A shareholder activist is a shareholder who uses his or her stake in a publicly-traded company to exert pressure on management to take a certain approach. Since obtaining a controlling interest through a takeover is a costly process, shareholder activists instead leverage a relatively small stake of less than 10% of the outstanding shares to initiate a campaign.
The goal of shareholder activism may range from financial reasons, such as unlocking shareholder value, to non-financial reasons such as adopting environmentally friendly policies, divestment from politically-sensitive countries, and increased support for workers’s rights, etc.
Shareholder activists acquire a sizable stake in the target company in order to gain a seat on the board of directors. By gaining influence within the target company, the shareholder activist can initiate changes aimed at reducing operational costs, improving efficiency, divesting from certain countries, and maximizing profits.
A shareholder activist is a shareholder who uses his or her equity stake to bring change within the company.
A shareholder activist targets companies with high costs, are mismanaged, or with an opportunity of becoming profitable if they are taken private.
Notable investors who consider themselves shareholder activists include Carl Icahn and Bill Ackman.
Shareholder Activist Explained
A business may be a target for shareholder activism if it reports high costs, suffers mismanagement, or if a shareholder believes that a company could become more profitable if it is run as a private company. For an investor to launch a successful campaign, they do not need to hold a majority stake in the target company. Instead, they can acquire 10% or less of the outstanding shares to have a voice on the board.
Investor types that typically choose to act as shareholder activists include hedge funds, private equity firms, and high-net-worth individuals. Such individuals buy shares of less effective or mismanaged companies from the open market to increase their stake to a level that gives them control or a board seat.
Usually, the market gets tipped off to these strategic plays when the investor makes required public disclosures. In the United States, the Securities and Exchange Commission (SEC) requires investors who acquire at least 5% of the voting class shares to file SEC Form 13D.
How Shareholder Activism Works
Shareholder activists may target companies that hold excess cash reserves that could be distributed to shareholders as dividends. If the investor thinks that the company does not need the excess cash pile and there is a possibility of distribution, he will start growing his ownership stake in the company to get a seat among the board members. In such a way, the investor hopes to persuade other stakeholders to agree to a large dividend distribution.
Where a target company is incurring high operating costs, a shareholder activist may suggest cutting salaries paid to the management, scrapping non-performing business units, and other measures that return the company to the path to profitability. The shareholder activist relies on other external institutional investors who share the same ideas and can exercise their shareholder rights to pass the resolution during the shareholder’s meeting.
The shareholder activist can employ multiple strategies ranging from contentious to collaborative approaches, such as public campaigns, proxy contests, litigations, and negotiations with management.
Notable Shareholder Activists
The following are two notable shareholder activists who became famous and feared by influencing management decisions to increase shareholder wealth:
Carl Icahn is one of the most recognized activist shareholders who is also a recognized traditional investor and philanthropist. Icahn started as a stock trader on Wall Street in the early 1960s. He founded Icahn & Co. in 1968 with a focus on arbitrage and options trading.
In the 1980s, Icahn started positioning himself as a corporate raider by buying sizable positions in companies. His notable acquisition is the 1985 takeover of TWA Airlines, which was one of the largest airlines in the U.S. at the time. Through the acquisition, he successfully prevented the company from becoming bankrupt by steering the company onto the path to profitability.
He founded Icahn Enterprises in 1987 as a diversified holding company that attempts to increase shareholder value by influencing management decisions or acquiring a controlling interest in target companies. The company holds significant positions in Cloudera, Hertz Global, and Herbalife.
Bill Ackman is the CEO of Pershing Square Capital Management. Ackman considers himself a shareholder activist, and he owns a sizable interest in Wendy’s International and Target Corporation. He is famous for his short position and public relations campaign against Herbalife, which he lost to Carl Icahn.
In 2011, Ackman initiated a proxy campaign against Canadian Pacific Railway, campaigning to change the management of the company. In an SEC 13D disclosure in October 2011, Ackman’s hedge fund announced its acquisition of a 12.2% stake in the Canadian Pacific, which later increased to 14.2%. The acquisition made Ackman the largest shareholder, giving him significant influence over the company’s board of directors.
Ackman initiated a change in the management and replaced them with another team that he considered more competent. The change in management helped double the share price of the company, increasing shareholder value.
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