Fighting back against activist investors is no easy task, especially since it is often hard to detect their presence. A fund manager might ramp up from a passive to an assertive stance so quickly that executives could find themselves in the middle of a proxy firestorm before they even know it.
Part of the difficulty in predicting activist moves stems from the latitude that 13-D forms provide. The forms must be filed and mailed to the SEC within 10 days after a hedge fund buys more than 5 percent of a company’s voting equity with the purpose of acquiring or influencing its control. But the 13-D permits the fund to state its purposes in the broadest possible terms — such as merely wanting to discuss the company’s direction with the board or monitor changes on a regular basis.
“We certainly see a large number of interventions that are very vague initially,” observes Brav.
Much tougher to detect are hedge-fund managers who pursue activism without seeming to do so. They can, for instance, quietly amass large holdings in a company in preparation for an activist move without actually filing as an activist, though a fund that manages more than $100 million in securities must report its holdings to the SEC on Form 13-F within 45 days after the last day of each quarter. Unlike 13-D, however, the form doesn’t ask for information about the fund’s intentions. A hedge fund can also hide its identity as a shareholder by requesting confidential treatment from the SEC to protect its investment strategy, says Adam Gale, a lawyer with Orrick, Herrington, — Sutcliffe in New York, though such treatment is hard to obtain.
Another legal tactic that can anger management is hedge funds’ borrowing of shares to change the outcome of shareholder votes. Called “empty voting” or “vote morphing,” such moves enable funds to hold voting rights in companies in which they have little or no economic interest. A cottage industry of companies that facilitate share lending has cropped up to service such aims. Pension funds, which can often benefit from the actions of activist hedge funds, can make millions by lending out their shares.
Short of stiffened shareholder-disclosure rules or voting mandates, companies may not be able to do much to curb the negative effects of this kind of activism. But managements and boards can attempt to protect themselves from destructive confrontations with funds that have a genuine economic stake in the company.
In the most extreme cases, that may mean circling the wagons. A strong activist sally “warrants the same kind of preparation as for a hostile takeover bid,” wrote Martin Lipton, the father of the poison pill, in a recent advisory memo. “In fact, some of the attacks are designed to facilitate a takeover or to force a sale of the target.” Among the tactics he suggests: create a team to deal with hedge-fund activism and run periodic “fire drills” to maintain a state of readiness.