The Activist Investor Blog
The Activist Investor Blog
Fun With Exempt Proxy Solicitations
The few times in recent years that investors have pursued an exempt proxy solicitation, they’ve succeeded - in restructuring a BoD, changing executive teams, and making other necessary improvements at an underperforming portfolio company.
We think investors should take advantage of the “ten-or-fewer investors” exemption from the SEC proxy solicitation rules more often.
The conditions to do this are not as uncommon as one might think. In addition to the typical valuation metrics a portfolio manager might follow, one looks for two other conditions:
❖low insider ownership
❖high ownership among the top ten institutional shareholders.
Of course, “low” and “high” vary by company. For starters, we’d suggest that an investor look for insiders to have under 10% of the shares outstanding, and for the top ten institutions to have at least 40% of shares outstanding. But, what works will depend on a number of other factors, including the nature and size of institutional shareholders outside of the top ten, and of individual investors.
We now have three resources for investors that want to learn more about the exemption:
1.We’ve put together a guide to the mechanics of exempt proxy solicitations. It discusses the applicable regulations and explains how to decide whether it makes sense for a given portfolio company. We also include a checklist for using the exemption.
2.We analyze how the exemption might work on a portfolio of companies. Our equity research, “Effective Activism, on the Cheap”, combines the two conditions from above with some other typical valuation screens. We thus identify the impact that an exempt solicitation can have on portfolio value and management costs. That research, which we originally undertook in May 2010 and updated in August 2012, shows that for a reasonable sample of companies, exempt solicitations can reduce the costs of activist investing.
3.We illustrate how the exemption works in a case study. Four prominent investors used the ten-or-fewer exemption to restructure the BoD at Take-Two Interactive Software. As they asked themselves at the time, “Can’t we just call these four or five people up and change control?" While these investors did this in 2007, the lessons learned then apply equally to investors today.
Under the right circumstances, investors can achieve their objectives with some careful research and planning, and clever use of this little-known regulation.
Tuesday, September 11, 2012