Disclaimers: https://www.transactionaldelights.com/disclaimers

Here are a few notes and connections on the investor and public company landscape, including some thoughts on stakeholder activism and the “S” in ESG:

• On November 13, Elliott and DUK announced a cooperation agreement for the appointment of two directors to DUK’s Board, in addition to one director to be named by March 31, 2022 that is mutually agreeable to DUK and Elliott. Prior to the cooperation agreement, according to Bloomberg, Elliott had sought to split DUK into three companies in order to unlock $15 billion in value, and criticized DUK for CEO Lynn Good’s “excessive compensation”. For now, Good remains.

  • If you recall, a few months ago I noted how Elliott’s termination period for its standstill would be worth watching out for. That may have been a one off though, as here the cooperation agreement has a standstill period based on time (30 days prior to the nomination deadline) – with an important exception (among others) that the period will end if DUK enters into a change of control transaction.

• Elliott has also been busy with a variety of other matters domestic and abroad, and its co-CEO Paul Singer has a few notes on with what he’s seeing in the public markets on stakeholder capitalism stating that “the fundamental rights of owners are increasingly being pressured due in large part to the efforts of well-compensated corporate advisors and lobbyists, who masquerade as advocates for a new, more enlightened capitalism." In contrast, Singer views his role as an activist that “influence[s] outcomes” and “make[s] things happen” in order to increase a company’s share price and “hold its gains”.  

• Singer’s view that “shareholder rights” are being pressured stems from the relatively new concept of stakeholder rights put forth by Jamie Dimon and the Business Roundtable; which is a normative concept that seeks to enhance the rights of stakeholders other than shareholders (direct owners of the company), similar to the actual legal construct of a Public Benefit Corporation. Historically, there have not been many of these PBCs, so Chobani going public as another is important milestone[1].     

• Singer’s notes on public markets don’t just extend to stakeholder rights, but also to index investors, who have been typically viewed as competition (or maybe an existential threat) to active managers. Here Singer implies that activist investors and index investors need each other (mutualism, commensalism, or parasitism?), stating that index investors “cannot catalyze improvements in individual company performance, given the huge number of companies their governance teams must cover… Indeed, index investors need activists even more because the former cannot sell the underperformers in the index. The refrain ‘if you don’t like the management, just sell the stock’ never made much sense to us anyway — why not use your rights as an owner to interact with management teams and try to effect changes?’”

• Singer’s relationship with BlackRock’s Larry Fink, thus, is an interesting one and the general relationship between entities (activist investor and index investor) is very much a large part of the focus at every single major proxy contest. Fink himself, has had some interesting comments on public markets and ESG, stating that “the climate transition presents a historic opportunity. By BlackRock's research, the transition could drive as much 25% higher cumulative GDP growth over the next two decades alone. It represents an investment opportunity of at least $50 trillion." You think Singer and Elliott might be interested in that $50 trillion climate transition opportunity?

• ESG as a tool brandished by Activists in the public markets’ best and first example is Engine No.1’s campaign at XOM. Thus, it is interesting news that Charlie Penner is leaving Engine No. 1 after its June victory. On the flip side, former Canadian PM, Stephen Harper is starting new activist hedge fund, Vision One, with Icahn protégé Courtney Mather, that will target mid-sized PubCos and try to create value through governance improvements.

• While Engine No.1, put the “E” In ESG, is SOC[2] at ATVI going to put the “S” in ESG? At ATVI Bobby Kotick, CEO and Founder, doesn’t own a lot of shares (less than 1%). The timing is certainly good for SOC (or for a more significant dedicated activist) as the nomination window doesn’t open until Feb. 14, 2022, and doesn’t close until March 16, 2022[3]. According to the Washington Post, the allegations leading to the SOC letter at ATVI include quite a few “S” issues including: gender discrimination, failure by Kotick to disclose to the board misconduct allegations, and a “systematic.. hostile workplace culture”, ultimately leading to a 110-employee walkout and protest (the second employee walkout in the past four months). SOC’s letter to the Board makes a series of demands including: (i) increasing board diversity and reserving at least one board seat selected by employees (guten tag[4]); (ii) clawing back exec comp from execs engaged in “abusive behavior”; and (iii) undertaking a company-wide Equity Review. Of course, SOC doesn’t have the cache as a real activist, but it may be opening the door for someone it hopes walk through. Alternatively, could this be signaling a new form of activism - Stakeholder Activism?

• Who knows if ATVI will make it to a vote? But, if it does go that route Universal proxy cards are on their way. As a result of recent changes in SEC rules, contested elections will feature universal proxy cards that identify all nominees for the upcoming election, rather than separate cards for each respective side (company side, dissident side)[5]. Although notable proponents of institutional investors, Calstrs, and CII, have applauded the adoption, I view the adoption as relatively neutral depending on the facts. Don’t forget Jeff Smith of Starboard argued against it a few years ago… but, the universal ballot adopted by the EQT and Rice dissidents from two years ago, was the first example of dissidents winning with the Universal card. Of course, for those who always look forward to getting the white card first, don’t worry, that remains in play. But not so much for those who like playing the game of whether the dissident’s nominee has consented to being named in a company’s proxy statement.

• Speaking of contested elections, In Japan, hostile takeovers might also get a legal makeover. Japan’s supreme court recently made a ruling allowing Tokyo Kikai Seisakusho, a manufacturer of newspaper printing presses, to adopt a poison pill takeover defense diluting the company’s top shareholder. According to Reuters, “Tokyo Kikai can now issue new shares that would dilute the top shareholder’s stake of 40%, a measure already approved by shareholders in a controversial vote that excluded the top shareholder.”

• Finally, and on the theme of proxy contests, I was also going to include something on the SEC’s rule proposals on proxy advisors, but basically its just… things were going to change, and now, not so much.

[1] Separately, the WSJ has noted that the market for PubCos has done something it hasn’t done in years, it has gotten bigger.

[2] The Strategic Organizing Center Investment Group (formerly known as CtW Investment Group), whose letter also included signatures from Future Super, NEI Investments, Shareholder Association for Research and Education (SHARE), and Verve Super. This is a page out of Engine No. 1’s coalition of stakeholders at XOM.

[3] “The shareholder must also be a shareholder of record of Activision Blizzard at the time notice is given. For such a nomination to be considered timely, we must receive it no earlier than February 14, 2022, and no later than March 16, 2022 (unless the date of our 2022 annual meeting is advanced by more than 30 days or delayed by more than 30 days from the anniversary date of the Annual Meeting, in which case the notice must be submitted no earlier than 120 days prior to the meeting and no later than the later of the 90th day before the meeting and the 10th day following the day on which notice of the date of the meeting is first mailed to the shareholders or public disclosure of the date of the annual meeting is first made, whichever first occurs).”

[4] If you get this reference, this blog is for you.

[5] Here’s a good summary of the revised rules.