Hedge Funds, Activists Go Undetected

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The 13D rule requires investors to disclose stakes of more than five percent, and the Hart-Scott-Rodino Act requires investors to disclose when they invest more than $60 million.  With these required alerts in place for decades, why are public companies surprised when they find a hedge fund or activist fund has taken an enormous stake and is well poised to mount a proxy contest?
 
Today’s hedge funds and other activists have cleverly found that the law requires them to disclose only when they control more than five percent of the vote, not five percent of the “economics” in a company.  These hedge funds and activists have quietly and cunningly been able to get around the rules through complex “swap” agreements with investment banks.
 
Here’s a simplified version of how the loophole works: An investor calls an investment bank and says, “Please buy 100 shares of company X. You can hold onto those shares in your name — and technically, you can do whatever you want with them. In six months, if the shares have gone up, you’ll owe me the difference. If they go down, I’ll owe you. And for all the cartwheels you’re doing for me, I’ll pay you a ‘small’ fee.”
 
The banks buy the shares on the investors’ behalf, but technically never transfer full ownership until a predetermined time and price.  During the time in which these shares are “parked” in the investment bank’s name, the investors do not own the shares at all, just the “economics” of them, and are therefore not required to file the regulatory notices.
 
Is this legal?  The answer is yes.
 
Although it may sound absurd, the funds are doing nothing wrong. But given the possibility for abuse and the impact on other shareholders, this loophole should be closed.
 
A spokesman for the Securities and Exchange Commission said they are looking into the issue — but clearly they are not acting fast enough.

 

— PondelWilkinson, investor@pondel.com
 
 

NYSE Euronext to Acquire AMEX

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NYSE Euronext, the owner of the New York Stock Exchange, announced that it has entered into an agreement to purchase the American Stock Exchange (Amex) for $260 million in NYSE Euronext stock.  As part of the transaction, current Amex members will be entitled to receive additional shares of NYSE Euronext common stock based on the net proceeds from the expected sale of Amex’s lower Manhattan headquarters.
 
The deal is expected to close in the third quarter of 2008.  No word yet on what impact, if any, the merger will have on Amex listed companies.

 

— Laurie Berman, Senior Vice President, lberman@pondel.com
 
 

Fed Head Acknowledges Risk

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Federal Reserve chairman Ben Bernanke told the Women in Housing and Finance and Exchequer Club today that the U.S. Central bank is prepared to act aggressively to help stem problems caused by the recent housing slump and strains on the credit markets that are putting economic growth at risk.
 
Many analysts who fear that the United States is headed for a recession, reacted positively to the Fed chairman’s remarks and his public acknowledgement that the economy may indeed be in trouble.
 
Bernanke commented that policy makers are now more worried about sustaining economic growth than they are about inflation and pointed to rising oil prices, lower stock prices and falling home values as drivers for hurting consumer spending over the next year.
 
The Federal Open Market Committee, the Fed’s policy setting body, will hold a two-day meeting January 29-30.  Bernanke’s comments today reinforced expectations that rates will be cut by a half percentage point.

 

— Laurie Berman, Senior Vice President, lberman@pondel.com
 
 

Kendall Jackson

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So, NIRI hosted its annual Los Angeles dinner last night at the Loews Santa Monica Beach Hotel.  I was the first person to arrive (gulp) and quickly did a u-turn at the door to avoid feeling like an over zealous investor relations professional.  But then I noticed Kendall Jackson standing at the bar.  I affixed my name tag to my lapel and meandered over to the bar for a chat with Mr. Jackson.  I kept my head down at first, you know, to keep the casual nature of the event in full effect.  Armed with business cards and a fresh coat of antiperspirant, I proceeded to speak with Mr. Jackson.  I said hello, and before he could utter a word, his handler, the bartender, informed me that it would cost $5 to speak with Mr. Jackson.
 
I forked over the $5 and spent the next hour and a half entertaining Mr. Jackson, along with other investor relations professionals.  We met Jeff Morgan, the recently appointed chief executive officer of NIRI.  We said hello to Jim Lucas of Abernathy MacGregor.  We also listened to Linda Kelleher, executive vice president of NIRI, talk about shareholder activism and where the industry is headed.  Specifically, Kelleher said instead of letting activist shareholders come to you with questions about a particular company, you should proactively be reaching out to them.  My motto for 2008: Engage activism with activism.  And with that I finished my conversation with Kendall Jackson and proactively ordered another one at the bar.

 

— Evan Pondel, Senior Associate, epondel@pondel.com
 
 

E-Proxy Timeline for Early Adopters

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According to NIRI, 29% of investor relations officers surveyed said that they expected their companies to adopt a combination of notice and full set delivery of proxy materials in 2008.  22% plan on using the notice only model (also called the notice and access model in which a company sends a notice to shareholders at least 40 days before its annual meeting of shareholders letting them know that proxy materials are available on a public website other than EDGAR), while only 3% plan on sending a full set of proxy materials to all shareholders.  Almost half of those surveyed were still undecided as to how their company’s proxy materials will be delivered this year.

For those companies choosing to blaze the e-proxy path, the following timeline provided by NIRI should prove helpful:
 

  • Immediately – Determine method for proxy material delivery (notice only, full set delivery only or a combination of the two).
     
  • 60-100 days prior to annual meeting – Coordinate proxy delivery plans and important dates with partners, including your IR firm, outside legal counsel, annual report printers, proxy material website builders and proxy solicitors.
     
  • 46+ days prior to annual meeting – Confirm that your proxy website is running properly.  Remember that materials must be in both readable and printable format.  The website must ensure visitors’ anonymity and be capable of handling heavy traffic.
     
  • 45+ days prior to annual meeting – Deliver notice and access cards to all parties responsible for mailing materials to your shareholders.
     
  • 40+ days prior to annual meeting – Mail notice and access cards to shareholders (as well as printed proxy materials if you are adopting a combination delivery strategy).  Remember to file your notice and access card with the SEC.

 
Some additional NIRI pointers:
 

  • Monitor proxy responses regularly.
  • Respond to investor requests for printed materials within three business days.
  • Record requests from shareholders who have opted to receive paper materials on a permanent basis.

 

— Laurie Berman, Senior Vice President, lberman@pondel.com
 
 

A Little Optimism for ’08

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It never hurts to express a little optimism for what could be in 2008.  And the Wall Street Journal did just that this morning with a list of why investors should feel pretty darn good about the year ahead.
 
Drum roll, please.
 

  1. Stocks rally — Assuming we’ve seen the worst in the fourth quarter.
  2. The housing market stabilizes — Really, how low can it go?
  3. Consumer spending remains solid — A healthy job market is keeping those cash registers ringing.
  4. Corporate profits accelerate — The jury is still out on this one.
  5. Economic growth accelerates — The Fed’s gonna have to provide some assistance here.

 

 — Evan Pondel, Senior Associate, epondel@pondel.com
 
 

Bubbles, Bubbles, Bubbles

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A little cynicism to start the new year off right!
 

 

— PondelWilkinson, investor@pondel.com
 
 

Conference Buzz: Bored of Directors

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Rising shareholder activism clearly topped the hot topic list when the National Investor Relations Institute’s senior-most members got together recently at their annual roundtable bash at the posh Montage resort in Laguna Beach.
 
Two take aways…
 

First, consider having a large institutional shareholder sit on the board. Other professional shareholders will like that and sense that their interests are being well represented. It will keep activists away.
 
Second, in a swing of the pendulum and score for baby boomers and smart young dot-com retirees, seek board board members. No, that was not a typo you just read. The wisdom being imparted relates to seeking directors who have time to be directors, rather than time-strapped CEOs and others who are actively engaged in their careers.

 
As for Laguna Beach, it was too chilly to get a suntan.

 

— Roger Pondel, President, rpondel@pondel.com
 
 

OTCBB – Stock Symbol Requests Not an Option

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Issuers with stock trading on the OTC Bulletin Board (OTCBB) need to be aware that a corporate transaction, which results in the issuance of a new cusip number, triggers an automatic change in the ticker symbol. According to the folks at the OTCBB, the issuer is “not allowed” to reserve or request a specific ticker symbol.  No ifs, ands or buts about it.  While no one I spoke with at the OTCBB could tell me why requests and/or reservations are not allowed, the only possible conclusion is that allowing reservations on the OTCBB would reduce the pool of ticker symbols available to Nasdaq traded issuers.

 

— PondelWilkinson, investor@pondel.com
 
 

Do Retail Investors Matter?

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A recent survey by Thomson Financial noted that only 18% of 102 investor relations officers (IROs) surveyed actively court individual investors and that less than 25% had plans to begin doing so in the near future. In a report on the survey, IR Magazine, noted that while some IROs believe individual investors can add to the stability and diversity of their company’s investor base, many do not think the effort is worth it, citing the tribulations of dealing with mom-and-pop investors who might panic with downward price movements, bombard companies with questions and increase the risk of securities class actions.

However, for a public company that is largely held by institutions, increasing the retail base might not be a bad idea. Increasingly, large institutions and mutual funds are becoming activist in nature and many are opposing proxy initiatives. The National Association of Investors Corporation (NAIC) notes the following characteristics of retail investors:

  • On average, NAIC’s 119,000 members hold a stock for at least four years (that is much, much longer than the average institution holds a stock).
  • The combined portfolio value of NAIC members is $70 billion.
  • Cumulatively, NAIC members invest approximately $75 million of new capital per month.

So, if you’re an IRO looking for a way to bring new interest into the stock, it might be worth investigating some of the retail-oriented investor communications programs that are available to help you reach this powerful group of long-term investors.

— Laurie Berman, Senior Vice President, lberman@pondel.com