| Insight for investors who track 13D and other activist filings

Activist’s minority board seat is not an insurance for alpha. Screen companies that experienced a majority board change

by | Sep 3, 2019

Minority board seat: problems faced by activists after securing board seats

Many investors who track activism believe that securing a board seat is a “successful accomplishment” for an activist. Moreover, newspapers and TV channels tend to stop covering activism, as soon as the activist secures a board seat.

Even though securing a board seat is a significant activism milestone, as evident by few activist situations, gaining a minority board seat is not enough. Incumbent directors may not listen to the activist. Minority board representation does not bestow unilateral power to bring change to a company.

There are situations where activist investors expressed frustration after securing board seat(s).

  • Resonant, Park City: In early 2018, Park City complained that the company’s board had carried out a dilutive financing strategy while deliberately excluding Park City’s current board representative, Michael Fox, from the board’s review process. It added that the Resonant board had even taken the extreme and outdated entrenchment measure of forming a committee to operate as a shadow board—which includes all of its directors other than Mr. Fox—to exclude Mr. Fox from board matters.
  • Cars.com, Starboard: After securing two board seats in early 2018, in December 2018 Starboard complained that it had not been able to reach an agreement with the board on the third independent director.
  • Rent-a-center, Engaged Capital: In June 2017, three of Engaged Capital’s nominees were resoundingly elected to the board by shareholders. Within a few days, Mr. Welling of Engaged Capital complained that the chairman had informed him that he would be leaving on a two-month vacation and there was no need for the new board to convene at any time prior to his return.
  • Rockwell Medical, Richmond Brothers: In June 2017, Mark H. Ravich of Richmond Brothers secured a seat on the Rockwell Medical board after garnering overwhelming support from the shareholders. But within a few months he complained that he was “shut-out of the boardroom” and “his requests for materials and access to the company’s personnel have been repeatedly denied.”

What does this mean to investors?

The potential catalyst that investors hope activists will unlock usually remains only on paper, even after activists secure a board seat.

In an article published by Derek D. Bork on The Harvard Law School Forum dated July 7, 2016, Mr. Bork argues that companies may be settling with activists as a defensive measure. Mr. Bork is one of the leading lawyers hired by activist investors during proxy campaigns.

Majority board change: an interesting screening tool

Few activist investors have the patience and persistence to change the majority board to make sure the “catalyst” is unlocked.

By tracking companies that underwent “majority” board changes after activist(s) showed up, investors can increase the odds of success.

To be clear – “majority board” is not mandatory for an activist to implement changes. Also, majority board control does not guarantee alpha.

The argument is simple: investors can increase their odds of success by researching companies that have experienced a majority board change.

Success case studies

(a) Ariad Pharmaceuticals

  • In 2014 and 2015, Sarissa Capital secured one board seat in each year.
  • Significant Board shake-up: In May 2016, two new directors were appointed to the board. After a few weeks, four incumbent directors agreed to resign and the board size was reduced from 11 to 7. As of May 2016, the board comprised of two Sarissa nominees and two new board members i.e. 4 out of 7 are new directors.
  • In February 2017, the company was acquired by Takeda Pharmaceutical for $24.00 per share in cash.

 

 

(b) Darden Restaurant

On October 14, 2014, all of Starboard’s twelve candidates were elected to the board through a successful proxy campaign. Subsequently, the stock price increased significantly.

 

 

Common question: What makes this screen peculiar?

Most of “board control” situations cannot be uncovered by merely reading 13Ds or other activist filings. You need to keep track of company filings along with 13D filings on a daily basis.

Even though this is tough to uncover, it is worth the daunting process.

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