete and the agreed transitional period where he remained at the helm now over, it was the "right time" to "put an end" to his career at Unicaja. Unicaja announced the acquisition of smaller lender Liberbank at the end of 2020, creating Spain's fifth-largest bank with around 110 billion euros ($121 billion) in assets when the deal closed in July 2021. At the time, the banks said Azuaga would remain in post at the merged entity before the board reviewed its corporate governing structure around two years after the deal's close, with the chair giving up his executive powers. Unicaja formally appointed Isidro Rubiales as its new CEO in July to replace Manuel Menendez, with the European Central Bank authorizing the appointment in September with executive powers. Supervisors of euro area banks favor separating the roles of chairman and CEO. Corporate governance has been at the center of the banking turmoil triggered in March by the collapse of Silicon Valley Bank in the United States and UBS Group's (UBS) state-backed takeover of Credit Suisse in Switzerland.
TCI Fund Management has opened an office in Abu Dhabi, led by global head of investor relations Bronwyn Owen, following in the footsteps of several asset managers to set up shop in the United Arab Emirates this year. Owen, a director in the firm, has relocated from New York to head the office, which will help the $60 billion hedge fund acquire investors and compete for talent, it said in a statement. "The Middle East is a vital market for the investment management industry, both from a talent and asset growth perspective, as well as a critical partner in global efforts to reduce carbon emissions and climate change," said the British hedge fund's founder Sir Christopher Hohn. TCI is headquartered in London but also has an office in New York. The Abu Dhabi Global Market (ADGM), an international financial center based in the capital of the United Arab Emirates, said in September that it had added 25 asset management firms in the first half of the year. A total of 102 asset managers are operating in ADGM and managing 128 funds, up from 77 and 88 respectively last year. The financial district is expanding its area of jurisdiction to 10 times its footprint by adding al-Reem Island to its current location on al-Maryah Island in Abu Dhabi. "TCI’s new base underscores ADGM’s rise as an international financial hub and reinforces Abu Dhabi’s position as a prospering center for the investment management industry," ADGM Chairman Ahmed Jasim AL Zaabi said in the statement.
Shareholders passed all resolutions put forward at Crystal Amber (CRS) fund’s annual general meeting on Nov. 22, but some faced strong dissent. The board said four resolutions saw votes of more than 20% against them, including the re-appointment of the auditor KMPG, directors' remuneration, the re-election of three directors, and the provision of share buyback authority. KMPG has been Crystal Amber's auditor since its listing in 2008, which could trigger independence concerns. According to the shareholder registry, Saba Capital owns over 25% of the company. In a stock exchange notice, the board said it was committed to "continuing an open dialogue with the company's shareholders. The board will continue to seek to engage with those shareholders who are understood to have voted against the resolutions to understand their views or any specific concerns. The board will update shareholders on this and actions taken within six months." At the end of October, the fund reinstated its management fee for 2024 and beyond, as the activist investment trust expected to require management of the portfolio longer than it had previously expected. Following its failed continuation vote in December 2021, the board decided to return capital to investors via timely disposals. The move was confirmed at an extraordinary general meeting in March 2022.
The Durham, N.C. semiconductor chipmaker Wolfspeed Inc. (WOLF) has a new shareholder that could seek to change how the company operates. Jana Partners has disclosed a $35.6 million investment in Wolfspeed, representing a roughly 0.75% stake in the company. The move comes as Wolfspeed’s stock price has fallen considerably in the past 12 months — from more than $85 a share last November to below $35 this week. “(Jana is) extremely experienced, and respected for this,” said Kevin Kaiser, who teaches corporate finance at the Wharton School of the University of Pennsylvania. Taking even a small stake in a company, Kaiser explained, gives activist investors credibility as they rally support from larger shareholders like pension funds, endowment funds, or big asset managers. In recent years, Wolfspeed has transformed its operations. Until 2021, it went by Cree and was better known for making LED lights. Under the leadership of CEO Gregg Lowe, who took over in 2017, the company sold its lighting divisions and funneled resources toward manufacturing a specific type of semiconductor chip. Today, Wolfspeed’s silicon carbide chips power appliances like electric vehicles and energy storage equipment. Unlike traditional silicon, silicon carbide is a unique material the company champions as more efficient. It grows silicon carbide crystals and converts them into blank wafers at facilities in Durham before sending them to a fabrication facility in New York’s Mohawk Valley. But delays in production — first at the Durham site and then the Mohawk “fab” plant — have left some investors weary. “We are focused on extending our leadership in silicon carbide and driving long-term investor value while executing our strategic plan and growth initiatives,” said company spokesperson Tyler Gronbach. He added Wolfspeed is “continuing to ramp our device capacity” in Mohawk Valley while it constructs a new materials site near Siler City. Kaiser said a firm like Jana Partners generally gets involved when it thinks “the operating performance of a company is below what its potential is. It probably requires some change in strategy, which may include a change in board membership or changes in management.” In recent years, activist investors have engaged multiple semiconductor producers, including On Semiconductors and Marvell Technologies. Kaiser said the sector has drawn interest from activist shareholders who feel executives and boards of directors are overly focused on science and engineering rather than on what is financially best for the company.
KCGI Asset Management positively evaluated the recent resignation of Hyun Jeong-eun from the posts of both Hyundai Elevator's (017800) board of directors' chair and the firm's registered director, calling it "the first step in normalizing the board." The activist fund that holds nearly a 3% stake in common shares of Hyundai Elevator stated Wednesday that it hopes Hyun's resignation from the board contributes to Hyundai Elevator becoming a more shareholder-friendly company. In August, the asset management company sent an open shareholder letter to Hyundai Elevator, demanding improvements in the firm's corporate governance. "The resignation of current Hyundai Group Chair Hyun Jeong-eun, who's also the de-facto largest shareholder of Hyundai Elevator, from the board of Hyundai Elevator, is regarded as the first step in normalizing the board," said Jake Myung, the asset management firm's equity team leader. "As Hyun was a party who lost in a shareholder representative lawsuit, KCGI Asset Management will closely watch whether she maintains influence over the firm or its subsidiaries either by receiving salaries or participating in the corporate decision-making process." Yet, KCGI went on to further press Hyundai Elevator to come up with fundamental measures to make tangible results in its management structure. Regarding a set of shareholder return plans announced by the company at the end of last week, the asset management said: "It is regrettable that Hyundai Elevator has failed to make a mention of fundamental measures to bring in profitability improvements in the firm's shareholder return plan." The asset management company emphasized the need for fundamental changes in management structure and the normalization of corporate value. In the shareholder letter issued in late August, KCGI stated that Hyundai Elevator is showing a very disappointing management performance and corporate value due to large-scale losses from opaque entry into overseas markets and substantial impairment losses from domestic and foreign equity investments, despite the elevator industry's attractive growth outlook in domestic markets. Hyundai Elevator is slated to convene an extraordinary shareholders' meeting near the end of next month to form a new board of directors and appoint a new chair of the board.
Toshiba Corp.'s (TOSYY) shareholders approved a consolidation of the company's shares at an extraordinary meeting Wednesday, paving the way for its delisting from the Tokyo Stock Exchange on Dec. 20 and marking the end of its 74-year history as a public company. The move will allow a consortium led by Japan Industrial Partners Inc. (JIP) to buy the remaining shares it failed to acquire in its successful 2 trillion yen takeover bid for the troubled Japanese conglomerate, founded in 1875. The intention behind the delisting is to sever ties with overseas activist shareholders, allowing the company to focus on growth areas such as social infrastructure and quantum technology, Toshiba has said. The JIP-led consortium acquired 78.65% of Toshiba's shares in the takeover bid, more than two-thirds of the total amount it needed for the consolidation proposal to be approved at the meeting. Under the approved plan, 93 million shares will be consolidated into one stock, reducing general shareholders' holdings to less than one share. The consortium will then buy the remaining portion to make Toshiba its wholly-owned subsidiary. Toshiba, one of Japan's leading companies, started as an electric appliance maker and gradually branched out into new business sectors such as infrastructure and renewable energy. But the company has been struggling to recover after running into a spate of problems in the 2010s, including a scandal related to overstating its profits in financial filings. It also incurred massive losses in its U.S. nuclear business in the same period. The company increased its capital in 2017 by allotting about 600 billion yen worth of shares to third parties in a bid to improve its financial standing, leading to activist shareholders investing in the company.
Shares in Entain PLC (ENT), the owner of Ladbrokes, Coral and U.S. joint venture Bet MGM, rose on reports that it faces growing investor unrest from activist investors. After the shares recently dropped to a three-year low below 840p, Sachem Head Capital Management and Dendur Capital have expressed concern about the gambling group’s languishing share price and ability of CEO Jette Nygaard-Andersen to revive the FTSE 100 company’s performance. Sachem Head Capital Management and Dendur Capital have built stakes in Entain, according to several sources. They join Eminence Capital, a Wall Street firm that has a 2.1% stake and went public with its concerns in June. Having had "many" conversations with directors, Eminence's open letter stated, among other criticisms, that its approach to acquisitions is "perplexing on many levels," because "funding them with highly undervalued equity is an empire building, shareholder value destroying strategy." Further, after previously spurning takeover approaches from MGM and DraftKings at materially higher prices on the grounds that they undervalued the company, "to then turn around and issue equity at depressed prices for an asset that is at best a 'nice to have' is illogical." The investors are also concerned about flagging sales in Entain’s core markets, including the UK, where regulators have cracked down on the online betting industry, as well as a series of management mishaps, sources said.
Land & Buildings has boosted its ownership stake in Canadian REIT Tricon Residential (TCN), which owns about 37,000 single-family rental houses in the U.S. and Canada. It purchased approximately 6.2 million shares in the company in the third quarter, according to Land & Buildings securities filings. In a presentation in October, Land & Buildings described Tricon as “substantially undervalued,” saying that poor revenue management and excessive overhead costs have depressed the REIT's earnings and stock price. Tricon stock has fallen roughly 9.3% in value since this time last year, but its shares have risen 16.2% from a month ago. Land & Buildings said Tricon's residential properties cater to middle-income households that skew younger, with an average yearly income of $97K and an average tenant age of 39. The company forecasts that single-family rentals will experience rising demand from population growth among younger cohorts because, on average, renting is less expensive — about $1K a month — than purchasing a starter home. Still, single-family rents are climbing. Tricon, Invitation Homes (INVH) and AMH (AMH), all significant players in the SFR sector with an aggregate of 180,000 homes, were each able to post more than 6% raises in rent in the third quarter compared with a year ago. “In such a distorted environment for homebuyers, the case for rental is more compelling than ever,” Tricon CEO Gary Berman said during the company's latest earnings call.
Avantax (AVTA) shareholders overwhelmingly supported the merger between the tax-focused wealth management firm and Cetera Holdings at a special shareholder meeting Nov. 21, according to U.S. Securities and Exchange Commission (SEC) filings. Avantax announced the move to sell to Cetera in an all-cash $1.2 billion deal in September, with shareholders cashed out at $26 a share. The move would take Avantax private and delist it from Nasdaq, with the remnants of the company operating as a separate unit within Cetera. In addition to voting to support the merger, shareholders agreed by a wide margin that remuneration “may be paid or become payable to (Avantax’s) named executive officers that is based on, or otherwise relates to, the merger.” Previous SEC filings indicated Avantax CEO Chris Walters, CFO and Treasurer Marc Mehlman and Chief Legal Officer and Corporate Secretary Tabitha Bailey all intended to step down after the transaction closed. Other filings indicated Walters could receive a “golden parachute” of up to $21.5 million with the finalization of the transaction. Earlier in 2023, Avantax changed its name from Blucora and sold its tax software business, but it faced rising calls from activist investors to weigh selling the company, including from Engine Capital, which owned approximately 2% of Avantax shares. Engine urged Avantax to consider a sale because of its holding company structure, competitive positioning shortfalls and that improvements in recruitment and advisor satisfaction made a sale more attractive to purchasers. In October, Avantax also revealed through SEC filings that it faced multiple lawsuits from shareholders claiming the Cetera deal could shortchange shareholders and that the proxy statement touting the deal omitted material information. The plaintiffs demanded the Cetera transaction be put on hold until the disclosures were made, including information on managements' conflicts of interest, post-employment agreements and some financial forecasts for Avantax. Avantax denied that the additional disclosures were legally necessary, but filed an amended regulatory statement with the information, “in order to moot the unmeritorious disclosure claims, alleviate the costs, risks and uncertainties inherent in litigation and provide additional information to its stockholders.” Avantax management has fought numerous battles against activist investors over the years. In 2021, Ancora waged a proxy fight against Blucora, saying management failed to find synergies between Blucora’s roll-up of tax-focused b/ds, and its legacy professional tax software, resulting in a stock price fall (shareholders voted to retain the board members). Later that year, Ancora also pressed the board of directors to sell its online tax prep unit, which it eventually did in November 2022. In February 2022, Engine Capital also pressed Blucora to attain three seats on the board.
AVI Global Trust (AGT) was at the forefront of the campaign to tackle failings at Hipgnosis Songs Fund (HPGSF) and profited from the Pantheon International’s (PIN) tender offer and buyback program; and AGT was a winner of best global fund at the recent Citywire Awards. AVI does not tend to be vocal about the work that it does to unlock value for investors unless it meets resistance. It thinks galvanizing other stakeholders to put pressure on companies to do the right thing will help shift the dial. The £1 billion plus portfolio is focused on assets trading at a discount to the manager’s assessment of their intrinsic value. This could mean that it is categorised as a value investor. However, in reality, the underlying portfolio is exposed to a wide range of businesses, from luxury goods to convenience stores, and from asset management to online marketplaces. The portfolio bears no resemblance to any index and so finding an appropriate yardstick to measure its success by is difficult. The board has decided to switch the trust’s performance benchmark to the MSCI All Countries World Index (MSCI ACWI). Over the past 10 years, AGT has delivered NAV returns of 126.7% compared with 70.2% for its old benchmark. The overwhelming strength of the U.S. market meant that MSCI ACWI delivered 155.8%. However, over three years, AGT is well ahead up 37.9% versus 29.4%.
Walt Disney Co. (DIS) CEO Bob Iger will hold a town hall meeting on Nov. 28 with the company's stock remaining under pressure, ending the pre-Thanksgiving session at $95.07, below its year-ago level, as investors and analysts are waiting for more clarity on Iger's next steps for Disney. Nelson Peltz's Trian Fund, one of the company's largest shareholders, has boosted its stake in Disney further and signaled another potential push for board seats after abandoning a proxy battle in February in a big win for Iger. ValueAct Capital has also built a notable stake in Disney and has reportedly been in dialogue with the conglomerate's management. With that as a backdrop, observers will listen out for possible new hints or guidance for what the next phase of “building” will bring after the problem-solving phase. Iger said on a recent earnings call: “While we still have work to do to continue improving results, our progress has allowed us to move beyond this period of fixing and begin building our businesses again.” In line with that, an internal memo said that the town hall would focus on “future building opportunities” for the conglomerate. “Combined with our portfolio of valuable businesses, brands and assets — and the way we manage them together — Disney has a strong hand that differentiates us from others in our industry,” Iger argued. But questions abound. “Disney is continuing on an ambitious cost-cutting strategy that likely is causing some uncertainty within the Magic Kingdom,” Third Bridge analyst Jamie Lumley warned in a recent report. “As the business looks to slash costs and make streaming profitable, there are sure to be concerns about cutting too deep and impacting the business going forward.” With that in mind, Wall Street will listen out for possible updates on various topics during the town hall. While Iger signaled no big acquisition plans a year ago, talk about potential deals has since moved into focus.
A wave of dealmaking has come to Europe, and corporate boards aren’t sure what to do about it. Listed European companies have received about $40 billion in takeover bids over the past three months, as everyone hunts for bargains in the region’s depressed stock markets. In several cases, the target’s directors can’t decide whether minority shareholders are getting a good deal. Medical diagnostics provider Synlab AG (SYAB) recently announced a private equity offer which its board believes does not reflect its long-term value. Munich-based Synlab said earlier this month its management and supervisory boards see a €2.2 billion bid from buyout firm Cinven as “inadequate” from a financial perspective, and two separate fairness opinions back up that view. Still, after the board held talks with other interested parties, Cinven’s offer was “the most attractive in the current environment,” and the German company said it appreciates Cinven’s support for its strategy. Synlab’s management and supervisory boards ultimately abstained from making any recommendation and concluded that each investor “has to decide for him- or herself.” All of Synlab’s management board will tender their shares. Elliott Investment Management revealed this week it’s built a position in Synlab. Its shares closed Thursday at nearly 11% above Cinven’s offer price. Given the economic climate and uncertainty, there’s a greater likelihood of a valuation gap between suitors and target companies, according to Nick Bryans, a partner at law firm Baker McKenzie. “For private equity suitors, many of the companies that are available now likely look cheap, but are probably cheap for a reason,” MKP’s Kelly said. “Many of the higher-quality companies that could be bought were bought when financing could be secured more cheaply and easily.”
In the last two years, the number of actions from the red states addressing ESG in the public pension context has significantly increased, according to Ropes & Gray. The recent surge can be attributed in part to both blue state activity and the backlash the Biden administration generated from its May 2021 directive to the Department of Labor to identify steps the agency could take to protect the life savings and pensions of U.S. workers and their families from the threats of climate-related financial risk. With anti-ESG laws, lawmakers are imposing limits on investment considerations and fiduciary discretion. Many red states opposed to ESG investing have also created restricted lists and several have enacted anti-boycott laws. Besides legislation and regulation, elected officials in many states have engaged in collective action to demonstrate their support for or against the use of ESG factors in public pension investments. While these state laws may seem contradictory, Ropes & Gray believes it is generally still possible for managers to thread the needle and continue to retain both red and blue state mandates. Managers will need to be measured and careful in communications, thoughtful when responding to state inquiries, and know what their contracts require.
Britain's corporate governance and accounting watchdog should weigh its effect on the nation's competitiveness and growth when writing rules, according to business minister Kemi Badenoch. Britain wants to bolster the global influence of its financial sector, a key source of taxes for the nation, as it faces competition from New York for listings, and more recently from European Union centers following Brexit. Following a backlash, the Financial Reporting Council (FRC) ditched much of a planned overhaul of its Corporate Governance Code which listed companies must use on a "comply or explain" basis. "At a strategic level, in fulfilling its core purpose to enhance public trust and confidence in corporate governance, financial reporting and audit, the FRC should contribute to promoting the competitiveness and growth of the UK economy, embedding its growth duty across its work," Badenoch stated in a letter to FRC CEO Richard Moriarty. Moriarty said he welcomed the new brief for the FRC. The Financial Conduct Authority and the Bank of England's Prudential Regulation Authority have both been given a similar competitiveness brief. London Stock Exchange CEO Julia Hoggett has described the governance code as "comply or else," with its lack of flexibility restraining investment in Britain. Badenoch said proportionality of any new requirements is essential, and that it is also important to withdraw or streamline rules and guidance that are no longer proportionate. "I would ask that you report back in a year’s time on the steps that the FRC has taken in promoting competitiveness and growth," she said. The FRC's stewardship code of asset managers should also operate in a "flexible way," Badenoch said. Moriarty said the priority was to complete the FRC's review of the corporate governance code, followed by a fundamental review of the stewardship code, making sure they are proportionate and that any "unnecessary or disproportionate requirements are removed or streamlined."
Pressure from Elliott Management has prompted Goodyear Tire (GT) to "actively pursue strategic alternatives" for its Dunlop tire brand, as well as its chemical and off-road equipment tire business. In its announcement in early November, Goodyear said it hopes to achieve gross proceeds of more than $2 billion from portfolio optimization. Goodyear also plans to close two plants in Germany. However, industry observers are doubtful regarding the prospects for the company's moves, at least in the near term. Goodyear's chemicals business mostly produces tire products and does not offer much added value, which may make it hard to find a buyer. Unlike its competitors in the U.S. and China, Goodyear has yet to tweak its business model so that it can offer other services with added value and improve its business prospects. Moreover, the acquisition of Cooper Tire in 2021 has not been a boon for the company. An increase in debt left Goodyear with little flexibility to pursue new business opportunities, industry experts add.
The U.S. Securities and Exchange Commission's Corp Fin on Nov. 17 released new CDIs relating to the proxy rules. The CDIs, found under the caption Proxy Rules and Schedules 14A, are all new except for the newly revised CDI under Rule 14a-6, and three new CDIs are on universal proxy. According to Corp Fin, for purposes of calculating the “10 calendar day” period in Rule 14a-6, the date of filing is day one pursuant to Rule 14a-6(k). A soliciting party can't satisfy Rule 14a-12(a)(1)(i) through a legend that only refers shareholders to a general reference of filings made by the soliciting party or the participants. A soliciting party can't use discretionary authority to vote the shares represented by overvoted proxy cards in accordance with that party's voting recommendation for the director election. A soliciting party can't use discretionary authority to vote the shares represented by undervoted proxy cards for the remaining director seats up for election in accordance with that party's voting recommendation. A soliciting party can use discretionary authority to vote the shares represented by a signed but unmarked proxy card in accordance with that party's voting recommendations. The determination as to whether there is a substantial likelihood that a reasonable security holder would consider certain information important in making a voting decision on a proposal ultimately depends on all the relevant facts and circumstances.
Japanese companies may struggle to meet rising expectations from global institutional investors amid change in board diversity standards, according to the latest report on Japanese corporates by MSCI ESG Research. Just one-tenth of MSCI Japan Index firms have reached the 30% female board member threshold that the government is seeking for top-listed businesses, according to Moeko Porter, the author of the report and vice president at MSCI ESG & Climate Research. That 30% level is already lower than the 40% target set by European peers, and the current situation could hinder Japan’s ambition to improve its standing as a global financial hub, she added. “While we are seeing gender diversity improving, there’s still obvious concern that the rate of improvement needs to catch up with what might be expected of them,” said Porter. Her comments came after Japan’s latest annual general meeting season demonstrated that pressure from institutional investors is already driving change, and shareholders are likely to push firms toward further change. Investors have become more critical of Japan’s remaining all-male boards, and seven companies within the MSCI index added a female director to their board lineup for the first time this year, according to Porter’s report. “This year’s proxy season shows that the lack of gender diversity can lead to investor discontent,” said Porter, who was also a researcher at proxy advisor Glass Lewis & Co. in the past. “A decade ago when I started covering corporate governance in Japan, it was unthinkable for a management proposal to fail or for a shareholder proposal to pass.” But increased investor scrutiny has now shifted to more concrete actions for voting against all-male boards, and pushing companies to be more open about what efforts they are making toward diversity, she added. Growing pressure from investors may outpace current efforts to increase the female talent pipeline in Japan. Compared to their male counterparts, female board members in the country are far more likely to hold seats at multiple firms, due to a perceived lack of talent that can fill those roles. In addition to the higher bar for gender diversity, overseas investors might look to the governance risk associated with long-tenured and aging directors, Porter’s report showed.
Sustainable investing seems to have fallen out of favor with Wall Street, given that investment returns were disappointing, regulatory oversight has increased, and environmental, social, and corporate-governance (ESG) investing has come under political fire. Tony Turisch, senior vice president at Calamos Investments, said, "This really is the result of too many managers looking to cash in on increased awareness and demand for ESG investments." Morningstar indicated that Wall Street ESG funds are being shuttered and liquidated as investors withdrew over $14 billion from sustainable funds in 2023, while others, like Hartford Funds' Core Fixed Income Fund, are removing ESG criteria from their practices. Sustainable funds were not alone in losing money, but they were hit harder than conventional funds.
“As I’ve looked at our overall output, meaning the studio, it’s clear that the pandemic created a lot of challenges creatively for everybody, including for us,” Walt Disney Co. (DIS) CEO Bob Iger said last week during Disney’s earnings conference call. “I’ve always felt that quantity can be actually a negative when it comes to quality, and I think that’s exactly what happened, we lost some focus.” Iger followed his comments with a new mandate: Disney will be making fewer films. It’s a similar strategy to one Iger took when he first became Disney CEO in 2005. At the time, Disney’s animation and live-action studio divisions had struggled with a string of failed movies. Iger’s solution then was to cut 650 studio jobs and slash its annual movie production output in half, releasing only about a dozen films each year. He also acquired Pixar, giving Disney an immediate infusion of quality movies and a brand of storytelling that rubbed off on Disney’s traditional animation studio. Iger appears to be re-running the playbook for 2024. After flooding Disney+ with movies and other new content for several years, Iger is strategically cutting back to accelerate free cash flow generation and profitability. Disney eliminated animation jobs in June — the first significant cuts in about a decade — as part of a larger round of job reductions. After releasing four Marvel Cinematic Universe movies in 2021 and three in 2022 and 2023, Disney will have just one in 2024. There hasn’t been a Star Wars movie since 2019. Disney will need to improve organically, putting pressure on Iger and studio head Alan Bergman to show results as activist shareholders Trian Partners and ValueAct threaten to pressure management and the board. “I feel good about the direction we’re headed, but I’m mindful of the fact that our performance from a quality perspective wasn’t really up to the standards that we set for ourselves,” Iger said last week. “And so working with the talented team at the studio, we’re looking to and working to consolidate, meaning make less, focus more on quality. We’re all rolling up our sleeves, including myself, to do just that.” Disney houses its studio business in a division it calls “Content Sales/Licensing and Other.” This includes Disney’s theatrical business along with home entertainment and selling film and TV content to other third-party TV and subscription streaming services. In its most recent fiscal fourth quarter, Disney reported an operating income loss in that division of $149 million, which it attributed to “the performance of ‘The Haunted Mansion.’” In its fiscal third quarter, Disney claimed a “Content Sales/Licensing and Other” operating loss of $243 million. A quarter before that, Disney lost $50 million, and $98 million in the quarter prior. If Disney’s shift away from quantity toward quality doesn’t deliver stronger box office numbers, Iger may start facing investor and collaborator pressure to make leadership changes, potentially putting Bergman on the hot seat.
The SEC has been looking the other way when proxy advisers have allegedly misled investors, according to the Wall Street Journal editorial board. The editorial claims Glass Lewis and Institutional Shareholder Services are in essence a duopoly that often make material analytic and factual mistakes in their voting recommendations. "Even when public companies have notified the firms and the SEC of the errors, the proxy advisers have failed to correct them or change their voting recommendation," the editorial says, citing a new report by the American Council for Capital Formation (ACCF). During the 2023 proxy season, at least 64 complaints about inaccurate proxy adviser recommendations were filed with the SEC, up from 50 in 2021 and 40 in 2020. The ACCF report suggests these complaints are likely the tip of the iceberg “because companies — unlike proxy advisers — must assume legal liability to submit a filing” to the SEC. "The ACCF documents proxy advisers' numerous errors, which stem from a combination of sloppiness and one-size-fits-all voting guidelines that 'fail to capture the nuance' about specific company issues," according to the editorial. Former SEC Chairman Jay Clayton required that proxy advisers notify their investor customers of company statements alleging errors in voting recommendations, but current agency head Gary Gensler scrapped the Clayton rules, saying they imposed undue “burdens on proxy voting advice businesses.” The editorial concludes that "the manifest reason that Glass Lewis and ISS enjoy a government-protected duopoly is because they promote the progressive agenda against corporate America."
Hispanic board representation is still proportionately low despite a significant increase in recent years, according to Institutional Shareholder Services. There has been a consistent trend toward increased Hispanic representation across all market cap groups, but the large cap S&P 500 is the only segment where representation exceeds 5%. There are currently almost 1,000 Hispanic directors at Russell 3000 companies of whom approximately 360 are women. The average age of Hispanic/Latin American directors is 60, two years less than the average for all other directors. Many Hispanic directors are also new joiners to the board, with half of these directors having tenure of less than three years (compared to 33% of all directors). Only about 29% of Hispanic directors are appointed to a leadership role inside the board, compared with 41% of their non-Hispanic peers. Hispanic directors don't hold more than 10% of the board seats in any industry. ISS's findings indicate that Hispanics continue to face significant barriers to inclusion and representation in corporate boards.
Third Point sees the opportunity in credit as the most attractive since 2020, with yields now at high levels, according to its third quarter letter to investors. While spreads are "not extraordinarily wide," the strength of yields combined with dispersion between "high quality" and more complex situations provides a strong opportunity, chief executive and chief investment officer Daniel Loeb explained. Loeb said there is a range of opportunities in "improving credits with 'bulletproof' securities" by virtue of their seniority, security, or both, and that he has focused on "relatively defensive" industries including health care and telecoms. "We also have concentrated on credits that face challenges in their capital structures or businesses that we believe are temporary and relatively easy to overcome," Loeb added. Interest in structured credit has risen due to rising rates. Money managers and insurance companies first spotted this opportunity earlier in the year, he said. Across asset-backed securities, Third Point has focused on the commercial real estate sector due to increasing default rates and loss severities in recent months.
The U.K.'s share ownership system is keeping companies from engaging directly with retail investors. However, 44% of companies want easier access to nominee shareholder data, and 43% are asking for government support to reduce administrative hurdles, according to new research from Lumi, a global specialist in delivering in-room, hybrid, and virtual annual general meetings, investor meetings, and member meetings. One-third of companies say they are facing shareholder backlash due to the current system and 32% fear investors will sell their shares if they can't attend company meetings. With the emergence of DIY investing apps, the percentage of U.K. shares owned by individual retail investors has surged to 13.5%, marking a 32% increase since 2010. Three in 10 (37%) companies lack information about their shareholders' demographics, making it difficult to understand their investors. As a result, 75% of retail shareholders openly admit to feeling uncertain about voting on resolutions at AGMs due to the limited information available to them.
Equity trusts facing corporate action will need to watch their back as Stifel predicts Saba Capital will announce more stakes in these companies as its strategy for the UK investment trust market begins to take shape. Saba has made itself known among UK investment trusts by declaring positions in 10 equity funds, many of which have been established through the use of derivatives, such as total return swaps. Stifel said this focus on equity funds is deliberate and "reflects a strategy of hedging, or shorting, the underlying company exposure in the trusts" either by investing directly in the stock or holding an exchange-traded fund as a proxy for the portfolio. "We expect Saba to declare positions in more trusts as it invests additional capital," said Iain Scouller, investment companies analyst at Stifel. "Trusts with corporate action coming up — eg, continuation votes — appear likely targets." So far, European Opportunities Trust (EOT) is the only trust about which Saba has made a public comment. In two letters to the board ahead of the trust's continuation vote on Wednesday, it called for Alexander Darwall's fund to return capital to shareholders. Saba has been partly successful given the sweetener the board has offered in the shape of a 25% tender offer if the continuation is passed. Saba has called the offer woefully insufficient and said it should be doubled. Stifel calculated that Saba has about £500m to invest in London-listed investment trusts and appears to be "looking to bolster this firepower by raising a further $500 million [£403 million]. ... However, even with the use of leverage, we think Saba will need quite a few “quick wins”, recycling of capital and a significant narrowing of discounts to reach its 20% [internal rate of return] target." Scouller said focusing on equity-based trusts is a tough strategy as long-term shareholders in trusts that "have had relatively stable discounts and reasonable performance" are unlikely to be looking for a quick exit. However, he added Saba "may have some success in trusts with a large direct private investor base given these tend to be relatively passive shareholders and Saba's stakes of 10%-plus could have a disproportionate impact on votes, where turnout is low."