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When the Securities and Exchange Commission introduced a rule change to make it easier for shareholder activists to elect board nominees, there was a notable dissenting opinion from one of its commissioners.
Hester Peirce warned that the change would favor vested interests rather than enhance the value of the company. Using a lighthearted example, she said even an activist passionate about issues surrounding bees would have leverage to demand that companies “put beehives on the roof of every office building”.
The new rules have been in effect since last September. So far no known proxy battles over hives. But activist shareholders made advances on corporate boards in a busy year for proxy clashes in the United States.
Activists won 88 board seats through May 31, up from 77 at this time last year, according to Diligent, a data provider. Big corporate activists like Nelson Peltz’s Trian and Elliott have also won concessions from Disney and Salesforce respectively without securing board seats.
And on Monday, a tussle between an activist investor and Masimo, a small medical device maker, will culminate in the company’s annual shareholder vote. Politan Capital Management, led by New York-based activist investor Quentin Koffey, alleged that Masimo’s corporate governance was broken and the company needed more independent oversight. Politan named Koffey and another nominee to Masimo’s board. The fight will be the key test of a change in corporate governance influenced by the SEC rule change.
For activists, the new “universal proxy” rule ensures that all board nominees will appear on shareholder ballots at a company’s annual meeting. It also allows shareholders to pick and choose individual directors. Previously, unless shareholders showed up in person at an annual general meeting, they were forced to vote for a slate of company candidates in contested elections or for those of activists.
Universal proxy voting rules have raised concerns among corporations that would-be activists — environmentalists, unions and human rights activists — would have an easier time waging proxy campaigns. Hester argued that any activist “just has to dangle the possibility of buying a few shares and proposing directors to scare management into the trading room.”
For months, major Wall Street law firms have warned clients of boardroom chaos, predicting that non-traditional activists will try to appoint directors. Fears peaked when a former Warner Music executive launched a campaign in early December to run for a seat on the board, building on the change in the universal proxy rule. Fearing a rise in activism, hundreds of companies have rewritten their corporate bylaws to make life harder for activists.
Some changes to the statutes have required more information from activists, especially about their funders. Masimo approved these changes last year, and in October, Koffey sued the company to cancel its statutory changes. Masimo eventually relented and allowed Koffey’s nominees to proceed to a vote on Monday.
“Companies were weaponizing their bylaws far more than ever,” said Elizabeth Gonzalez-Sussman, vice president of activism practice at the Olshan law firm.
But while the bylaws changes might drive away unsuspecting activists, they only offer a false sense of security. If activists splurge in a court battle against arcane bylaw changes, then those defenses will prove beatable, says Lazard chief executive Richard Thomas.
“If the juice was worth it, it will be worth it no matter what the regulations say,” he says. “You really don’t avoid a problem just by changing the regulations.”
The successes of activists in winning more board seats this year also show that shareholders and mainstream asset managers approve of the need for board overhauls at some companies. On the battle for Masimo, asset manager Neuberger Berman has already said he votes for Koffey, who previously worked at DE Shaw and Elliott Management, and his other candidate, citing concerns about the company’s corporate governance.
Shaun Mathew, a partner at law firm Kirkland & Ellis, says the fundamentals of activism haven’t changed because of the SEC’s universal proxy changes. On the contrary, they “may have allowed activists to win at least one seat on the board of directors”. In the coming months, “the boards shouldn’t take too much comfort either.” Perhaps the councils would have preferred a “bee activist” after all.