Hedge funds and other activist investors wishing to acquire seats on corporate boards of directors and to drive performance are behind an increase in corporate legal work.
Activist investors, particularly hedge funds, are driving an increase in legal work which is the natural result when sophisticated investors make demands and initiate proxy contests to acquire a seat on the board of directors. Naturally, this creates a lot of work for attorneys who advise the parties on these matters and who may continue to provide counsel related to investor proposals after any proxy fight has been resolved.
Hedge funds want to get value from their equity portfolios so they search for new investment opportunities in equity markets, buy the stock and develop plans to help the targeted companies maximize profits. Theses fund managers believe that they have the philosophy and expertise to increase performance at undervalued companies.
The good news for lawyers is that when one hedge fund targets a company, others frequently become interested in the same company. And when multiple hedge funds invest in the same company shareholder activism increases as well. For example, Steel Partners recommended that missile propulsion manufacturer, GenCorp Inc. add noted Delaware corporate law expert R. Franklin Balotti to the board in 2005. Then, in 2006, another fund, Pirate Capital, launched a successful proxy fight to replace three directors, including Mr. Balotti.
Proxy disputes typically give rise to work for several firm practice groups and additional firms with expertise in the corporate law of the state where the company is incorporated may also be needed. Depending on where a company’s primary outside firm is located, and since US state laws regulate director-election issues, local counsel may need to be retained if the company is based in another state.
Investor groups are also examining corporate merger plans. For example, Caremark Rx Inc. shareholders asked the Delaware Chancery Court to force the company to disclose more complete and accurate information about its planned merger with CVS Corp. Following the court’s ruling Caremark released more information and postponed the merger vote.
Last year, a group of shareholders pushed to reinstate a former President and CEO and replace the entire board of Competitive Technologies Inc. During this shareholder uprising, the company’s board did not know what they supposed to do and as a result they relied on counsel extensively. One board member, Maria Maccecchini, a scientist and “angel investor” said the board was “taken aback” by all the rules and regulations associated with a proxy fight.
Proposed Securities and Exchange Commission (SEC”) and New York Stock Exchange (“NYSE”) rule changes for proxy contests will increase the leverage of investors by easing the board election hurdles faced by outsiders.
To provide parties engaged in proxy campaigns a less expensive alternative than using the mail to collect shareholder votes, the SEC will allow these parties to distribute proxy materials over the Internet. The SEC is also engaged in a comprehensive review of the rules surrounding the proxy process and specifically working to clarify a rule that allows companies to exclude certain shareholder proposals from company-issued proxy materials in light of a 2006 2nd U.S. Circuit Court of Appeals decision which held that the SEC was wrong to recommend that insurer American International Group Inc. would not face enforcement action if it excluded an investor’s proposal.
In addition, NYSE is contemplating changes to the proxy process to facilitate good corporate governance, including a recommendation to eliminate broker discretionary voting that allows brokers to vote on routine matters, such as the election of directors, if they don’t receive shareholder instructions 10 days before the shareholder meeting. And more and more companies are also changing their bylaws or adopting policies to require a majority vote for the election of directors, rather than a plurality vote.
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