The Official Activist Investing Blog (TM)

Steel Partners Files 9.9% "Active" Ownership in ModusLink

noreply@blogger.com (Hedge Fund Solutions) — Fri, 14 Oct 2011 22:02:00 +0000

It looks as though Steel Partners is rejoining the increasingly busy activist investing space.

After a few years of remaining quiet, Steel filed a 13D today with ModusLink (Ticker: MLNK) through a Company they control - Handy & Harman (Ticker: HNH). While the filing doesn't say much, it did disclose that they have been aggressively purchasing the stock since early August - just after Peerless Systems (Ticker: PRLS) announced that they have nominated two directors to the board for election at the next annual meeting (which is expected to take place in December).

Here is some background on the ongoing activist situation at MLNK.

Here is a link to Steel's 13D filing today.

He's Baaaaack! Dan Loeb sends letter to Yahoo board

noreply@blogger.com (Hedge Fund Solutions) — Thu, 08 Sep 2011 20:16:00 +0000

It's been a few years since Dan Loeb has sent one of these letters.

[LETTERHEAD OF THIRD POINT LLC]

September 8, 2011
Board of Directors
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089
Attention: Mr. Roy Bostock, Chairman

Dear Ladies and Gentlemen:

Third Point LLC (“Third Point”) is a registered investment adviser with approximately $8 billion under management. We are writing to inform you that certain investment funds we manage have acquired a 5.1% interest in Yahoo! Inc. (the “Company” or “Yahoo”), bringing our holdings of common stock and currently-exercisable equity options to 65,000,000 of the outstanding shares, and positioning us as the Company’s third largest outside shareholder.

This letter details our principled demands for sweeping changes in both the Board of Directors (the “Board”) and Company leadership, and outlines the hidden value of Yahoo, which has been severely damaged – but not irreparably – by poor management and governance.

The Failures of Yahoo’s Board of Directors Necessitate a Significant Infusion of Fresh Board Talent

1. Yahoo’s current Board of Directors has made a number of decisions that have directly harmed the Company and resulted in a stock price far below the Company’s intrinsic value. While we are focused on the future for Yahoo under new management, it is instructive to understand how this Board’s many mistakes have created the current conditions at an asset and talent rich company.   Among others: It is now widely accepted that the Board made a serious misjudgment in approving the hiring of Carol Bartz as Yahoo’s Chief Executive Officer, given her inexperience in the consumer-oriented internet space.   Although we are pleased that the Board has terminated Ms. Bartz’s employment, we fail to understand why this decision was so long in coming given her abysmal performance over the last two and a half years. During this period, Ms. Bartz’s poor decision-making and communication skills publicly alienated the Company’s highly respected Asian partners, as well as its shareholders, sell-side analysts, bloggers, customers and employees.

While the decision to hire her alone is grounds for questioning the Board’s competence, its willingness to turn a blind eye to these serious problems and inexplicably remain supportive of Ms. Bartz notwithstanding the negative impact she was having on the Company is even more troubling. As recently as June 23, 2011, at the Company’s annual meeting, Chairman Bostock reportedly stated that the Board remained “very supportive of Carol and this management team” and that they were “confident that Yahoo [was] headed in the right direction." These comments demonstrate that this Board lacks the courage to urgently make the difficult decisions required by the situation today.

2. It is also now widely recognized that the Board made a gross error in turning down the $31 per share Microsoft bid in 2008, which would have generated significant returns for Yahoo’s shareholders. This mistake is all the more frustrating given Yahoo’s current depressed stock price of $13.61 per share — far below the Company’s intrinsic value, which we currently place in excess of $20 per share, as detailed below.

From the failed Microsoft sale negotiations, to a subsequent bungled and disappointing search deal with Microsoft, through a series of misguided CEO selections, and most recently the Alipay debacle, this Board’s failures have destroyed value for all Yahoo stakeholders. Ms. Bartz’s exit and Mr. Morse’s elevation to interim CEO makes him Yahoo’s fourth CEO in four years and further demonstrates the poor corporate governance Yahoo investors have been saddled with for too long. Even before Ms. Bartz’s hire, Yahoo’s shares materially underperformed the market and their peer group, as graphically evidenced in the Company’s most recent 10-K. Against this background, it is evident that merely replacing the Company’s CEO – yet again – will not be enough to alter the direction of the Company. Instead, a reconstituted Board with new Directors who will bring fresh eyes, relevant industry expertise and increased investor alignment to the table is immediately necessary.

Yahoo’s website states the Company’s values, among them: “We foster collaboration while maintaining individual accountability.” It is time that certain members of this Board were held accountable for its past failures and their individual roles. Accordingly, we insist that Mr. Bostock, who championed Ms. Bartz’s hiring and led the charge against the Microsoft deal, promptly resign from the Board. We also demand that fellow Directors Arthur Kern and Vyomesh Joshi, who have stood by silently during these last five years of woeful performance, join Mr. Bostock in resignation. Finally, we can only assume that Director Susan James, the President of Tri-Valley Animal Rescue, will also resign, given her close relationship with Ms. Bartz. If she does not do so voluntarily, the Board should request her resignation as well.

As the Company sets out to recruit a new CEO and evaluate strategic alternatives, we are adamant that reconstituting the Board is crucial to provide any serious CEO candidate or strategic counterparty with a stable and responsive governance structure.   There is much work to be done and time is of the essence. Even after the Company announced Ms. Bartz’s dismissal and the pursuit of strategic alternatives, Yahoo shares rose only 5%. We believe the muted market reaction to Ms. Bartz’s dismissal represents a recognition that this management change is a necessary, but not sufficient, step towards unlocking Yahoo’s actual value. Investors’ reluctance to embrace the stock and their lack of confidence in this Board’s ability to lead the franchise is understandable given the current Board’s track record.

Third Point has held discussions with many highly respected entrepreneurial executives active in technology, internet, media and consumer-related businesses. From these discussions we have distilled an All-Star team of potential Director candidates, who would be indispensable in working with the reconstituted Board to pursue the three paths outlined in the recent company announcement: CEO search, business review and strategic options. We look forward to sharing our candidates with you shortly.

The Obscured Value in an Iconic American Technology Asset

We firmly believe that there is much to be gained from a successful and rapid transition in management, as we are convinced that Yahoo is grossly undervalued. We have followed Yahoo for many years, and our analysis suggests that at a share price of $13.61, with $2.49 per share in tax adjusted net cash, $3.10 per share and $5.24 per share of after-tax values for the Yahoo! Japan and Alibaba Group stakes respectively, core Yahoo is left at an implied value of $2.78 per share or 2.2x 2012 EBITDA.   With more effective and focused management, one could realistically envision a re-rating to at least 7.0x 2012 EBITDA, driving a target of over $19.00 per share. When coupled with tax efficient outcomes for its Asian assets, an additional $3.00-4.00 per share stands to be realized. Continued share count reduction via buybacks and other potential capital structure optimization alternatives would further bolster the Company’s stock price. In addition, based on our discussions with industry experts and entrepreneurs, we believe that with new management, there is significant further value in leveraging Yahoo’s globally trusted franchise and platform for a range of new products and innovations.

Focusing specifically on the Alibaba Group, the mid-term value potential for this stake alone could represent another $5.00 per share of upside. The e-commerce interests housed under the Alibaba Group umbrella hold the dominant positions in the “B2B” (63% of 2010 market share according to Marbridge Consulting), “C2C” (85% share) and “B2C” (51% share) Chinese e-commerce markets.   Alibaba Group’s Taobao business is essentially Ebay and Amazon on steroids in terms of market share and revenue growth.   According to Goldman Sachs, the Chinese e-commerce market was $75 billion in 2010, with a 3 year forward compound annual growth rate of 43% compared to the $193 billion U.S. market with compound annual growth of 14% over the same period.   We currently estimate a pre-tax value for Alibaba Group of $25 billion. Given Alibaba Group’s growth potential and market share, it is entirely conceivable that Yahoo’s 40% fully diluted stake in Alibaba Group could double in value over the next 2-3 years, highlighting its tremendous value.

Looking deeper into core Yahoo, it is clear that the Company possesses unique scale and scope as the Internet’s premier digital media company. The near completion of significant platform transitions and increasing ad format creativity and client engagement translate to exciting prospects for 2012.   These compelling Yahoo initiatives were sadly lost in the chaos surrounding Ms. Bartz’s tenure as CEO. Hidden by Yahoo’s senior management drama is a franchise benefitting daily from tremendous investment in resources and new platforms successfully built by Yahoo’s corps of talented, committed engineers, product development team and salespeople.

Finally, the Company’s leadership needs to rebuild relationships with its valued Asian partners in Yahoo Japan, Softbank and the Alibaba Group.   These are important sources of value for Yahoo, and the Company needs to enter a new, constructive era with these critical allies and friends of the Company.

In conclusion, we are eager to present to the Board our candidates and thoughts on the Company’s future.   We hope that the Board will take our proposals seriously and move towards the leadership overhaul that we are championing. While the decision to undertake Board turnover initially rests with individual directors, ultimately, shareholders like Third Point have other means to effect changes necessary to protect their investment. We are prepared to propose a slate of directors at the Company’s annual meeting next year should it become necessary. Such proxy disputes are burdensome, and we sincerely hope that one will not be necessary here. Shareholders have already suffered enough.

It is time for new leadership at Yahoo.   Yahoo’s investors, employees, clients and users deserve it.   We look forward to having what is great about Yahoo make headlines, encouraged and communicated by new CEO and Board leaders.

Sincerely,

/s/ Daniel S. Loeb

Daniel S. Loeb
Chief Executive Officer
Third Point LLC

CC:    Ms. Patti Hart
          Ms. Sue James
          Mr. Vyomesh Joshi
          Mr. David Kenny
          Mr. Arthur Kern
        Mr. Brad Smith
          Mr. Gary Wilson
          Mr. Jerry Yang

Shareholder Activism Webinar on Board Corporate Governance

noreply@blogger.com (Hedge Fund Solutions) — Thu, 18 Aug 2011 20:18:00 +0000

TUESDAY AUGUST 23, 2011

12:30 - 2:00 PM EST

Join an experienced faculty as they explore the following questions that every company concerned being targeted by activist investors should ask of its Board, including:

- Is the Board lacking sufficient industry expertise?
- Is the Board lacking the necessary competencies among its members?
- Is the Board sufficiently independent?
- Do the Board members have little or no stake in the company?
- Can the Board's compensation be perceived as excessive?
- Are the Board's chairman and CEO roles combined?
- Is there an unusually low turnover among Board members?
- Does the Board have a record of failing to heed the will of its shareholders?
- Does the Board have a record of facilitating its own entrenchment?
- Does the Board have a record of failing to hold management accountable?

Faculty:

Chris Cernich - Director of M&A and Proxy Contest Research, Institutional Shareholder Services Inc. (ISS), oversees analyses and vote recommendations for high profile and contentious mergers and proxy fights globally. Prior to joining ISS, Chris was Director of Mergers & Acquisitions and Quantitative Analysis at Proxy Governance, Inc., another proxy advisory firm. His previous management experience includes eight years in corporate finance and strategy at the Ford Motor Company. Chris is also the chief author of two studies sponsored by the IRRC Institute: "The Effectiveness of Hybrid Boards" (2009), which examined the impact of shareholder activism on corporate financial performance and "Compensation Peer Groups at Companies With High Pay" (2010), which examines systemic bias in compensation benchmarking processes at S&P 500 companies. Chris holds an MBA from the University of Michigan in Finance and Strategy.

Keith E. Gottfried – Partner, Blank Rome LLP, advises clients with respect to public company matters, including mergers and acquisitions, securities regulation, corporate governance, shareholder activism, and NYSE and Nasdaq compliance. Keith also advises clients in connection with proxy contests and other contests for corporate control as well as vulnerability assessments and the implementation of stockholder rights plans and other types of defensive strategies.

Paul Schulman — Senior Vice President, MacKenzie Partners, Inc., primarily advises clients on shareholder engagement and proxy solicitation strategies in proxy contests, mergers & acquisitions, corporate financings and restructurings. He also counsels clients on governance and compensation issues and activist issues. Over the course of his career, Paul has worked on over 100 contested solicitations, representing companies, limited partnerships, shareholder groups, activist institutions and hedge funds.

Click here to register online.

Posted by David Schatz

Mock Proxy Battle Conference - Seating is Limited and Filling Up Fast!!

noreply@blogger.com (Hedge Fund Solutions) — Tue, 09 Aug 2011 16:01:00 +0000

Interactive Case Study on Shareholder Activism

MOCK PROXY BATTLE CONFERENCE

Main Event August 31, 2011

Capital One Headquarters, McLean, VA

LIMITED NUMBER OF SEATS AVAILABLE

A licensed educational product from Hedge Fund Solutions, LLC

www.hedgerelations.com

Join us on August 31, 2011 for what's being billed as the fight of the decade!!

INTERACTIVE CASE STUDY ON SHAREHOLDER ACTIVISM

This is an Interactive Case Study on shareholder activism (Download the Case Study). This case, which is fictional, presents a dilemma facing many boards of directors and managers at publicly traded companies today.

ABSTRACT

The case describes the efforts of two activist investors (Yuri N. Trubl and D. Mandy More) who have formed an investment group and call themselves The Committee For Value Improvement and Shareholder Accountability. The Committee is attempting to obtain three board seats on WidgeCo's eleven member board and want to persuade the other board members to divest an underperforming business unit and use the proceeds from the transaction to repurchase some of the Company's shares outstanding. WidgeCo's board is not sure whether to concede, fight or attempt to seek middle ground.

Download the Activist Letter to Management

Each participant will play the role of a board member and will consider analyses presented by management, the dissident investors, institutional shareholders, company advisors and others. In the end, based on the information presented, each board member will recommend to the others how to proceed.

PURPOSE

To simulate an activist campaign at a mid-sized public company plagued with business and governance issues. Participants will gain a greater understanding of the causes, effects and complexities of shareholder activism, and wrestle with key fiduciary issues as if they were directors of a public firm.

BACKGROUND

WidgeCo (WIDG) a manufacturer of specialized widgets for the defense, shipping, electronics and food service industries is challenged by flat sales, a declining stock price, an underperforming, overpriced and not-yet integrated acquisition that is the brainchild of the CEO's recently hired heir apparent, and a number of governance issues.

ADDITIONAL INFORMATION & REGISTRATION

For additional information about the conference and to register (NOTE: Seating is limited to 80 total participants and places are filling up fast!) go to www.niricapital2011.com.

AGENDA: Download the Updated Agenda.

Free Activist Investing Research (Week Ending August 5, 2011)

noreply@blogger.com (Hedge Fund Solutions) — Mon, 08 Aug 2011 21:56:00 +0000

Click here to download Hedge Fund Solutions' activist investing research for the week ending August 5, 2011.

Sign up to receive this free research every Monday afternoon.

Subscribe To Receive FREE Weekly Research

Guest Contributor: Activist Investor Phil Goldstein Says "CSX Opinion is Not About Swaps"

noreply@blogger.com (Hedge Fund Solutions) — Thu, 04 Aug 2011 20:56:00 +0000

Phil Goldstein - Bulldog Investors

I think that for most activist shareholders the most significant takeaway from the Second Circuit's CSX opinion is not about swap contracts. See Blog Post on CSX Decision

More important is that it reduces the fear that mere communication between like minded shareholders can subject them to a lawsuit alleging that they formed an undisclosed 13d group. The Court significantly narrowed the ability of an issuer (or the SEC) to allege that such a group exists. Merely alleging "concerted action" is not enough. Instead, applying the statute literally requires that coordinated purchases must be alleged (and proven). It said:

As we have noted, the statute and the implementing rule are both concerned with groups formed for the purpose of acquiring shares of an issuer. See 15 U.S.C. § 78m(d)(3); 17 C.F.R. § 240.13d-5(b)(1). The District Court recognized that whether a group exists under section 13(d)(3) “turns on ‘whether there is sufficient direct or circumstantial evidence to support the inference of a formal or informal understanding between [members] for the purpose of acquiring, holding, or disposing of securities.’” CSX I, 562 F. Supp. 2d at 552 (quoting Hallwood Realty Partners, L.P. v. Gotham Partners, L.P., 286F.3d 613, 617 (2d Cir. 2002) (emphasis added).

Endeavoring to meet the statutory standard, the District Court found that TCI and 3G formed a group, within the meaning of section 13(d)(3), “with respect to CSX securities,” and that this group was formed no later than February 13, 2007. See id. at 555. Then, after identifying the Defendants’ “activities and motives throughout the relevant period,” id. at 553, the Court stated, “These circumstances . . . all suggest that the parties’ activities from at least as early as February 13, 2007, were products of concerted action . . . .” Id. at 554 (emphasis added).

These findings are insufficient for proper appellate review. Although the District Court found the existence of a group “with respect to CSX securities,” the Court did not explicitly find a group formed for the purpose of acquiring CSX securities. Even if many of the parties’ “activities” were the result of group action, two or more entities do not become a group within the meaning of section 13(d)(3) unless they “act as a . . . group for the purpose of acquiring . . . securities of an issuer.” 15 U.S.C. § 78m(d)(3).

****

[A] precise finding, adequately supported by specific evidence, of whether a group existed for purposes of acquiring CSX shares outright during the relevant period needs to be made in order to facilitate appellate review."

Presumably, the same requirement would apply to a group formed for the purpose of either selling or of holding shares. However, it is unlikely that a group would ever be formed for either of those purposes after the shares were independently acquired (which is presumably why the Circuit Court focused on acquisitions.) The bottom line is that general allegations of shareholders acting "in concert" are no longer sufficient to survive a motion to dismiss IMO. There must be a specific allegation that their purchases were coordinated.

Judge Winter, in his concurrence, was even more emphatic about the requirement to prove a plan to coordinate purchases by the group members. He said:

The district court’s finding of a group also suffers from a second error. That finding was that “the parties activities from at least as early as February 13, 2007, were products of concerted action.” Id. However, Rule 13d-5(b)(1) applies only to groups formed “for the purpose of acquiring, holding, voting or disposing” of “securities” of the target firm. The Rule does not encompass all “concerted action” with an aim to change a target firm’s policies even while retaining an option to wage a proxy fight or engage in some other control transaction at a later time. Indeed, the Rule does not encompass “concerted action” with a change of control aim that does not involve one or more of the specified acts.

****

There is no evidence that 3G’s purchases at this time were more than the result of this sharing of information, which hardly amounts to an agreement to buy CSX shares.

Thus, two large stockholders that independently acquired their positions can discuss their investment and the company with each other and possible actions they might take separately or together to enhance shareholder value but the existence of such discussions alone is insufficient to support a finding of the formation of a 13d group. In almost all cases such shareholders independently determine how they will vote their shares so there is no reason to form a group for voting them. Unless they actually agree to do something together that suggests a voting agreement, e.g. to fund a proxy solicitation, there is no group.

Guest Contributor Phil Goldstein

Question Over Cash-Settled Derivatives Remains Unresolved, Requirement for Disclosing 13D Group Activity Narrowed

noreply@blogger.com (Hedge Fund Solutions) — Thu, 04 Aug 2011 17:20:00 +0000

In a proxy fight that begun in late 2007, hedge funds TCI (The Children's Investment Fund Management) and 3G Capital Partners nominated five candidates to the board of railroad company CSX. Owning 9% of the stock and 11% more through long cash-settled derivatives, TCI and 3G Capital Partners were successful in getting four of their five nominees elected to the board. In the process, however, CSX sued the hedge funds for violating the Williams Act, arguing that they failed to report their cash-settled derivatives as beneficial ownership and that they were acting as a group before TCI filed its Schedule 13D statement, among other things.

On June 11, 2008, Judge Kaplan of the lower court found that investors were deemed to constitute a group under broad circumstances: should investors merely meet to discuss, they would trigger a group filing requirement in the event that they own collectively more than 5% of a company's outstanding shares.

A July 18, 2011 majority-opinion on CSX v. TCI by the U.S. Second Circuit Court of Appeals reversed this notion and accordingly narrowed the extent to which shareholders could be considered a group for Section 13(d) of the Williams Act, a 1968 amendment to the Exchange Act of 1934. The Second Circuit found that proof that shareholders were acquiring shares in concert was needed before they could be deemed a group. Subsequently, the Second Circuit remanded the case. Thus the Second Circuit's opinion represents a favorable shift for activist hedge funds--which will now have less reservations in communicating investments with other shareholders--as far as group filing requirements go.

As far as resolving the issue of whether or not cash-settled derivatives would count as beneficial ownership--this remains very much a work in progress. Both the lower court and now the Second Circuit side-stepped the issue. Judge Kaplan in the lower court took a broad view of cash-settled derivatives counting as beneficial ownership, finding that one should consider "all of the facts and circumstances to identify situations in which one has even the ability to influence voting, purchase, or sale decisions of its counterparties". Despite this broad view, Judge Kaplan ultimately never made a rule on his judgement and thus did not "sterilize" the shares derived from from the cash-settled derivatives (ie. they could be used for voting purposes). The Second Court also did not make a rule on the issue due to "disagreement within the panel".

In a separate concurrence, however, Judge Winter was clear about his opinion on cash-settled derivates. He found that "without an agreement between the long and short parties permitting the long party ultimately to acquire the hedge stock or to control the short party's voting of it, such swaps are not a means of indirectly facilitating a control transaction". According to corporate law firm Schulte Roth, which represented TCI in the proxy fight and ongoing litigation, "given Judge Winter's thoughtful analysis of the beneficial ownership question, it can be expected that, in the absence of guidance from Congress or the SEC, future courts confronted with this issue will take guidance from the Winter concurrence, and consider his analysis in the context of subsequent cases".

Posted by David Schatz

U.S. Court of Appeals Denies Proxy Access in July 22, 2011 Decision

noreply@blogger.com (Hedge Fund Solutions) — Thu, 04 Aug 2011 17:03:00 +0000

In a U.S. Court of Appeals ruling on July 22, 2011, proxy access was denied in favor of the case presented by the U.S. Chamber of Commerce and Business Round Table.

TIMELINE OF PROXY ACCESS

July 21, 2010 - The Dodd-Frank Wall Street Reform and Consumer Protection Act is passed. Tucked away in the omnibus bill under Title IX (Investor Protections and Improvements to the Regulation of Securities), Subtitle G (Strengthening Corporate Governance), Sec. 971 (proxy access) is a rule that gives the SEC the authority to issue a rule on proxy access (giving shareholders the right to nominate directors in corporate proxy statements as opposed to having to mail their own proxy statements).

August 25, 2010 - The SEC votes 3-2 along party lines to allow proxy access (Rule 14a-11). A shareholder, or group of shareholders, is eligible to use proxy access if they have owned 3% or more of a given company's shares continuously for at least the past 3 years. Companies under a $75M market capitalization are exempt for three years. Moreover, under the proxy access rule, shareholders can only nominate no more than one or what is 25% of the number of company director (whichever is greater). A final limitation is that proxy access cannot be used "for the purpose of changing control of the company".

September 29, 2010 - The U.S. Chamber of Commerce and Business Roundtable files a legal challenge to the SEC's final proxy access rules and requests a stay of those rules (as well a repeal). The petitioners argued that the SEC's judgment was "unlawful under the Investment Company Act, Securities Exchange Act, and Administrative Procedure Act… The Proxy Access Rules are arbitrary and capricious…, do not promote efficiency, competition, and capital formation…"

October 4, 2010 - The SEC stays proxy access, finding that "[a]mong other things, a stay avoids potentially unnecessary costs, regulatory uncertainty, and disruption that could occur if the rules were to become effective during the pendency of a challenge to their validity".

July 22, 2011 - The U.S. Court of Appeals for the District of Columbia overturns the SEC's decision, thus denying proxy access. The three Republican-appointed judges who made the ruling write in the decision, "We agree with the petitions and hold the [SEC] acted arbitrarily and capriciously for having failed once again… adequately to assess the economic effects of a new rule. Here the [SEC] inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters" .

According to Los Angeles Times, "[t]he court decision leaves the door open for the SEC to do more analysis and enact a revised rule".

Tom Donohue, President of the Chamber of Commerce, commented that the decision is "a strong message that regulators need to meet their statutory requirement to clearly prove that the benefits of regulation outweigh the costs".

Posted by David Schatz, Hedge Fund Solutions

Meister Nets $500M For Corvex Hedge Fund

noreply@blogger.com (Hedge Fund Solutions) — Thu, 04 Aug 2011 16:51:00 +0000

According to FinAlternatives, Carl Icahn's former right-hand man is half-way to his goal of raising $1 billion.

Keith Meister's Corvex Capital has netted almost $500 million in assets since its launch in March, HFMWeek reports. The New York-based event-driven fund was seeded to the tune of half that amount by Soros Fund Management and hopes to raise at least $1 billion by the end of the year.

Corvex charges 1.5% for management and 20% for performance. The fund features quarterly redemptions after a one-year soft lockup—early exiters will pay a 3% redemption fee—with 60 days notice and a 25% gate. Goldman Sachs and JPMorgan Chase are prime brokers...

Click here to read more.

Alan Miller, Top Proxy Contest Advisor, Dies at Age 62

noreply@blogger.com (Hedge Fund Solutions) — Tue, 26 Jul 2011 18:22:00 +0000

Below is the press release issued by Innisfree today announcing the passing of proxy contest veteran Alan Miller.

INNISFREE MOURNS THE LOSS OF CO-CHAIRMAN AND MANAGING DIRECTOR ALAN MILLER

NEW YORK, July 26, 2011 - Innisfree M&A Incorporated today announced with great sadness that Alan Miller, the firm’s Co- Chairman and Managing Director, died on Monday, July 25, 2011 following a battle with lymphoma. He was 62 years old.

“Alan led a truly remarkable life. He was an inspiring leader with a unique combination of keen intellect, solid judgment and unmatched dedication,” said Arthur Crozier, Co-Chairman of Innisfree.

“Alan demonstrated grace under pressure and was the person you wanted on your team during the toughest fight. For more than 30 years, Alan advocated fiercely on behalf of his clients around the world. He always put others first and had a will to win that was unparalleled. We are deeply saddened by his loss and extend our sympathies to his family, particularly his wife and children, who meant the world to him.”

Alan founded Innisfree with Arthur Crozier, Jennifer Shotwell and Meredith Cole in 1997. The firm quickly grew to 45 employees with offices in New York, London and Pittsburgh. Alan took great delight in the choice of the firm’s name, which was based on a poem written in 1892 by William Butler Yeats:

THE LAKE ISLE OF INNISFREE
By William Butler Yeats
I will arise and go now, and go to Innisfree,
And a small cabin build there, of clay and wattles made;
Nine bean rows will I have there, a hive for the honeybee,
And live alone in the bee-loud glade.

And I shall have some peace there, for peace comes dropping slow,
Dropping from the veils of the morning to where the cricket sings;
There midnight’s all a-glimmer, and noon a purple glow,
And evening full of the linnet’s wings.

I will arise and go now, for always night and day
I hear lake water lapping with low sounds by the shore;
While I stand on the roadway, or on the pavements gray, I hear it in the deep heart’s core.

Innisfree has advised on most of the high profile M&A transactions and proxy contests since its inception. The firm has worked with, among others: HP in its merger with Compaq; CF Industries in its acquisition of Terra Industries and its defense against Agrium, as well as Xerox, Stanley Works, IMS Health and Burlington Northern Santa Fe in their respective friendly merger solicitations. Most recently, Alan represented Barnes & Noble in its proxy contest victory over the Yucaipa Funds, as well as Potash Corp. and Airgas in their successful defenses of unsolicited offers by BHP Billiton and Air Products, respectively.

Alan grew up on the Lower East Side of Manhattan, graduated from Stuyvesant High School and attended Syracuse University. Early on, he established his reputation in contested matters with his work on Lockheed/Simmons, Texaco/Icahn, Norfolk Southern/Conrail, Glaxo/Wellcome, Viacom/Paramount Communications, Northrop/Grumman, Ingersoll Rand/Clark Equipment, Johnson & Johnson/Cordis, and Great Western/Ahmanson.

Alan was an avid Yankees fan, an inspired fisherman, a Bob Dylan connoisseur and a tireless advocate for Scotland’s and Cuba’s most famous exports. He is survived by his wife, Melissa; his mother, Miriam; his sister Diane, his brother, Larry; and his two beloved children, Harry and Josie.

A memorial service for Alan will be held on Thursday, August 4th, at 2:30 PM at Riverside Memorial Chapel, 180 West 76th Street, New York, NY (800) 262-6609.

Donations can be sent in Alan’s memory to:

UJA-Federation of New York
130 East 59th Street
New York, NY 10022
http://www.ujafedny.org/
Donation Line: (212) 836-1486

The Leukemia & Lymphoma Society
1311 Mamaroneck Avenue, Suite 310
White Plains, NY 10605
http://www.lls.org/
Phone: (914) 949-5213
Fax: (914) 949-6691

The Lymphoma Research Foundation
115 Broadway Suite 1301
New York, NY 10006
www.lymphoma.org
212-349-2910
212-349-2886 (Fax)

About Innisfree
Innisfree M&A Incorporated (New York) and its wholly-owned subsidiary Lake Isle M&A Incorporated (London) provide clients with sound tactical and strategic advice and results-oriented implementation in proxy solicitations, tender and exchange offers, mergers, rights offerings, restructurings and other corporate actions - friendly or contested, domestic or cross- border. In addition, the firm provides consulting services on strategic management issues, such as corporate governance, executive compensation and investor relations.

With an experienced professional staff in New York, London, and Pittsburgh, Innisfree has represented hundreds of companies in over 20 countries.

New Research (FREE) on Potential Activist Investing Targets

noreply@blogger.com (Hedge Fund Solutions) — Mon, 18 Jul 2011 20:40:00 +0000

Now Available to Qualified Investors

HIGHLY PROBABLE ACTIVIST INVESTING TARGETS & ONGOING CAMPAIGNS

This research report examines the companies where top activist investors have been aggressively increasing ownership and may engage with the board and/or management to improve value.

Featuring:

110 companies under $1 billion in market value
38 companies over $1 billion in market value

Qualified investors may request a copy of the research report by emailing David Schatz at Hedge Fund Solutions dschatz@hedgerelations.com. Please include your business email address in the email.

Posted by David Schatz

Icahn's Unsolicited Offer to Acquire Clorox Company

noreply@blogger.com (Hedge Fund Solutions) — Fri, 15 Jul 2011 18:35:00 +0000

BACKGROUND

*Damien Park, Managing Partner of Hedge Fund Solutions, speaks to Marketplace's David Gura

On July 14, 2011, Icahn made a $12.6 billion offer to take Clorox (NYSE: CLX) private at $76.50/share. The takeover values the equity of the brand name company at $10.2 billion, a 21% premium to when Icahn (now a 9.4% owner) first initiated his investment in Clorox in December 20, 2010.

In the proposed transaction, Icahn Enterprises LP will contribute $12.6 billion and Jefferies & Co. (which has issued a highly confident letter) will arrange $7.8 billion in financing. Should the Clorox board approve the offer by July 29, 2011 and the deal not close, Icahn will pay the company a fee of $100 million. The fee is being offered to prevent the takeover offer from being rejected based on concerns over whether the debt financing will come through.

No stranger to strategic activism, Icahn is encouraging Clorox to pursue a "go-shop" process where prospective synergistic buyers will have the opportunity to perform due diligence and properly value the company. According to a letter filed to the SEC, Icahn is "confident the process will result in numerous superior bids".

The letter goes onto mentioning that although Clorox has failed to meet its strategy of annual sales growth of 3% to 5% and thus lessened its valuation on a "standalone basis", the company nevertheless has tremendous synergistic accretive value to other suitors armed with strong balance sheets...

"[N]ow is the time for this Board to move. In our opinion, Clorox is simply too accretive for these potential Strategic Buyers to ignore"… ~Carl Icahn

STRATEGIC BUYERS

The above chart contains the metrics of 6 of the 7 companies that Icahn mentions as possible strategic buyers. Icahn also mentions SC Johnson as a possible strategic buyer, but since this company is private, the data has not been listed.

STOCK PERFORMANCE

5-Year Clorox Stock Performance Source:Google Finance

Posted by David Schatz

August 31, 2011: Interactive Case Study on Shareholder Activism

noreply@blogger.com (Hedge Fund Solutions) — Thu, 23 Jun 2011 20:37:00 +0000

Increasing M&A activity combined with additional corporate governance reforms and regulatory changes are likely to nurture an increase in shareholder activism. Find out first-hand what it's like to go through a proxy fight.

Seating is limited to 80 total participants. Those who register before June 30 will receive a discounted rate.

The Capital Area Chapter of NIRI and the Mid-Atlantic Chapter of the Society of Corporate Secretaries and Governance Professionals are co-hosting this interactive case study on shareholder activism. This case, which is fictional, presents a dilemma facing many boards of directors and managers at publicly traded companies today. The objective of this immersion role-playing program is to familiarize you with the increasingly complex decisions to be made when confronted with an underperforming stock price and an activist shareholder's demands for boosting shareholder value.

Delivered in a fast-paced and intensive 1/2 day format, each audience member will play the role of a board member. Participants will gain a greater understanding of the causes, effects and complexities of shareholder activism; wrestle with key fiduciary issues and "vote" to determine how the Company should proceed.

YOUR ROLE: You will play the role of a board member of an under-performing and undervalued public company. Your job is to reveal the facts, quiz the contenders and prepare a knockout strategy to win. The afternoon session of the conference will include in-depth panel discussions on topics related to proxy battles and issues related to communication in a crisis and feature leading experts.

Early registered participants include corporate executives, board members, institutional investors, hedge fund managers, pension plan managers, family investment offices, law firms, proxy solicitors, investor relations and public relations advisers, corporate governance specialists and more.

WHEN: Wednesday, August 31, 2011 - All Day
WHERE: Capital One Headquarters, McLean, VA
COST: NIRI and SCSGP members - $250 before June 30 or $295 after June 30; Non-members $350 before June 30 or $395 after June 30.

Click here to go to the official event website.

Click here to see the agenda.

Click here to register.
For general information, contact info@niricapital2011.com.

The Interactive Case Study on Shareholder Activism is a licensed educational program from Hedge Fund Solutions, LLC. For more information about the program contact HFS.

Peerless Systems Launches the First Ever Publicly Traded Activist Fund

noreply@blogger.com (Hedge Fund Solutions) — Thu, 23 Jun 2011 19:17:00 +0000

Peerless Systems Corporation (Nasdaq: PRLS) and Peerless Value Opportunity Fund (the "Fund"), a newly formed Delaware statutory trust, announced today that they are seeking to complete an offering of Units at a price of $10.00 per Unit. Each Unit will be comprised of one common share of the Fund and one warrant to purchase one share of common stock of Peerless, the parent of the investment advisor of the Fund. The Fund will be a non-diversified closed-end management company registered under the Investment Company Act of 1940.
In connection with the proposed offering, the parties filed a joint registration statement on Forms N-2 and S-1 today with the Securities and Exchange Commission ("SEC").

The Fund's investment objective is to provide a high level of total return. The Fund will seek to achieve its investment objective primarily by investing in a portfolio of equity securities issued by companies domiciled in the United States or Canada which it believes to be undervalued. The Fund may become actively involved in seeking to influence the managements and boards of directors of its portfolio companies, in an effort to maximize shareholder value.

Locksmith Capital Advisors Inc., a Delaware corporation ("LCA"), will be the investment advisor of the Fund. LCA is a newly formed entity and an indirect, wholly-owned subsidiary of Peerless.

Click Here to download the PVOF Form S1 Registration Statement

Another Swim Around BioPharma for Icahn

noreply@blogger.com (Hedge Fund Solutions) — Thu, 23 Jun 2011 13:50:00 +0000

Image extracted from Bloomberg

Carl Icahn is at it again. This time his target is Forest Laboratories (FRX), a $11.5 billion biotech firm that has struggled to create shareholder value for the last decade. Of late, Forest Labs has also struggled with seemingly never-ending complaints from the government about illegally promoting two of its drugs, and from losing its patent protection on Lexapro - one of the company's flagship products.

Recently, Icahn disclosed a 7.2% stake in Forest Labs and announced his intention to nominate four representatives to its nine-member board.

While Icahn may not be exactly what the company is looking for at this time, ultimately, he has been very successful in leading previous biotech firms where he has gained board representation. In total, Icahn has yielded significant returns in the stock of his previous biotech targets. As measured since the time of his first investment, his activism in ImClone, Amylin, Biogen, Enzon, and Genzyme has netted the creation of nearly $17 billion worth of shareholder value (not counting dividends). What follows is a summary of his impressive track record.

ImClone Systems (IMCL)
Market cap at the time of its sale: $6.5 billion

2006: Speculated to have started buying shares when IMCL was trading around $2, Icahn disclosed a 13.85% stake in June 2006. At that time, he opposed a $36/share sale and requested that the interim CEO not be given a long-term employment contract. Additionally, he pushed for more drug trials and improvements in the commercialization of certain products, such as Erbitux. Other aims included increasing R&D spending, reducing costs, replacing senior management, trimming capital expenditures, and boosting free cash flow.

Carl was offered a board seat in August 2006. The interim CEO and Chairman resigned around the time Icahn was named Chairman in late October 2006. In addition to being named Chairman, 4 other Icahn affiliates were elected to the board.

2008: In late July 2008, with influential representation on the board, IMCL turned down a $60/share all-cash buyout offer from Bristol-Myers Squibb, which valued the company at $4.5 billion. Bristol-Myers (which owned 17% of IMCL at the time) was in disbelief when Icahn stated that he found a suitor who valued the company at a higher premium. The pharmaceutical company subsequently raised their offer to $62/share.

On July 30, 2008, IMCL was sold to Eli Lilly (LLY) for $70/share at $6.5 billion, a 51% premium to what shares were trading at just a few days earlier when Bristol-Myers made its offer.

Image extracted from The WSJ (graph from April to Oct 2008)

Bottom Line: Icahn bought shares in IMCL for around $390.5 million. After 2 years of board representation, those shares were sold for around $818 million, netting him a profit of ~$427 million and creating $3.4 billion worth of shareholder value, a nearly 110% return.

Amylin Pharmaceutical (AMLN)
Market cap: $1.8 billion

2008: On May 22, 2008, Icahn disclosed a 6.54% stake in the company. A week later, Eastbourne Capital Management disclosed a 12.5% "active" ownership stake. On September 12, 2008, Icahn increased his ownership to 7.3% (owning 10.06M shares). Cognizant about the implications of being considered a group filer with Eastbourne (the group would trigger a 15% poison put trigger on the company's debt), both investors independently expressed their belief that the stock was undervalued and that product development could be improved. The two were also critical of the Chairman.

2009: On January 30, 2009, Icahn increased his ownership to 8.81%, proposed that the company reincorporate from Delaware to North Dakota (a non-binding shareholder proposal), and nominated 5 representatives to the board. That same day, Eastbourne nominated a separate slate of 5 representatives.

AMLN accused Icahn of seeking to sell the company to Eli Lilly. Icahn responded by stating that his intentions were mischaracterized. More verified objectives from the Icahn campaign included cutting costs and improving the commercialization of drugs, particularly Byetta, which the activist felt was a "blockbuster drug" that should have very easily made the company grow value.

Ultimately, on June 2, 2009, the activists prevailed: Not only was the Chairman and lead director replaced, but 2 Icahn and 2 Eastbourne representatives were elected to the 12-member board. Nevertheless, shareholders did not approve of the Icahn proposal to re-incorporate the business to shareholder-friendly North Dakota.

2010 and 2011: Entire board was re-nominated.

AMLN relative stock price performance 2008 to present

Bottom Line: When Icahn first disclosed ownership and the start of his activist campaign, he starting purchasing AMLN shares at around $24 on average. In the eight months that followed when Icahn accumulated 2.27% greater ownership, the stock price fell substantially, hitting a low of $6.05/share in late November 2008. Since Icahn's initial investment, the company has been negative and underperformed both its peers and the market. When the board was reshuffled in mid-2009, shares were trading at around $11.10/share. After much volatility, they are now worth $11.87. If measured from the time that Icahn began his investment, ~$2.6 billion worth of shareholder value was lost. However, in part due to the stock's wild swings, it is difficult to say that the company has underperformed since the reshuffling. Overall, it is a mixed record (at best) here for AMLN and a weaker record here so far for Icahn.

Biogen (BIIB)
Market cap: $24.1 billion

2007: On August 15, 2007, Icahn disclosed a 0.8% stake, valued at around $147 million. He pushed for a sale in late 2007 and the company was "unable" to produce a suitor, which Icahn criticized as a deliberate lack of good faith effort. He continued to pursue a sale.

2008: On May 2, 2008, Icahn disclosed 4.24% ownership, then increased it to 6.03% on August 11. He unsuccessfully pursued a proxy contest to get 3 representatives elected to the board.

2009: With about 5.5% ownership, Icahn pursued a second proxy fight and ended up getting 2 of 4 representatives elected to the 13-member board. He pushed to cut costs and spending, improve partnership relationships, and to enhance product pipeline.

2010: On March 20, 2010, Icahn reached a settlement deal with the company to avert what would have been the third proxy fight. 1 Icahn representative was added to the board, although the activist was seeking 3 more seats.

2011: Icahn continues to own around 5.56%.

BIIB relative stock price performance

Bottom Line: When Icahn started pushing for a sale around August 2007, BIIB shares were trading at ~$57. The stock value of Icahn's holdings has nearly doubled. Evaluated from the time that Icahn began his campaign, or from the time that he gained board representation, BIIB's stock performance significantly outperformed the market generally and its competitors specifically. Since gaining board representation, the stock has nearly doubled to around $100, resulting in the addition of ~$11.5 billion dollars worth of shareholder value.

Enzon Pharmaceuticals (ENZN)
Market cap: $544.3 million

2008: On March 14, 2008, Icahn disclosed 6.93% ownership. He urged the minimization of specific assets, spinoff of the biotech business, and for the company to explore a sale.

2009: On January 29, 2009, Icahn increased ownership to 7.83% and the board agreed to nominate 2 Icahn representatives to the board.

2010: From November 9, 2010 to November 18, 2010, Icahn gradually increased his ownership to 9.72%.

2011: As disclosed in the March 31, 2011, 13F-HR statement, Icahn owns 3.1% of ENZN.

ENZN relative stock price performance

Bottom Line: When Icahn first disclosed ownership, ENZN shares were trading at ~$8.66. Since then, the stock has generally performed equivalent to the market. Since gaining board representation, the picture is a little worse. With shares currently at ~$10.13, about $94 million in shareholder wealth was added.

Genzyme (GENZ)
Sold: $20.1 billion

2010: On March 22, 2010, Icahn disclosed a 3.8% stake in the company and his intention to remove the Chairman & CEO (dual position) and 3 other directors. He also nominated 4 Icahn representatives to the board. About two weeks later, he increased his ownership to 4.91%, criticized management for acquiring unrelated businesses, and pushed for reductions in SG&A, greater margins, better management of manufacturing assets, and the exploration of possible spinoffs.

GENZ then tried to ward off Icahn by electing shareholder activist Ralph Whitworth of Relational Investors and buying back $2 billion worth of stock, in addition to spinning-off certain assets.

On June 9, 2010, GENZ reached a settlement agreement with Icahn and appointed 2 Icahn representatives to the board, which was increased from 10 to 13 members (2 Icahn representatives and Whitworth would fill the vacancies).

2011: Through a 13G statement (a "passive" investment disclosure), Icahn disclosed 5.06% ownership of GENZ. On February 16, 2011, GENZ was sold to Sanofi-Aventis SA (now Sanofi) for $20.1 billion.

Image extracted from Biotech Sector Investing

Bottom line: In less than a year since the first investment and eight months since gaining board representation, Icahn was able to help drive tremendous returns and sell the business. Icahn is said to have made $300 million off of the investment. As measured from the time that he first disclosed ownership and from the time he gained board representation, shareholder value increased by ~$4.3 billion (27.1%) and by ~$6.9B (52.5%), respectively.

Forest Laboratories Inc. (FRX)
Market cap: $11.5 billion

Annual meeting date: Expected to take place in August 2011

2011: Disclosed 7.2% ownership (19.9M shares) on June 21, 2011.

Background on Forest Lab's recent difficulties

In September, 2010 Forest agreed to pay $89 million to federal programs and another $60 million to states to resolve charges that it – through a subsidiary, Forest Pharmaceuticals – had illegally promoted two of its drugs, Celexa and Lexapro. Forest also agreed to resolve criminal liability on related charges by pleading guilty to felony and misdemeanor counts. Those guilty pleas cost it another $164 million, combined fine and forfeiture.

It appears Forest Labs promoted Lexapro, chemical name escitalopram, as a way to treat depression in children. Escitalopram is an antidepressant, but it is only approved by the Food and Drug Administration for use on adults with “major depressive disorder” or “generalized anxiety disorder.” It is said to increase suicidal thinking and behavior in patients under 24 years old.

Celexa, chemically citalopram, is also an anti-depressant. The involvement of Celexa in the same accusations and settlements was a bit surprising, though, because citalopram is generally considered a less drastic treatment than escitalopram. Doctors prescribe it for a variety of so-called “off label” uses.

Last month, the AFL-CIO, which owns a small stake of its own in Forest Labs called for the resignation of the chief executive, Howard Solomon. Download the AFL-CIO's letter here.

Extracted from the labor federation's press release: “While we recognize that Mr. Solomon was not personally accused of wrongdoing, we believe that the Chairman and CEO should be held accountable for major regulatory compliance failures by company subsidiaries"

Icahn moves into Forest Labs' stock

On June 10, Icahn nominated 4 representatives to the 9-member board for election at the 2011 annual meeting. He reportedly had a meeting with company representatives on June 14, 2011, where "no agreements or understandings" materialized. Icahn stated his concern about poor stock performance and the loss of patent protection on Lexapro, one of the company's flagship drugs. He also requested that the company disclose information about the OIG-HHS' (Office of the Inspector General, Department of Health and Human Services) exclusion letter preventing Chairman & CEO Mr. Solomon from participating in federal health programs.

Icahn's Nominees:

Dr. Alexander J. Denner - Icahn Capital; Chairman of ImClone Systems; director of Biogen, Amylin, and Enzon (later Chairman of Enzon)

Dr. Richard Mulligan - Director of ImClone, Biogen, Enzon

Professor Lucian A. Bebchuk - Professor of Law, Economics, and Finance and Director of Corporate Governance Program at Harvard Law School. Well respected governance activist.

Dr. Eric J. Ende - Director of Genzyme.

FRX relative stock price performance July 2010 - present

Bottom Line: With enterprise value trading at around 5.53x EBITDA, no debt, $3.85 billion worth of cash in a $11.5 billion market cap company, a quick ratio of 5.13, could Forest Labs be targeted by Icahn for a sale? It's worth noting that three of Icahn's four nominees have had direct experience in the specific strategic activism highlighted above. It is quite clear that Icahn has been a successful investor in this industry, so a negotiated settlement for board representation is likely being considered by the FRX board, as it was for Biogen and Genzyme (both larger corporations than Forest Labs)...

Download Forest Lab's recently filed preliminary proxy statement

*Graphs extracted and revised from Google Finance

Posted by David Schatz (Hedge Fund Solutions) and Christopher Faille (Christopher Faille writes about a variety of legal and financial issues, and co-authored Basic Economic Principles (2000) with David O'Connor)

Hedge Fund Solutions' Research Featured on CNBC

noreply@blogger.com (Hedge Fund Solutions) — Mon, 13 Jun 2011 20:42:00 +0000

On June 13, 2011, CNBC had a segment on The Strategy Session about shareholder activism. Reporter Kayla Tausche spoke about the ripening market for activism, the level of activism, the type of activists, and the type of targets, etc. that we are seeing in 2011.

Part of the research contained within Hedge Fund Solutions' 2011 Mid-Year Shareholder Activism Update was used in the segment. In addition to covering some of our work, The Strategy Session also highlighted certain activist campaigns. Take a look:

Posted by David Schatz

2011 Mid-Year Shareholder Activism Update

noreply@blogger.com (Hedge Fund Solutions) — Mon, 13 Jun 2011 14:30:00 +0000

Click here to download our 2011 Mid-Year Shareholder Activism Update.
Brief summary of this report:

So far this year, shareholder activism has declined by about 15% compared to 2010
More than half of all activist campaigns this year (total 142) have been related to M&A or cash allocation (including dividend distributions and share repurchases)
25 campaigns have ended in a shareholder vote. Of these, dissidents won 9 and management won 16
27 campaigns have ended in a settlement resolution between the dissident and the corporation
Bulldog Investors continue to maintain their top position on our list of most active activist investors with 9 closed-end funds targeted so far this year

This report also features a comprehensive review of 60+ current activist campaigns, 2011 settlement agreements, campaigns that have ended in a shareholder vote and the activist situations that ended because the dissident withdrew from the campaign.

Click here to download

Pharma Deals, Contingent Value Rights & Activist Investors

noreply@blogger.com (Hedge Fund Solutions) — Fri, 27 May 2011 15:21:00 +0000

The Contingent Value Right as Activist Goal

Ongoing consolidation of the biomedical and pharmaceutical industries, driven in large part by the tortuous nature of the research-to-market pipeline in those fields, has created a demand for tradeable Contingent Value Rights ("CVR"). These CVRs are very much on the minds of activist investors.

For example, in July 2008, ViroPharma Inc., (VPHM) a company perhaps best known for oral Vancocin, an antibiotic often used as a treatment of last resort for bacterial infections, agreed to buy Lev Pharmaceuticals for $442.9 million, payable in the form of (a) $2.25 per share in cash, plus (b) $0.50 per share in VPHM stock, subject to a collar. In addition, Lev Pharma stockholders would receive two $0.50 a share CVR payments in the event of either of two contingencies.

One CVR offered was the prospect that Lev’s leading drug candidate would receive a favorable FDA ruling. The other was the possibility that within ten years it would achieve cumulative net sales of at least $600 million. The net present value of the contingent consideration was valued around $174.6 million.

Lev’s leading drug candidate was Cinryze, a treatment for hereditary angioedema. The stockholders didn’t have long to wait before one of the expected contingencies came to pass. The FDA approved Cinryze that October.

Also that October, a lawyer with Kaye Scholer, commenting on the Viro/Lev deal and others, suggested that CVRs “may be the leading edge of more deals … as industry players become more comfortable with the use of this type of consideration.”

However, as useful as CVRs can be, especially in the Pharmaceutical industry, they do have their drawbacks. Under certain circumstances, for example, they may be deemed securities subject to registration requirements under the Securities Act of 1933, an act which (if it does apply) can impose significant costs and disclosure requirements. Other CVRs may be subject to the Trust Indenture Act of 1938, and if that is the case, there will have to be a trustee to look after the holders, and a written indenture between the issuer/acquirer on the one hand and the trustee on the other.

Despite these sand traps, CVRs are popular as a way of assuring shareholders receive maximum value, important given the very speculative nature of any pharma-world merger, and they are becoming more so.

Activist Investors Are Now Demanding CVRs

In August 2010, the French pharma giant Sanofi launched a takeover bid for Genzyme at $69 a share. It was at first met without enthusiasm from the Genzyme board and later recast as a hostile bid by October. As investors made it clear that they thought this was a low-ball bid, Sanofi had to ante up CVRs in January 2011. A deal closed in April 2011.

Meanwhile, in March 2011, Quest Diagnostics Inc. announced that it had agreed to acquire Celera Corp. through a simple all-cash offer, $8 a share, without either stock swapping or any CVR. Again, the offer encountered resistance, and again stockholders in the target company proposed CVRs as a way of overcoming that resistance without increasing the up-front component of the consideration. Activist investor Starboard Value & Opportunity Fund (formerly Ramius) focused especially on Celera ownership of a royalty associated with Odanacatib, a drug for the treatment of osteoporosis.

“It does not appear that [Celera] fully evaluated opportunities to monetize the value of the Company’s royalty interest” in agreeing to the deal with Quest, Starboard said in a April 7, 2011 letter to Celera’s board.

Mark Lampert, on behalf of his activist fund, Biotechnology Value Fund, was more direct in making the pro-CVR case. Lampert wrote Quest on March 30, telling it that the drug royalties Celera owns, including Odanacatib, “are extraordinarily valuable, are not of strategic significance to Quest, and are not at all reflected in the purchase price.”

(For more information on BVF's activist position in Celera you can read HFS's May 13, 2011 weekly activist investing report)

Despite such resistance, this deal went through. On May 17 Quest announced that it had successfully completed its cash tender offer for all outstanding common shares of Celera Corp. through a wholly owned subsidiary.

Quest’s success without offering CVRs as an element of consideration seems at this time a one-off exception within a continuing trend: CVRs will recur, despite the regulatory pitfalls mentioned above, because they simply make too much sense, especially as a tie-breaker for a wavering investor. And investors will learn that it makes sense to continue to ‘waver’ so long as CVRs are not yet on the table.

Contributed by Christopher Faille.

Image captured from BioJobBlog.com

May 24th Webinar on the "New Age of Shareholder Activism"

noreply@blogger.com (Hedge Fund Solutions) — Tue, 17 May 2011 16:12:00 +0000

Alliance Advisors, a leading proxy solicitor, and Blank Rome, a leading law firm, are hosting a 90-minute long webinar on May 24th to discuss the "New Age of Shareholder Activism".

Topics explored include:

The agenda and "modus operandi" of activist shareholders
The tools and tactics of activist shareholders including white papers, fight letters, media campaigns, stockholder proposals, proxy contests and consent solicitations
How to assess your company's vulnerability to activist shareholders
The early warning signs that your company may be a target of an activist shareholder
Why you should understand your shareholder profile
How to lessen your company's vulnerability to activist shareholders through the use of charter and bylaw amendments
How to lessen your company's vulnerability to activist shareholders through pro-active engagement with the proxy advisory firms
How to respond when you become aware that your company is the target of an activist shareholder
Why you should form a "rapid response team" now

Click here for more.

Posted by David Schatz

Supporting a Great Cause: The Sohn Investment Idea Contest

noreply@blogger.com (Hedge Fund Solutions) — Mon, 09 May 2011 11:46:00 +0000

The Ira Sohn Conference Foundation is hosting a contest to help benefit children with cancer. They are looking for a set of talented applicants to submit investment ideas that will help further their cause.

The conference will bring together a group of highly-successful investors to exchange investment ideas while raising money to fund a mission to treat and cure pediatric cancer. The event takes place on May 25, 2011, and will give one applicant with a compelling analysis the opportunity to present a ten-minute investment presentation at the renowned Sohn Investment Conference.

Successful activist and value investors Michael Price, Bill Ackman, Seth Klarman, David Einhorn, and Joel Greenblatt, among others, will judge the investment ideas submitted and select the winner. Investment ideas must concern a marketable security from a company that has a market capitalization of over one billion dollars.

With more than $20 million already raised for an important cause, the event presents a great opportunity for successful investors to make a difference.

The deadline to submit the online application and investment idea is 5pm EST on Friday, May 20, 2011.

Click here for more information!

Posted by David Schatz

Elliott's European Strategic Activism Gets Heated

noreply@blogger.com (Hedge Fund Solutions) — Wed, 04 May 2011 16:02:00 +0000

European shareholder activist Elliott Advisors is currently in the heat of two proxy fights between two very different mid-cap companies: one a Swiss biotech company; the other, a British transport company. While the firms are in completely different markets, Elliott Advisors is, interestingly, still employing the same type of activism on both. Namely, the activist has been pressuring both companies to explore strategic alternatives--an initiative that the managements of both targets claim put a quick profit over long-term value creation. At the same time, a major part of Elliott's activism has focused on addressing how the companies should expand in respect to either entering new markets or refocusing R&D. Below are summaries about Elliott's proxy contests at these two companies.

Actelion Ltd. (ATLN.VX)

Annual Meeting: May 5

Elliott Advisors is seeking a controlling position on the board of Actelion after the Swiss biotech company had a series of product failures. The activist, which owns more than 5% of the company, has nominated 6 independent individuals to the 9-member board. To no avail, management has currently made several concessions to Elliott--like repurchasing 800 million CHF worth of shares and nominating replacements for the aging Chairman and CEO--in order to avert a proxy fight. The annual meeting, scheduled for May 5, will be particularly momentous as the current board's agenda is essentially diametrically opposed to that of Elliott.

The activist has been critical of the firm's strategy and research pipeline--which it has called "high-risk", "runaway", "unfocused", and "unsuccessful"--as well as the firm's management oversight, which it claims is "destroying value for all stakeholders". In particular, the nominees of Elliott aim to slash R&D and explore a sale. Elliott has asked that the biotech company make public previous offers it received, claiming: "In our recent meetings with shareholders the overwhelming response continues to be that the current board of Actelion and its founders are not willing to have an open and comprehensive discussion about the company's strategic alternatives". The hedge fund also took aim at the company's management structure, arguing that "the company's decision-making process is too centralized" with too many executives reporting to the CEO.

Many had expected that, following the release of failed products, Actelion would receive a buyout offer as high as 9 billion francs, which values the firm at more than 30% premium to its current market cap of 6.9 billion CHF. The company's board, however, states that it has never received a bid and was never interested in receiving one. Rather, the board is focused on just the opposite--expanding the firm through acquisitions and releasing new products. On April 19, ISS questioned whether this "is the right strategy anymore" for the company to take and subsequently recommended a vote against the chairman and for three Elliott nominees and the activist's proposal to eliminate restriction on size of board (although the recommendation was essentially split). On the other hand, proxy advisors IVOX, Glass Lewis, and Ethos, have supported all of Actelion's nominees. Further, the company has also received backing from shareholders Rudolf Maag and BB Biotech, which together own 10% of the company. By contrast, Elliott--as the largest shareholder--owns roughly more than 5% and is expected to have the backing of the other shares owned by hedge funds, which amount to 15%. Analysis conducted by Georgeson expects approximately 50-55 percent of shareholders to vote their shares and that "Elliott has confirmations from 20 percent of shareholders and the likely support of another 15 percent from subscribers of ISS".

National Express (LON:NEX)

Annual Meeting: May 10

Elliott Advisors is also rattling cages at National Express. The hedge fund, which owns approximately 17.5% of the bus and rail company, has nominated three individuals to the 9-member board. Like Actelion, National Express has also argued that Elliott is waging a proxy fight in order to pressure the company into a sale, which management claims will ultimately be to the detriment of long-term value. Alternatively, the activist claims it is aiming to get the company to pursue aggressive growth in new markets and explore strategic alternatives that may value the company at around a 55% premium to its current market cap of $1.3 billion. The transport group, Elliott claims, will face significant challenges in the years ahead due to consolidation and liberalization in European mass transit, and that it is therefore "critical" that the company refocus investments in America and explore selling off assets elsewhere. Mark Levine, Elliott's manager in charge of the National Express investment, argues that the transport company is "trading at a big discount to the sum of [its] parts" and that its "composition of... non-executive board members has not changed since 2007"According to Bloomberg, the hedge fund is unlikely to receive support from 13% owner M&G Investment Management. However, Elliott states that it has support from Spain's Cosmen family, which owns 17.5% of the company, and only needs 15.2% more backing in order to prevail in its proxy fight. With that said, both ISS and Glass Lewis have disclosed support for management.

Posted by David Schatz

World Economic Forum on "The Future of Long-term Investing"

noreply@blogger.com (Hedge Fund Solutions) — Mon, 11 Apr 2011 20:48:00 +0000

In light of the financial crisis, there has been an increased concern that short-term objectives are outweighing long-term growth and value creation. Long-term investors play a key role in providing direction for corporations and in stabilizing the economy during times of distress. While short-term investing provides liquidity and "accountability on the part of corporate managers…, the market does not seem to be lacking in short-term capital". The World Economic Forum recently released a report, "The Future of Long-Term Investing", which addresses key investment concerns going forward from the financial crisis.

"Long-term investing can be usefully defined as investing with the expectation of holding an asset for an indefinite period of time by an investor with the capability to do so."

The report highlights "life insurers, pension funds, sovereign wealth funds, foundations and family offices" as possible sources of long-term capital. Although these institutional investors manage $27 trillion of the $65 trillion professionally managed assets, there are several constraints (highlighted in the report) that allow only 25% of their assets to be allocated as long-term capital. Moreover, the report expects a "decline in long-term investing by life insurers and pension funds", which have traditionally been the largest long-term investors and have a total of $22 trillion AUM (approximately a third of all professionally managed assets). While family offices, sovereign wealth funds, endowments, and foundations will likely increase their assets…,

"[W]e expect that there will be an overall reduction in the proportion of global investable assets directed towards long-term investing, with potentially significant economic implications."

FOUNDATIONS OF LONG-TERM INVESTING

While the length of time necessary for an investment to be considered "long-term" varies, the report states it is "typically… for at least 10 years or through an entire business cycle". Consequentially, assets ideal for long-term investment are usually riskier and more illiquid. The following classes meet such criteria: direct venture capital, infrastructure, direct private equity, and strategic positions in public equity--the last of which is defined to be, "[m]ajor stakes in public companies often associated with a board position and potential lockup period".

Several constraints hinder long-term investing: liability profile, investment beliefs, risk appetite, and decision-making structure. Moreover, certain constraints impact long-term investors differently. While the constraints for family offices (which have $1.2 trillion AUM) are minimal, the constraints for both pension funds and life insurers (which have $22 trillion AUM combined) are significant--and increasingly so. Consequentially, family offices are able to allocate nearly the same amount of capital toward illiquid investments (~$420 billion) as life insurers, despite having only slightly more than a tenth of the AUM life insurers have. All told, constraints result in total actual illiquid investment by long-term investors being less than one quarter of its potential ($6.5 trillion of $27 trillion potential).

BENEFITS OF LONG-TERM INVESTING

The report lists the three primary benefits of long-term investing,

(1) might offer better returns to certain investors;

(2) could bring benefits to individual corporations; and

(3) may be a 'social good' by helping to stabilize the financial markets, promote global economic growth and bring wider social benefits. (Read the report, The Future of Long-term Investing, for more details)

Long-term investors benefit by being able to access structural risk premia, take advantage of secular themes/ macro trends, impact corporate decision-making, avoid buying high and selling low, and minimize transaction and market disturbance costs.

The report states that while academic literature is unclear on the size and length of abnormal announcement returns due to long-term investor presence, "there is strong evidence presented… that sovereign wealth funds induce positive abnormal returns for target investments, at least for a short [period of time]". (Note - Research papers concerning shareholder activists have generally shown positive abnormal short-term and long-term returns (read more)).

Moreover, many believe that the financial crisis has indicated that the short-term liabilities of a corporation could compromise its long-term investment portfolio and focus. Equally troubling is the fact that some managers have focused on the short-term as a result of principle-agent problems, unfavorable valuations from takeovers due to temporarily depressed earnings and imperfectly informed stockholders (Stein, 1988), and rational market adjustments to earnings inflation (Stein, 1989), to list a few. Hence the importance of shareholder activism,

"If short-termism can be shown to exist, it offers a powerful argument for the offsetting benefits of activist investors with a long-term horizon… [S]hareholders would become aware of the negative effects of [short-termism] and act to prevent them."

LONG-TERM INVESTING AFTER THE FINANCIAL CRISIS

During the financial crisis, many long-term investors failed to properly cover their positions and to "reallocate capital to equity when the value of equity holdings dropped". The financial crisis also saw unanticipated highly correlated declines between different asset classes. This experience raised questions concerning ideal portfolio diversification.

"For many investors..., the crisis and the current economic climate have raised tough strategic questions and highlighted the need for rebuilding investment frameworks and governance processes."

Among some of the governance process and investment framework changes we can expect from long-term investors: explicit clarity of investment beliefs and their implications; debate within organizations about risk exposure, especially considering liquidity and regulatory constraints; frequent dialogue with stakeholders; greater accountability balancing short-term considerations with longer-term ones; and the development of compensation schemes beter aligned with the long-term.

In addition, the report states, "There are also signs that long-term investors have become more interested in select hedge funds" for improved alpha, as well as risk and volatility reduction.

RECOMMENDATIONS

For both long-term investors and policy-makers, the World Economic Forum lists six recommendations "to ease the constraints on long-term investing and increase the benefits that flow from it".

In regards to shareholder activism, the report makes clear,

"It is... important to stress that shareholders can and should hold management accountable for their actions and direct them to manage their business towards the creation of long-term value"

The report also goes on to implicitly note the constraints to shareholder activism, "Although this [above statement] sounds like an uncontroversial recommendation, many corporations do not necessarily welcome the active involvement of shareholders". The World Economic Forum encourages "responsible ownership that plays a measured and active role while not exerting undue influence to promote the investor's aim at the cost of the corporations and other shareholders". Accordingly, the report concludes by proposing that long-term investors:

- "make the exercise of ownership rights part of the mandate of an investment manager";
- "investment managers could work with their investee companies to help develop long-term goals and identify long-term risks";
- "long-term investors could work with each other to promote long-term decisions on the part of the corporations in which they invest".

Read The Future of Long-term Investing

Posted by David Schatz

Activist Investors Talk Strategy

noreply@blogger.com (Hedge Fund Solutions) — Mon, 04 Apr 2011 17:02:00 +0000

Phil Goldstein, Bulldog Investors

While there has been much press coverage about activist 13D filings of late, CNBC's The Strategy Session has been particularly effective in shedding light on the activist modus operandi. On March 18, 2011, Phillip Goldstein discussed the benefits of SPAC investing. He views SPACs as "extremely safe… If [management] can't come through with an attractive transaction then you get your money back… But you have the optionality--if they do come through with an attractive transaction--that the the stock can go significantly higher… You can't lose".

Note: On January 22, 2009 Damien Park, Managing Partner Hedge Fund Solutions, wrote an article for RealMoney titled, "Activists Pounce on SPACs". One year later we posted the investment returns of the SPACs listed in the article. [Available Here]

Goldstein also spoke about hedging volatility risk through investing in special situations and how the environment for activism is "excellent". Currently, Goldstein believes he has found "a very attractive situation" at Casey's General Stores (NASDAQ: CASY), which earlier escaped a $2 billion hostile offer from Couche-Tard, then rejected a $43 per share friendly takeover offer from 7-Eleven, and has recently missed earnings expectations. Goldstein acknowledges that while the company is well managed, it is now trading at a discount to the valuations of previous offers and is thus an ideal candidate for both shareholder activism and a takeover. CASY is unique to Bulldog's portfolio, as the activist typically invests in closed-end funds trading below NAV and then persuades management to make a transaction that closes the discount. According to Goldstein, "It produces alpha--real sustainable alpha without leverage--and reduces risk over the long-term. It works".

Donald Drapkin, Casablanca Capital

Several days later, CNBC also had Donald Drapkin on The Strategy Session. Drapkin discussed shareholder activism, characteristics of hostile takeover targets, and Mentor Graphics. Interestingly, one of the companies that they highlight as a possible target, Pentair (NYSE: PNR), has also been pressured for a breakup as a result of recent strategic shareholder activism elsewhere. In particular, the pressure has intensified due to the recent breakups of ITT, Fortune Brands, and Motorola by campaigns from activist shareholders Relational Investors, Pershing Square, and Carl Icahn, respectively. Accordingly, Drapkin states that "Pentair is on everybody's list". Marvell and Mattel--the latter of which Icahn currently has a position in--were also highlighted as possible mid-cap targets based on their lagging price-to-book ratios, low debt-to-equity, strong interest coverage & sufficient cash flow, and shareholder value at the low end of 52-week range.

Drapkin emphasized "[some] of the things that you look at as an activist investor":

- stock underperformance;
- excessive compensation;
- directors not having a sufficient equity stake in the company;
- slow business development;
- excessive SG&A; and

for hostile takeover targets:
- divisional misalignments; and
- cash holdings.

See Also: More Hostile Takeovers Likely This Year

Posted by David Schatz

Activists Hope to Mirror Success of Barington

noreply@blogger.com (Hedge Fund Solutions) — Mon, 04 Apr 2011 12:48:00 +0000

In an earlier post, we highlighted five activist campaigns underway this proxy season. The score is now 1-0 in favor of the dissidents: Shareholders of Ameron International (AMN)--which had its annual meeting on March 30, 2011--overwhelmingly voted for the election of activist investor James Mitarotonda, CEO of Barington (preliminary votes indicate 72% of votes cast were in support of the sole dissident nominee). Read the MarketWatch story.

On March 11 Ramius withdrew their nomination to elect three individuals to Immersion Corp. (IMMR) following a March 9 announcement by the Company that they have agreed to add two new Directors from activist investor Dialectic Capital to the board. Elsewhere, Ramius' proxy contests at Zoran Corporation (ZRAN) is about two months away from the annual meeting, and other formal proxy solicitations have begun heating up at EMS Technologies (ELMG) and Mentor Graphics (MENT). Below is a summary of the latest relevant developments.

EMS Technologies (ELMG); Annual Meeting: May 12, 2011

Annually elected 10 member board

Activist Investor: MMI Investments (7.8% beneficial ownership)

Activist Concerns:

- business is overly complex and too small for the public market

- company has not been taking advantage of thriving M&A environment

- dead hand provision to poison pill (the provision was removed on 1/4/11)

- lackluster stock performance

- current board lacks genuine corporate credentials

- wasteful $150 million worth of acquisitions

Major Developments:

- MMI and ELMG begin formal proxy solicitation and name nominees.

- ELMG amends Executive Protection Agreements and EAICP that provide golden parachute compensation for executives whose employment is involuntarily terminated (other than for disability or death) or voluntarily terminated due to certain adverse employment actions within two years after a Board-approved change-in-control. The plan provides a "lump-sum payment of the present value of two years' salary", benefits, and target awards.

- MMI nominates 4 individuals to the board.

- ELMG announces on 2/2/11 that they have retained BofA Merrill Lynch to serve as a financial advisor for exploring strategic alternatives.

- ELMG removes dead hand provision to poison pill on 1/4/11.

- MMI pushes ELMG to sell the entire company.

ELMG's depiction of its stock performance:

MMI's depiction of target's stock performance:

Links:
ELMG Definitive Proxy Statement

MMI Definitive Proxy Statement

ELMG Amends Compensation Plans

ELMG Shareholder Presentation

MMI Preliminary Proxy Statement

ELMG Preliminary Proxy Statement

For a complimentary copy of Hedge Fund Solutions' in-depth research on the activist situation at ELMG contact dpark@hedgerelations.com

Ameron International Corporation (AMN); Annual Meeting: Completed for 2011.

Staggered 7 member board

Activist Investor: Barington Capital (1.3% beneficial ownership)

Activist Concerns:

- pay-for-performance disconnect and excessive executive compensation

- low insider stock ownership

- excessive anti-takeover defenses

- underperforming peers and market for the last 1-, 2-, and 3-year periods

Major Development:

- Shareholders voted overwhelming in favor of the election of activist nominee James Mitarotonda. Company nominee David Davenport is not re-elected, but CEO James Marlen is re-elected.

- Barington nominates 1 individual to board.

Links:

Activist hedge fund wins Ameron board seat

Ameron Definitive Proxy Statement

Barington Definitive Proxy Statement

Ameron Annual Report

Ameron March 1, 2011 Shareholder Letter

Ameron March 9, 2011 Shareholder Letter

Barington Investor Presentation

Barington February 28, 2011 Shareholder Letter

For a complimentary copy of Hedge Fund Solutions research on AMN contact dpark@hedgerelations.com

Mentor Graphics (MENT); Annual Meeting: May 12, 2011

Annually elected 8 member board

Activist Investor: Carl Icahn (14.7% beneficial

ownership)

Activist Investor: Casablanca Capital (5.48% beneficial ownership)

Activist Concerns:

- lack of cost containment

- poor corporate governance decisions (eg. moving annual meeting of shareholders)

- operational inefficiencies

Major Developments:
- Icahn names nominees.
- Icahn calls the debt issuance "cynical", "an absurd offering", "poisonous", and "ask[s] that [MENT] immediately make public all of the terms of the deal so that shareholders can evaluate what [the company] has done". Tells the board that its "shareholders are not irrelevant and will not be fooled. There was no need to issue convertible securities and there were clear alternatives".
- MENT issues convertible notes.
- MENT rejects Icahn's takeover offer and debt financing.
- Icahn offers to lend MENT $220 million on a 6.25% senior unsecured basis.
- Icahn and Drapkin (Casablanca) reiterate that the company should seek a sale and that Cadence Design Systems is an ideal acquirer.
- Casablanca rescinds its nomination and states intent to vote in favor of Icahn's slate.

- Icahn makes hostile $17 per share offer.

- Casablanca nominates 3 individuals to Board.

- Icahn nominates 3 individuals to Board.

Drapkin: "If Carl gets his three seats on the board, I think that will start a process from which the company will have no choice but not to back away... because then they know that the next meeting is coming up and if they haven't done something dramatic then they will lose control over the board... In a free market, we have the right to go in and make our voices heard. The Chairman of the company owns virtually nothing. He pays himself a lot of money, but he owns virtually nothing. He has been there forever... The company just doesn't do anything".

Links:

MENT Definitive Proxy Statement
Icahn Definitive Proxy Statement
Icahn asks MENT to disclose terms of debt issuance
MENT issues $253 million worth of 4.00% convertible notes

Mentor Graphics Management Discussion

Casablanca Letter to MENT

Posted by David Schatz

SEC Proposes to Maintain Existing Security-Based Swap Reporting Requirements

noreply@blogger.com (Hedge Fund Solutions) — Mon, 28 Mar 2011 20:49:00 +0000

As reported earlier by Schulte Roth, on March 17, 2011, the SEC proposed to readopt relevant portions of Rules 13d-3 and 16a-1. The action serves to preserve existing rules for reporting security-based swaps as beneficial ownership.

The SEC issued its proposed action in order to address the ambiguity of Dodd-Frank Section 766, which adds Section 13(o) to the Exchange Act. Section 766 stipulates that "a person shall be deemed to acquire beneficial ownership of an equity security based on the purchase or sale of a security-based swap, only to the extent that the Commission, by rule, determines… that [the transaction] provides incidents of ownership comparable to direct ownership of the equity security". Use of the word "only" might be misconstrued to mean that, without the SEC's judgment, security-based swaps would not amount to any beneficial ownership. The proposed rule clarifies that security-based swaps may still represent beneficial ownership without the SEC's rulemaking.

In light of the proposed rule, Schulte Roth clarifies that security-based swaps may confer beneficial ownership in the following instances:

"(i) where a security-based swap, by its terms or otherwise, gives a person voting or investment power over the underlying security…;

(ii) where a security-based swap is used with the purpose or effect of divesting or preventing the vesting of beneficial ownership as part of a plan or scheme to evade the beneficial ownership reporting requirements…; and

(iii) where a security-based swap, by its terms or otherwise, gives a person the right to acquire the underlying security within 60 days or the persons holds such right to acquire with the purpose [or effect] of changing or influencing control of the issuer".

In the release, the SEC also states that its "staff is engaged in a separate project to develop proposals to modernize reporting under Exchange Act Sections 13(d) and 13(g)" (emphasis added). It is safe to assume that this statement is welcomed by Wachtell Lipton, which just a few weeks ago filed a petition to the SEC "requesting that the Commission initiate a rulemaking project regarding… beneficial ownership reporting rules". In an earlier post, we had mentioned that the corporate law firm is seeking to modernize Schedule 13(d) rules by broadening the definition of beneficial ownership, as well by changing timing requirements of the filing.

Activist investors' use of security-based swaps in so-called "stealth acquisitions" have come under sharp criticism by the law firm. While, for now, the SEC is likely to maintain the current beneficial ownership reporting requirements as it relates to security-based swaps, the regulatory environment concerning shareholder activism is still very much evolving.

To read the Schulte Roth alert, click here.

To read the SEC's proposed action, click here.

To read Wachtell Lipton's petition, click here.

Image Extracted from Schulte Roth's official website.

Posted by David Schatz