Monday, August 06, 2007

IR Magazine: Activists with Attitude

From IR Magazine:

Aug, 2007

By Clare Harrison in London and Anna Snider in New York

Takeover battles have long been the classic way to challenge corporations, but they cost millions and can get messy. Minor stakeholders making behind-the-scenes approaches to management often can’t get a meeting. Now some rogue investors are refusing to be marginalized, finding opportunities to stir up trouble by launching hard-hitting, election-style campaigns backed up with a generous helping of publicity.

It’s not hard to do in the internet age. Since April, small shareholders in Vodafone, Yahoo, Aquila, Friendly’s Ice Cream and AIM-listed Torex have been using websites, blogs, bulletin boards and even YouTube to organize broader investor rebellions. While it is unclear precisely how much effect they’ve had, they are getting attention. Proxy advisers say this type of activist attack may become commonplace, particularly as companies and shareholders begin choosing to communicate by e-proxy.

In April Connecticut-based hedge fund Pirate Capital put up a website,, dedicated to generating opposition to the sale of utility Aquila to Great Plains Energy. The Texas-based Lion Fund also began publicizing its interest in two board seats at Friendly’s on In the UK, Efficient Capital Structures (ECS) followed suit with, which lays out ECS’ radical plans for Vodafone.

New-age techniques

The sites drew their share of commentary in the financial press, in part because of their novelty. But they also gained notice because their slogans and posturing were more reminiscent of political campaigning than anything seen before in financial markets.

‘The logistics of communicating with shareholders is difficult so we are using modern techniques like websites and email to reach them,’ notes Glenn Cooper, chairman of ECS. ‘My background is in corporate finance and these days we are regularly using websites and chat rooms to monitor investor sentiment.’

Eric Jackson, who led the assault on troubled Yahoo, said he consciously studied grassroots political campaigns before selfbroadcasting irreverent spots explaining his ‘Plan B’ on YouTube.

‘I was surprised these techniques hadn’t really been used in the shareholder realm,’ he says. The UK Shareholders Association (UKSA), which represents private investors, also made full use of online media during its battle with Torex. ‘You can get a lot of publicity quickly by using bulle-tin boards and the internet in general, and setting up your own website helps enormously,’ remarks Roger Lawson of UKSA.

Retail investors seem to be benefiting from the support of their larger institutional peers, too. ‘I think institutions are becoming more amenable to working with private investors,’ Lawson adds. ‘If you take the case of ABN Amro, it was the VEB, the Dutch private investors’ association, that attacked the firm initially, but it was greatly helped by the support of a larger resource-rich institution.’

Jackson defends small shareholders like himself against accusations they are part of a lunatic fringe. He says he and his fellow activists are just asking questions on behalf of those who have opinions but lack the political will to act on them. Indeed, there were many current and former Yahoo employees who sent him private messages of support and share pledges, he maintains.

Global activity

The good news for activists lacking in financial clout is that this trend is not confined to Europe and the US. In Japan investors scored a first in Japanese proxy history when they reversed a merger agreed upon by the management teams at Tokyo Kohtetsu and Osaka Steel. The battle saw the recently launched Ichigo Asset Management become the reluctant star of one of this season’s most watched proxy fights. ‘We met with management to try to avoid a proxy fight but, unfortunately, we failed,’ remarks Scott Callon, founder of Ichigo. ‘Although we led the campaign, it was the individual retail shareholders of Tokyo Kohtetsu who stood up to be counted as their votes were worth twice ours.’

Small activists may not always be able to replicate the situation with Kohtetsu and force a company to change direction. But they are succeeding in shaping strategy by making a democratic process out of company decisions that traditionally have not been up for debate.
Patrick McGurn, senior vice president and special counsel for Institutional Shareholder Services, says the internet is giving the activists leverage. ‘In light of e-proxies, this type of activity is going to grow exponentially,’ he predicts.

Jackson says his ability to amplify his small stake shows that tiny shareholders can secure more status. ‘Before, the conventional wisdom was you had to have 2 percent to 10 percent in a large company or you wouldn’t be listened to,’ he says. ‘Now what seems more important is the quality of the argument.’ Cooper agrees. ‘We’re not like some hedge funds that say they’re really important because they own 5 percent,’ he says. ‘We’re saying these are really important issues on which shareholders should have a vote.’

Cooper and his colleagues used section 376 of the UK Companies Act to allow them to put resolutions to Vodafone’s AGM. ‘Under that article, 100 shareholders holding a minimum capital of approximately £350,000 ($711,526) between them may put resolutions to the general meeting,’ he explains.

The 210,000 shares ECS bought initially constituted what Cooper calls a ‘minuscule’ stake in Vodafone – which has a market cap of nearly £90 bn – but in the game of proxy battles, size isn’t everything. ‘Our whole company is less than a fifth the size of Vodafone’s PR department,’ Cooper adds.

Garnering support prior to going public with a resolution is difficult for any activist investor. To get around this problem, ECS commissioned a third party to gauge investor sentiment toward its proposals in advance. The researchers asked investors how they felt about issues relating to the capital structure at Vodafone. ‘We took comfort from the poll results that showed shareholders felt passive stakes should be spun out to shareholders, which is what we were suggesting,’ remarks Cooper.

Technological advantage

Back in the US, with developments coming out his way at Yahoo, Jackson says he now has a few mid-cap companies on his radar. He acknowledges that his fifth YouTube campaign might not attract the same attention as his first. ‘There are going to be diminishing returns,’ he concedes. ‘For whatever reason, people like to write and read about Yahoo.’

McGurn agrees. ‘Yahoo also has a very techno-savvy shareholder base,’ he adds. ‘YouTube may not be as effective in other situations.’ But Jackson sees continuing media interest: ‘You may see campaigns by larger shareholders over the internet. The attention they get may be driven by who the shareholders are.’

In any case, the infrastructure for dissident campaigns is only improving. Mike Dever, co-founder of, says he wants the Yahoo effort to be the first of many. ‘We’re going to make shareholder activism a stand-alone category of campaign starting in August,’ he says.

Electronic distribution of the proxy statement, which will be a mandatory offering to most US shareholders next year, could play a huge role here as well. The advent of e-proxies brings the dissident campaign down ‘to zero cost,’ at least when targeting shareholders who don’t ask for paper proxies, McGurn says. That’s a big shift: at a recent SEC roundtable, activist investor Stanley Gold of Shamrock Holdings said his 2004 campaign to get Michael Eisner off the Disney board cost $2 mn in US postal fees alone.

Swingvote, a shareholder communications firm, even has a new technology to reach out confidentially to street-name shareholders typically walled off from direct solicitation by their brokerage firms. Swingvote’s senior vice president of business development, Carolina Menezes, says she expects dissidents to use this solution plus additional Swingvote technology to embed video, audio or plain text outlining their views directly in online ballots.

McGurn will be there to take note. ‘We like to bring dissident campaigns to the attention of our clients,’ he says. ‘We’ll make an effort to do that in the future as more investors avail themselves of internet outlets.’

So be warned: it may well be worth arranging a meeting with your small shareholders before they go public with a YouTube campaign that captures the imagination of thousands of investors. Fail to do so and you could have a mutiny on your hands.

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