When most people think shareholder activism, they think big names and big hedge funds – Carl Icahn, Bill Ackman, Jana Partners – who have the wherewithal to obtain a sizeable stake in the target company. However, as explored by Ronald Barusch in the Wall Street Journal, a new form of activism, spearheaded by a former Obama aide, Harry J. Wilson, has shown that you don’t need to carry a big stick (or have a major stake in the target company) to have clout as an activist.
In a February 9, 2015 notice to General Motors, Wilson put the company on notice that for their 2015 annual general meeting he (1) intends to nominate himself to stand for election for a seat on the board; and (2) requests that a proposal be put to shareholders that GM should carry out not less than $8 billion in share repurchases. These are the sorts of requests that are fairly typical in shareholder activism by the major funds. What is atypical, however, is that Wilson is the beneficial owner of a mere 30,000 or so shares of GM.
Traditionally, in order to get clout as an activist, you have to buy it, and in order to realize profits, you have to earn them through your shareholdings. Instead, Wilson obtained the backing of four funds to support his plan – Taconic, Appaloosa, HG Vora, and Hayman – who collectively own approximately 31.2 million shares, or 1.9%, of the company’s stock. With respect to Wilson’s potential profits, the notice discloses that Wilson has reached agreements with these funds providing for the reimbursement of funds connected with his activism and for profit sharing on any gains realized from the funds’ shares, if his plan is successful (as defined by the terms of those agreements).
On February 10, GM issued a statement stating that it would evaluate the proposal, and underlining its commitment to act in the best interest of all shareholders.
Although certainly an inventive form of activism, commentators such as Barusch have raised concerns about whether Wilson’s incentives are in line with the long-term best interest of GM. Specifically, the terms of his profit sharing agreements, some of which may require adoption of a version of a buyback plan or, at least, that the buyback proposal be put to shareholders and voted upon, pose a risk of stymying reasonable compromises that may be in the best interests of shareholders. Similarly, Wilson’s limited capital exposure and the fact that the incentive fees are generally only realizable over a three year period might arguably motivate Wilson to prefer short-term gains.
Any misalignment of interests is already a common concern for targets of activist investors. These concerns are likely to be magnified where activism occurs without the safeguard of a substantial investment by the activist. However, such worries may be offset by the interests of the underlying funds. Wilson’s bold move may be the start of a new trend in shareholder activism that companies should be prepared to watch for and defend against in the future.