The activist investor definition and the term activist shareholder defines an individual investor or institutional investor, such as an activist hedge fund, that purchases a non-controlling minority stake of the voting class of a public company’s equity securities to effect changes within the target company.
Activist investors do not own, control or manage the corporations in which they invest. Instead, they rely on the support of institutional investors and pension funds to exert influence and exercise their shareholder rights.
In the United States, activists must disclose their activist stake by filing a Schedule 13D with the U.S. Securities and Exchange Commission (SEC). This requirement is triggered whenever an activist investment passes the 5% threshold of the voting class of a company’s shares.
No other turn of events has shaped public companies’ operational and financial decision-making as thoroughly as the rise in shareholder activism and activist investing strategies in the wake of the global financial crisis of 2008.
Famous activist investors, such as Carl Icahn, Nelson Peltz and Bill Ackman, have been remarkably successful in agitating for change at a number of high-profile activist targets in recent years. In 2014, a total of 344 companies worldwide were targeted by activists, up 18% from the 291 recorded in 2013, according to a report by Activist Insight, causing shake-ups at big corporate names that resulted in 75% of activist demands being at least partially satisfied, up from 67% in 2013.
Whenever the CEOs and management of public companies lack appropriate incentives to maximize shareholder value, good corporate governance becomes essential. Without it, managers run the risk of maintaining their position regardless of performance while receiving excessive executive compensation and depleting free cash flow on value-reducing acquisitions.
Activists and activist hedge funds, on the other hand, are unique in that they maintain more concentrated portfolios and are subject to fewer reputational risks and regulatory constraints. This permits the activist investor to function as an important intermediary in global equity markets by driving sustained improvements in operating performance and shareholder value at public companies.
Even though hedge fund activism and activist investor strategies have transformed in recent years, the primary activist themes remain the same and can be categorized as follows:
These activist engagement themes, while broad in scope, provide a general direction for most activist investor strategies. Although activist strategies will include many different proposals that are likely to touch on many different themes, the activist investor strategies tend to aim at bringing more rigor to target companies and engaging passive institutional investors.
Activist investor tactics are relatively diverse and range from collaborative to contentious, including negotiations with management, public campaigns, shareholder resolutions, proxy contests, and litigation.
While high-profile activist campaigns garner the most attention and despite how activists are portrayed by embattled management teams, many activists prefer to approach companies privately in an effort to address the issues in a collaborative manner. Nonetheless, in certain instances, activist investor tactics will incorporate steps to put pressure on target companies prior to escalating the activist engagement:
Due to the financial expenses and the time associated with launching a proxy contest and pursuing litigation, relatively few activist investor campaigns proceed past letters and presentations to a company’s management and board. This is also true for target companies that increasingly seek an amicable settlement in an effort to avoid a contentious battle in light of the changing attitudes of institutional investors and proxy advisors.
Activist funds and activist shareholders are increasingly using online platforms to engage and make their case for constructive dialogue. The importance of social media as an interactive platform for activist investors dates back to 2007 when an individual activist investor launched an online engagement at Yahoo which ultimately resulted in the company’s then CEO to resign.
The new normal for a growing number of public companies is active use of social media to live-tweet quarterly earnings calls, share YouTube video messages from leadership and post corporate blog updates to amplify annual meetings. Some of the more prevalent online engagements currently pursued by both the activist investor and the target companies include the following:
It is expected that social sharing and communication tied to activist investing will continue to increase in the future. If the past is any indication, activist investor funds will seek to remain innovative with their digital communications strategies and investor engagement approaches moving forward.
Twitter has a long-established record as the go-to communication platform for breaking, real-time news and information.
The appeal of the platform’s growing reach and real-time impact has already prompted a few shareholder activists, including Carl Icahn (@Carl_C_Icahn), to present their views and respond promptly to criticism through their personal accounts.
Since many more activists are likely to establish an active presence on the social network in 2016, we encourage your to subscribe to our Twitter lists to follow new activist investor resources as they continue to emerge:
Time will show whether the level of shareholder engagement will continue to increase as institutional investors become more involved in activism and more supportive of activism as a catalyst to bring to light potential shareholder value creation opportunities.
Although historically these investors have preferred to avoid supporting an activist investor directly, in today’s corporate environment there seems to be a distinct decrease in the number of “management-friendly” investors that were the norm only a few years ago despite the ongoing debates about reducing shareholder rights.