How a SEC rule change has opened more doors for activists

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When the Securities and Exchange Commission introduced a rule change to make it easier for shareholder activists to elect board nominees, there was a notable dissenting opinion from one its commissioners.

Hester Peirce warned that the change would advance special interests rather than enhancing corporate value. Using a light-hearted example, she said even a passionate activist on issues surrounding bees would have leverage to demand companies “put beehives on the roof of each office building”.

The new rules have been in effect since last September. So far, no known proxy battles over beehives. But shareholder activists have made boardroom advances in a busy year for proxy showdowns in the US.

Activists have won 88 board seats through May 31, up from 77 at that point last year, according to Diligent, a data provider. Big activist firms like Nelson Peltz’s Trian and Elliott also scored concessions from Disney and Salesforce respectively without obtaining board seats.

And on Monday, a fight between an activist investor and Masimo, a small medical device maker, will climax at the company’s annual shareholder vote. Politan Capital Management, run by New York-based activist investor Quentin Koffey, has alleged that the corporate governance of Masimo is broken and the company is in need of more independent oversight. Politan has nominated Koffey and another candidate to Masimo’s board. The fight will be key test of a shift in corporate governance influenced by the SEC rule change.

For activists, the new “universal proxy” rule guarantees that all board candidates will appear on shareholder ballots at a company’s annual meeting. It also allows shareholders to pick and choose individual directors. Previously, unless shareholders turned up in person to an AGM, they were forced to vote for a slate of the company’s nominees in contested elections or those of the activists.

Proposed by the SEC in 2016, the rule change was applauded by activists such as Carl Icahn and was not adopted until Democrats came back into power under president Joe Biden.

The universal proxy voting rules raised concerns among companies that potential activists — environmentalists, labour unions and human rights advocates — would have an easier time waging proxy campaigns. Hester argued any activist “need only to dangle the possibility of buying a few shares and putting forward directors to scare management into the negotiating room”.

For months, Wall Street’s big law firms warned clients of boardroom chaos, predicting non-traditional activists would try to nominate directors. Fears peaked when a former Warner Music executive launched a campaign in early December to put herself forward for a board seat, relying on the universal proxy rule change. Fearing an activism surge, hundreds of companies rewrote their corporate bylaws to make life harder for activists.

Some bylaw changes demanded more information from activists, including about their funders. Masimo approved such changes last year, and in October, Koffey sued the company to overturn its bylaw changes. Masimo eventually relented and allowed Koffey’s nominees to proceed to a vote on Monday.

“Companies were weaponising their bylaws a lot more than ever,” said Elizabeth Gonzalez-Sussman, vice-chair of the activism practice at law firm Olshan.

But while bylaw changes might ward off unsophisticated activists, they offer only a false sense of security. If activists will splurge on a court fight to war over arcane bylaw changes, then these defences will prove beatable, says Richard Thomas, a managing director at Lazard. 

“If the juice was worth the squeeze it is going to be worth the squeeze no matter what the bylaws say,” he says. “You really don’t avert a problem simply by bylaw changes.”

The activists’ successes in winning more board seats this year also show conventional shareholders and asset managers approve of the need for board overhauls at certain companies. On the Masimo battle, asset manager Neuberger Berman has already said it is voting for Koffey, who previously worked at DE Shaw and Elliott Management, and his other candidate, citing concerns about corporate governance at the company.

Shaun Mathew, a partner at law firm Kirkland & Ellis, says the fundamentals of activism did not change because of the SEC’s universal proxy changes. Rather, they “may have made it somewhat easier for activists to win at least one board seat”. In the months ahead, “boards should also not take too much comfort”. Perhaps boards would have preferred a “bee activist” after all.

patrick.templewest@ft.com