Examining the Convergence of PE and Shareholder Activism Through the Investor Agreement Between Senator and Cannae (Foley) at CLGX
Disclaimers: https://www.transactionaldelights.com/disclaimers
There’s been some talk regarding the convergence of shareholder activism and private equity. Your initial thought may be one of surprise. PE shops have a reputation that they need to uphold as decidedly not hostile bidders because they want to be repeat players, while most Shareholder Activists take a more aggressive and sometimes hostile approach towards their investments[1]. Each can be successful vis a vis their respective competitors, in part, if they uphold this reputation which serves as kind of a flywheel for their investments. As a PE shop, if you are friendly, a company may not be as uptight about a possible sale, and therefore more opportunities may come to you. As an Activist, if you are hostile and show a willingness to back the bark, a company may be more likely to settle with you and therefore you can avoid costly proxy contests[2]. And if both of those things happen repeatedly, respectively, then you’ll probably find yourself some investors.
But, that reputational point aside let’s take a look at how folks talk about how these two strategies can converge. The typical examples that folks typically use are: financial buyers could adopt activist toehold strategies (i.e., minority positions)[3]; activists could create their own acquisition vehicles[4]; or an activist investor could team up with a firm to support a bid.
The latter example is what happened with Senator and Cannae at CLGX. Senator’s campaign is led by Quentin Koffey, who spent time at Elliott and D.E. Shaw. Cannae is led by Bill Foley, a guy who has done some buyouts in his life.
The two investors formed a 13D group and filed their investor agreement, so we can examine the legal basis for the team up and how that model played out at their CLGX campaign. The Investor Agreement is a pretty basic legal document. Here are the most important legal terms and concepts based on how the CLGX matter played out:
Share Lockup: Neither Senator nor Cannae can sell any of its shares, swaps, or derivatives unless one of two events occurs, a Termination Event or an Offer Abandonment.
Forced Voting: Senator and Cannae both have to vote for a Company Transaction, and in favor of any nomination or proposal submitted by Senator.
Company Transaction: an acquisition of CLGX by Cannae.
Termination Event: the earliest date to occur amongst: shareholder approval of a Company Transaction, one year from the date their first 13D was filed, a violation of securities laws (for example, insider trading which is a heightened risk in the context of a tender offer), a material breach of the agreement by either Senator or Cannae.
Offer Abandonment: Cannae abandons its pursuit to acquire CLGX for $62.50/share (or greater).
Shares, Swaps, and Derivatives: They are treated the same for purposes of the lockup on Senator and Cannae’s shares. Senator had 5% ownership in economic exposure.
Now that we have those summarized, let’s take a look at what happened at CLGX:
6/26/20: Senator/Cannae deliver an unsolicited offer to CLGX of $65/share. The closing price on the day before is $52.93/share.
7/7/20: CLGX undertakes some defensive maneuvers including adopting a poison pill, forcing Senator and Cannae to launch a special meeting to take over the board of directors[5].
Note that Senator and Cannae never launch a tender offer, perhaps to avoid some of the heightened risk from insider trading, but also because their offer price of $65/share was quickly eclipsed by CLGX’s market price.
7/30/20: Senator/Cannae file their preliminary solicitation to call a special meeting to replace the CLGX board and dismantle the pill.
9/14/20: Senator/Cannae increase their bid by $1 to $66/share. The closing price on the business day before that offer is $66.59/share.
10/28/20: CLGX announces it is engaging with third party acquirers with an offer of at least $80/share.
10/30/20: ISS recommends that shareholders vote against replacing a majority of the board[6].
10/30/20: Senator and Cannae abandon their bid following CLGX’s announcement regarding the higher price.
11/17/20: Senator and Cannae lose the proxy contest, but still receive a decent consolation of putting three of its nominees on the board.
11/23/20: Despite losing the bid and proxy contest[7], Senator and Cannae announce that they will be monitoring the strategic review process, and threaten a consent solicitation should there be “unexplainable delays” in the review. In the same press release, they also announce that they will be reducing their economic position “as part of our ongoing portfolio management” which includes settling cash-settled swaps equal to 135,376 shares of common stock.
12/2/20: Senator / Cannae file a 13D announcing that they have chosen to settle swaps equal to 1,024,851 shares of common stock thereby reducing their swap position to 2,782,583 shares of common stock.
With the benefit of hindsight, from the perspective of the investors, the most important aspect of the agreement is probably the share lockup and Senator’s decision to purchase 5% of its share in swaps. That’s because the swaps served as a release valve for Senator after Cannae abandoned its offer for CLGX. Senator was able to settle some of those swaps to lock in some profits and maintain the same voting level it would need to threaten a possible consent solicitation if it doesn’t like the way the review process goes. In addition, the swaps allowed Senator to avoid the 10% threshold of the pill[8]. My view is that Senator and Cannae were thinking about the possible ways the bid could go, and made a decision to enter into an agreement that allowed flexibility for the potentially diverging interests between investors.
The diverging interests stem primarily from the differing motivations of Senator and Cannae. As an activist, Senator is interested in short term gains (balanced by the reputation it would like as a serious bidder should it try to repeat the play) while Cannae might have been more interested in owning 100% of the business rather than 15% of the business if it saw things that it could fix from an operations / management point of view.
How did the agreement deal with some of those differing motivations, and how did that play out? The only way for Senator to sell its economic exposure was after Cannae abandoned its offer, since there was no Termination Event[9]. That means that Cannae knew it had Senator’s backing in its ultimate hope for an acquisition.
On the other hand, did the strategic optionality in the investor agreement/swaps also signal a lack of buyer conviction? What the investors sacrificed for flexibility may have been the appearance of (or) actual conviction needed to get a hostile acquisition all the way through. Swaps mean that a potential bidder may not have the same ownership incentive to push an unsolicited bid through (from a strategic perspective) because that extra 5% doesn’t grant any voting rights that the bidder could use in a proxy contest or a consent solicitation. It could be perceived as the mark of a short-term investor looking to sell at the opportune moment[10], something that doesn’t plague a more serious bidder. Targets don't like buyer optionality; they want commitment and that's especially important when it is an unsolicited bid. That’s another divergence between PE and shareholder activism, the long-term view vs. the short-term view, or as it might have played out here, profit from the swaps and shares (15% of CLGX) vs. profit from the acquisition (100% of CLGX).
So, what is happening now? The investors are in a pretty good spot. They have three members on the Board, they are still invested in CLGX while selling down some of their swaps, and CLGX is promising a review of the third-party bids while the investors supervise and hold a quarter loaded gun to CLGX’s head (the consent solicitation). In many ways the investors ran the smart play, but it's also one that led to a consolation. They can't win the big prize anymore, but they can still win something.
[1] At least in public.
[2] Reputation is an important distinction, but not insurmountable for the convergence. This is also a generalization and some activists do very well without having a rabid approach. Of course, not all Activists take the same approach, or use the same tactics, but this is not the article for that discussion.
[3] KKR.
[4] Elliott’s PE arm.
[5] Here’s a piece I wrote on some of the clever defensive legal maneuvers from CLGX.
[6] How much of a factor did public news of an alternative bid play into an ISS determination?
[7] I say lose, but Senator and Cannae won a moral victory with their efforts and then some. Their actions (whether direct or indirect) led to CLGX popping in price… and they had a 15% stake before they started selling.
[8] If you look at the pill, derivatives are defined broadly to include cash-settled swaps under the definition of Beneficial Owner. However, the trigger is for a Beneficial Owner who owns 10% of “Common Stock”. How is Common Stock defined? It is defined to include only the common stock of the Company, and not derivatives, meaning that Senator and Cannae’s 15% ownership (9.9% in common stock and 5% in swaps) did not trigger the pill.
[9] There didn’t appear to be a termination event based on what I could review from the public disclosure.
[10] The opportune moment follows the pricing pop following the announcement of a public bid for a public target. Of course, the bid has to be legitimate to see upward movement. I am not doubting the legitimacy of the bid.
