What Happens When You Pick A Fight With Activist Hedge Funds

dupontAt the end of the musical Camelot, King Arthur, near the end of a tumultuous reign, commands a youngster, Tom of Warwick, to stay away from battles. Tom, an idealist, has heard wonderful tales about the Roundtable, and he wants to become a knight.

Arthur mutters that this is an extinct career. His army is about to encounter Lancelot’s army, and however the battle goes, the war itself means the end of Camelot. Still, he cannot turn away this lad, who has come before him as proof that his own youthful idealism may live on.

So the King knights Tom, and after doing so, King instructs him that now, as a proper Knight, Tom is obliged to follow the King’s orders. And the orders are as follows: “You will run behind the lines, you will return to England, you will live, and grow old, and have children.”

“Tom” is supposed to remind us of us of Thomas Malory, author of the 15th century masterpiece The Death of Arthur, and a Warwickshire man in whose debt stand all subsequent tellers of the legend, including of course Broadway’s Lerner and Loewe.

Their tear-jerker ending to that famous play comes to mind because the latest twist in the struggle over DuPont’s board has a venerable figure in the corporate-governance bar sounding a bit like King Arthur at that moment. Martin Lipton (pictured here) is unrepentant about the fights he has fought but he doesn’t want the next generation to keep fighting them.

Trian Fund Management currently owns approximately 24.6 million DuPont shares, and it is seeking the election of four nominees to that corporation’s board: Trian’s principal, Nelson Peltz; along with John H. Myers; Arthur B. Winkleblack; Robert Zata. On April 27th this campaign received a boost when Institutional Shareholder Service recommended that shareholders vote for two of those nominees at the May 13th meeting: Peltz himself, and John H. Myers.

What does this have to do with Camelot?

Martin Lipton, and his law firm, Wachtell, Lipton, Rosen & Katz, have no dog in this fight. Specifically, they are not representing DuPont.

But Lipton did interject himself in public discussion nonetheless, and he did so in a surprising way. Lest we forget, (or lest we “let it be forgot”), Lipton invented the poison pill. Insofar as any lawyer can be such a thing, Lipton is the face of that portion of the bar that defends corporate boards against disruptive influences from without, especially when “from without” means from the shareholders, either because they can sell to possible acquirers or because they have access to proxy machinery.  We at AllAboutAlpha have paid tribute to Lipton’s significance in this regard more than once.

So it was a bit of a surprise to see his reaction to the ISS report. In a post on the “Harvard Law School Forum on Corporate Governance and Financial Regulation,” Lipton conceded that at least some of those hedge fund meddlers have acquired, even one might say earned, credibility: “Trian Fund Management and its founder, Nelson Peltz, have clearly established credibility and acceptability. So too other well regarded funds like ValueAct. They have become respected members of the financial community.”

A well-advised corporation will work with the Trians and ValueActs of the world, rather than seeking to entrench itself against their influence, and will when appropriate adopt their suggestions. If Trian issues a whitepaper making public its view on a dispute, said corporation’s managers should be ready with a detailed response, not boilerplate intransigence. Otherwise ISS will, as here, generally support the dissidents, and life will be unnecessarily difficult for the corporate managements, even those who in time and with cost defeat the challenges before them. So … deal rather than fight. That was the gist.

Let Me Clarify That

CNBC’s Faber Report, on April 30th, broadcast excerpts of an email exchange between Lipton and an unnamed client. The anonymous correspondent expressed surprise that Lipton’s view on activists has mellowed so much. I wrote, “I don’t have any idea what caused you to change your mind.”

Lipton (again according to the leaks broadcast by David Faber on CNBC) responded that he hadn’t changed his mind all that much. He does not endorse Nelson Peltz and he continues to disapprove of Peltz’s tactics in proxy fights.

Even in that clarification, though, Lipton acknowledges that the legal and financial world has changed, and not in the direction he has championed. He writes, “I’m not doing my job if I don’t alert [clients] to the current state of the world, even if I don’t like it and don’t agree with it.”

Insofar as the last thirty-three years (since that first Shareholder Rights Plan) have been rather good for incumbent corporate managers and their lawyers, their Camelot may at last be crumbling. They may have to look to accommodation rather than defiant stands, hereafter. Thus, sadly, the King tells younger lawyers – Toms of Warwick — to stay away from at least certain sorts of battle, while offering his continuing “no regrets” defiance via leaked emails.

Ask every one if he has heard the story, and tell it loud and clear if he has not.

 

 

 

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