The Very Active Activist Investors

Activist investors have been very busy in recent months, both in the U.S. (see here, here and here) and elsewhere. Among other things, Bill Ackman, through Pershing Square Capital Management, obtained seats on the board of J.C. Penney and was named Chairman of Howard Hughes Corp.—the spinoff of General Growth Properties. Ackman invested in both the equity and debt of General Growth Properties shortly before its chapter 11 bankruptcy filing and, by many accounts, hit a home run on this particular investment. The governance structure of the resulting company, Howard Hughes Corp. (which is reportedly named for the former filmmaker/entrepreneur), also is very interesting. According to Ackman, “it’s a company you can buy stock in. You can throw out the board. The board is elected annually. You can call a shareholder meeting with 15 percent of the vote…so, you know, you can get me back.” So is this a sign of things to come?

Many predict a very active proxy season for activist shareholders and the companies they target. (For an explanation of this trend, see here.) Commentators also suggest the activist agenda likely will include “proliferation of majority voting for directors from the larger public companies to mid-size and smaller companies (which we believe will see the largest number of proposals), separation of the offices of Chairman of the Board and CEO, 10 percent or lower thresholds for shareholders to call special meetings and enabling shareholders to act by majority written consent.” This agenda includes governance features that are similar to those ascribed to Howard Hughes Corp., but Ackman was able to achieve that structure without a proxy fight. Ackman, like a growing number of activists, turned to the chapter 11 bankruptcy process to win control and implement a specific governance agenda.  (For an explanation of this loan-to-own strategy, see here.)

Activist distressed debt investors recently acquired ownership and control of companies like Lear Corp., Philadelphia Newspapers, Reader’s Digest, Six Flags and Tropicana Casino & Resorts through chapter 11. Certainly, not all activist distressed debt investors are focused on governance changes, and the value added by their activism is subject to debate. And interestingly, much of their activism goes unnoticed, unlike their shareholder counterparts. So will these debtholder activists follow Howard Hughes Corp.’s lead and implement investor-friendly governance policies? Will these policies truly enhance enterprise value? These important questions—related to both shareholder and debtholder activism—will only be answered with time and performance results, but create many issues for corporate boards and governance scholars to consider in the interim.

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