Court ruling gives Campbell’s Soup activist food for thought
Critics of investors such as Dan Loeb given boost by Delaware case
Next week’s Campbell’s Soup annual general meeting is effectively a shareholder referendum on whether the company with a $20bn enterprise value should attempt to sell itself.
Pressing for a potential sale is Dan Loeb, the billionaire activist investor. His fund, Third Point, has nominated five people to join Campbell’s board.
Pushing for a sale is a common activist investor tactic. Research from the investment bank Lazard shows that over a third of activist campaigns involve an M&A push. A good example recently was Jana Partners engineering the $13.7bn sale of grocer Whole Foods to Amazon in 2017, earning itself $300m in gains for an investment it made only a few months earlier.
Critics of these activists — often the incumbent managers and directors they are targeting — argue that these loud Wall Street types are simply trying to make a quick buck. Selling a company at a premium produces easy profits for the investors who have recently bought in. The risk, however, is that the company sells too quickly, undermining the opportunity for long-term value creation.
Such sceptics of activist investors had a boost in October from a Delaware court ruling involving a small US semiconductor company, PLX Technology. An activist fund, Potomac Capital Partners, was found liable for helping engineer the PLX board’s quick-fire sale to its competitor Avago — now known as Broadcom — in breach of the PLX board’s duty to act in the best interests of all PLX shareholders.
Travis Laster, vice-chancellor of the Delaware Court of Chancery, citing a law journal article, wrote: “Activist hedge funds . . . are impatient shareholders, who look for value and want it realised in the near or intermediate term. They tell managers how to realise the value and challenge publicly those who resist the advice, using the proxy contest as a threat.”
A recent memo from Cadwalader, the Wall Street law firm, said the decision was the first time a Delaware court had explicitly found a corporate director to be conflicted simply on the basis of affiliation with an activist hedge fund. The ruling will be appealed and several experts cautioned against any wider lessons as the facts of the case were unique. Still, if hedge funds are now to be labelled an investor requiring heightened suspicion, activists and companies must take notice.
Potomac, eventually owning a tenth of PLX, launched a campaign to unseat five board members in 2013. PLX had been previously been blocked by regulators from selling itself to a rival. Eric Singer, the Potomac founder, pushed PLX to sell itself to Avago, the other bidder in the earlier process. The fund ultimately put three nominees on the PLX board and Mr Singer was appointed to lead the M&A subcommittee. By June 2014, PLX had announced a sale to Avago for $300m.
According to the court’s decision, that sale had been effectively rigged. First, Mr Singer had not shared with the rest of the PLX board his personal communications with its adviser Deutsche Bank regarding Avago’s interest in acquiring PLX. Second, the PLX projections used to value the company were artificially low. Neither of these material issues were properly disclosed in securities filings.
After these findings, however, the court ultimately awarded no damages to the suing shareholders. The deal price, even if it was the result of a corrupt sale process, was still greater than the standalone value of PLX, it said.
That may be Potomac’s best counterargument against the idea that its own interests were divorced from all other shareholders. Mr Laster worried that the PLX board “was susceptible to activist pressure”. That, however, may not always be a bad thing. Lori Marks-Esterman, an attorney for Potomac, said: “The sale of the company was in the best interests of the shareholders. The record shows that the board, including Mr Singer, was open to all strategic options, and the court, in fact, ultimately concluded that the shareholders received consideration that exceeded the standalone value of the company.”
Mr Loeb’s Campbell’s Soup campaign comes after its shares have plummeted by a third in the past two years. He may be wise to push for a sale that the existing board has resisted. And if enough shareholders first back his vision and, later on vote to approve a sale, it is difficult to say there was some sort of misaligned interests between short and long term investors. Activist investors should be handled with caution by boards, but that does not mean their ideas are, reflexively, at odds with broader shareholder interests.