The Boardroom Strikes Back

APRIL 21, 2015

This year’s proxy season is turning out to be more hostile than ever, as companies fight back against hedge fund activists.

Companies typically have their annual meetings in the late spring, like the blooming of tulips, and they attract hordes of shareholder activists looking for profits. The activists will often try to elect directors, making proxy season not a reminder of the warming spring but a clarion call for the barbarians at the gate.

Last year, the activists won a series of stunning victories at Darden Restaurants, Sotheby’s and the real estate investment trust now known as Equity Commonwealth, among others. In each case, the companies refused to bow to the activist agenda, preferring instead to try to prevent the activists from electing directors. Each company lost after spending millions of dollars, wasting both money and their boards’ reputations.

The losses actually came as no surprise. In 2014, activists had a 73 percent success rate in electing directors, according to FactSet’s corporate governance database, SharkRepellent. Given the odds, many, including me, predicted that this year’s proxy season would be all about settling as companies sought to avoid these types of bloody losses. This would be the year that shareholder activists dominated completely as companies ran for cover.

We were wrong.

The companies are fighting back. According to the proxy-advisory firm Institutional Shareholder Services and data from SharkRepellent, about 32 out of 78 contests will go to a vote in the second quarter of 2015 alone. This compares with 33 out of 92 contests for all of 2014. Well-known names like Tempur Sealy International, DuPont, MGM Resorts, Macerich and Shutterfly are all fighting proxy contests and refusing to settle with activists.

What explains the surprising, fighting turn?

In large part it is the unique circumstances of each company.

The investment firm H Partners Management, which says it is the largest shareholder of Tempur Sealy, is seeking the ouster of the company’s chief executive, Mark A. Sarvary, which leaves no room for compromise.

At DuPont, the board offered to settle with Nelson Peltz’s hedge fund, Trian Partners, by offering a board seat to one of its candidates. But Trian, which owns 2.7 percent of DuPont, has refused these overtures because it did not include a spot for Mr. Peltz himself. Instead, Trian has preferred to accuse DuPont, which has performed reasonably well, of a laundry list of lapses, including overspending, bad corporate governance and poor negotiating skills in selling assets. This is a fight that should have long been over, except it took a detour into the personal.

Personality often plays a big role in these battles, pushing parties to contest rather than settle. The fight at Wynn Resorts is not a traditional shareholder activist battle but an internecine one between Stephen A. Wynn, the chief executive, and his former wife, Elaine, who is seeking to remain on the board. The messy battle involves a divorce decree and the sale of shares, and it has devolved into nasty accusations of incompetence and sexism.

The trend toward fighting rather than fleeing extends to the exotic, with activists singling out REITs in particular this proxy season. The investment firm Land and Buildings has taken aim at Macerich and the Associated Estates Realty Corporation. Macerich is notable because it adopted a “just say no” defense to a hostile takeover bid by Simon Property, refusing to negotiate with the company, which later withdrew its offer. That Macerich is now the target of an activist is no surprise and should be a cautionary tale to any company that simply refuses to entertain a hostile bid.

The horrible shareholder governance that is all too common in REITs is also drawing non-hedge-fund activists in. Unite Here, a labor union that also seems to like shareholder activism, is taking aim at Hospitality Properties Trust and Ashford Hospitality Trust, seeking to elect directors to improve their corporate governance. The REITs, true to form, are resisting.

What is also noteworthy about the 30 or so contests that Institutional Shareholder Services pegs as the most hostile is that with the exception of Trian, none of the biggest shareholder hedge fund activists — like Greenlight, Pershing Square, Elliot, Jana or Third Point — are involved. Even the Wile E. Coyote of shareholder activism, Carl C. Icahn, is absent.

For the most part this is because companies settled quickly in the face of attacks by these giants. Pershing Square took aim at Zoetis at the end of last year, but the company settled almost immediately. Mr. Icahn settled with Gannett and Manitowoc soon after he announced his positions in those companies.

Meanwhile, Greenlight has mostly been shorting companies; Third Point is digesting Sotheby’s and focusing on Japan; and Jana has focused on campaigns to maximize shareholder value at Qualcomm and Hertz without proxy campaigns. Elliot has been silent, also perhaps focusing on its current investments.

Instead, newer or lesser-known funds are leading the activist charge. For example, a hedge fund coalition led by Harry J. Wilson, a member of the government task force that administered General Motors’ bailout, sought a stock buyback from the automaker, which capitulated quickly. Sarissa Capital Management, a three-year-old fund, is conducting a proxy contest at Ariad Pharmaceuticals, which makes cancer drugs. Meanwhile, Land and Buildings, which is six years old, is taking on MGM International in addition to the two REITs.

Companies may be fighting back precisely because these hedge funds are relative newcomers, thinking they have a better chance against lesser-known funds without the experience or reputation of the biggest ones. The urge to fight may also be because of a change in mood.

Some of the big institutional investors are starting to question the shareholder activism boom. Laurence D. Fink, chief executive of BlackRock, the world’s biggest asset manager, with $4 trillion, recently issued a well-publicized letter that criticized some of the strategies pushed by hedge funds, like share buybacks and dividends, as a “short-termist phenomenon.” T. Rowe Price, which has $750 billion under management, has also criticized shareholder activists’ strategies. They carry a big voice.

There has been at least one notable corporate victory so far. Biglari Holdings, the restaurant company, fought off a proxy battle from Groveland Capital, which held only 0.2 percent of the company. While the chief executive, Sardar Biglari, holds about 19 percent, giving the company a head start, its victory is all the more remarkable because the company is a symbol of bad governance. It paid Mr. Biglari $34.4 million last year, prompting recommendations against the management slate from I.S.S. and Glass Lewis, the other big proxy adviser.

The shifting landscape of shareholder activism perhaps signals a transition. With more players and money pursuing it, companies seem to be adopting a more nuanced strategy that takes into account the fact that not all activists are alike. Activism this year has also mostly been a midcap affair, with hedge funds taking aim at only three companies with market values of more than $10 billion — G.M., DuPont and Macerich. The bulk has focused on companies worth $2 billion or less.

For those who are a bit weary of the knee-jerk response of companies to buy back shares or pay dividends at the first sight of a shareholder activist, this may be a welcome development. To be sure, sometimes the goals of activists are worthwhile, but Mr. Fink may be right that companies are rushing too fast to embrace short-term payouts at the expense of long-term value.

Still, whether the hostility of spring becomes perennial remains to be seen. It will depend on how this year’s contests turn out and whether companies find that fighting the shareholder activists is worth it. Take a seat at the ring.

Steven Davidoff Solomon, a professor of law at the University of California, Berkeley, is the author of “Gods at War: Shotgun Takeovers, Government by Deal and the Private Equity Implosion.” Email: dealprof@nytimes.com | Twitter: @StevenDavidoff

A version of this article appears in print on April 22, 2015, on page B5 of the New York edition with the headline: After Defeats at the Hands of Activists, the Boardroom Strikes Back.

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