Many activist hedge fund managers have an edge over the companies they target because of their close relationships with institutional investors, according to Sullivan & Cromwell attorney Melissa Sawyer.
Sawyer, who advises on mergers and acquisitions and strategic alliances, reviewed last year's resurgence of activist activities in a posting Tuesday on Harvard Law School's website for corporate governance. She found that deep relationships with certain investors increases the likelihood that hedge fund managers will succeed in their campaigns for change at companies.
"Well-known activists often develop relationships with significant institutional holders because they have communicated with these investors in prior activist campaigns and maintain a regular dialogue," wrote Sawyer, who has recently advised the Canada Public Pension Plan Investment Board, AT&T, and Nike on deals.
In contrast to hedge funds, she says that corporate executives and directors may have more limited ties to institutional shareholders, especially passive asset managers and voting teams at active firms. "While many issuers have engaged in significantly more outreach to the largest institutions as part of an increasingly proactive and routinized shareholder engagement calendar," Sawyer wrote, "they are not always successful in reaching their audience."
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If companies want to focus their relationship-building efforts, giant passive-fund managers and proxy advisor services would be a good place to start. BlackRock, State Street Corp., and Vanguard Group together own about 19 percent of shares on the Standard and Poor's 500 index, versus 15 percent in 2013, according to Sawyer.
"With the growing size of the index fund providers' stakes, an activist now only needs to convince a handful of holders (as opposed to hundreds) of its attack thesis," she wrote.
In 2017, these index funds flexed their massive stakeholder muscles. BlackRock, for example, supported Bill Ackman's doomed push against payroll processor ADP, according to her post.
Institutional asset owners likewise have shown their willingness to vote against companies. The California State Teachers' Retirement System came out against Tesla chief executive officer Elon Musk's multi-billion pay package, joining proxy firms Institutional Shareholder Services and Glass Lewis in opposing it. Last month, though, Tesla's other shareholders approved the compensation proposal.
"Activist agitation has been the genesis for numerous strategic and sale processes," Sawyer said in her review. "The resurgence of the most prolific activist investors in 2017 may not be solely related to their brand names and fund raising efforts."