The 2016 Proxy Season - J.P. Morgan Homebut the 2016 proxy season saw an increase of 15 percentage points in their contribution as they announced nearly 200 campaigns.5 4 Global Hedge

The 2016 Proxy SeasonActivists setting their sights further afield

ii | THE 2016 PROXY SEASON

Published by J.P. Morgan’s M&A team in August 2016

Corporate Defense and Shareholder Activism

David Hunker Head of Shareholder Activism Defense E: [email protected] T: +1 212 622 3724

Global Mergers & Acquisitions

Hernan Cristerna Global Co-Head of M&A E: [email protected] T: +44 20 7134 4631

Kurt Simon Global Chairman of M&A E: [email protected] T: +1 212 622 9882

David Freedman Head of M&A Capital Markets E: [email protected] T: +1 212 272 4209

Chris Ventresca Global Co-Head of M&A E: [email protected] T: +1 212 622 2228

Anu Aiyengar Head of North American M&A E: [email protected] T: +1 212 622 2260

THE 2016 PROXY SEASON | 1

Please note: Use of this material is subject to the important disclaimers set out on the inside back cover.

Contents Executive summary 2

1. 2016 proxy season key takeaways 4

Campaign demands in the U.S. continue to shift from capital allocation to overall corporate strategy 4

New managers continue to wade into the fray 5

Campaign volume is growing in every region outside the U.S. 6

Institutional investors are an integral part of the shareholder democracy 8

2. Notable emerging trends 10

As the number and types of activists increase, their target universe is also expanding 10

Aided by the trend toward quick settlement, activists have succeeded in gaining board seats 11

Short selling has become an entrenched subset of shareholder activism 12

Activist funds — and hedge funds more broadly — are feeling pressure from institutional clients 14

Activists are facing increased scrutiny from regulatory and legislative authorities 15

3. Implications for companies 16

Communicate proactively and clearly with shareholders 16

Think strategically about all external communications 17

Proactively address corporate governance lightning rods 18

Be ready to engage if and when activists show up 18

4. J.P. Morgan M&A advisory solutions and shareholder activism expertise 20

2 | THE 2016 PROXY SEASON

Executive summary

Activism continues to be one of the most dynamic investment strategies across global equity markets. In the past five years, it has evolved from a handful of seasoned hedge fund managers targeting underperforming stocks to a population comprising over 80 direct activist funds, in addition to the even larger group of multi-strategy and event-driven hedge funds that also frequently engage in activism.1

The 2016 proxy season further solidified activism as a widely accepted strategy within global equity markets. Activist-style engagement is now embraced by myriad investors, ranging from newly minted activist funds to traditional long-only investors. Other constituents are also making their voices heard, including labor unions and former executives with significant ownership stakes. As the universe of activists has expanded, so too have their parameters for screening prospective targets. Companies performing in line with (or even outperforming) peers can be targets. Companies once thought too big for activists to tackle or too small for them to notice can be targets. International markets once considered unfriendly to activism have begun to welcome the strategy — both by homegrown funds and with the appearance of U.S. funds seeking opportunities abroad. In summary, the 2016 proxy season has demonstrated the versatility of the activist investing strategy and the willingness of its applicants to expand far beyond its roots in their search for alpha.

Yet, despite its widespread use and acceptance, activism faces some headwinds as well. After growing at a compound annual rate of 23% from 2009 to 2015, total assets under management (AUM) for direct activists decreased by 8.5% during the first half of 2016 to $112.5 billion, as a result of both underperformance and outflows from the strategy. Hedge funds more broadly have experienced outflows too. Large pension funds and other fund investors are questioning whether the sector’s recent low returns merit their fees, particularly when compared with the returns and fees of passively managed products. On another front, regulatory and legislative authorities have taken notice of activists’ impact on companies and are revisiting their disclosure requirements. The U.S. Department of Justice (DOJ), Federal Trade Commission (FTC) and Congress have all recently examined ways in which to curb activists’ ability to build significant ownership stakes and exert outsized influence on companies, either by more strictly enforcing existing reporting requirements or by introducing legislation aimed at tightening regulatory rules.

¹ Global Hedge Fund Industry Report — Second Quarter 2016, HFR (www.hedgefundresearch.com). Note: In distinguishing activist strategies within the broader category of event-driven hedge funds, HFR defines activists as those that would expect to have greater than 50% of their portfolios in activist positions over the cycle.


2016 proxy season key takeaways

• As the strategy matures in the U.S. and the asset class becomes more competitive, campaign demands have continued to shift from capital allocation to addressing overall corporate strategy and advocating transformative transactions.

• Despite the underperformance of certain high-profile managers over the past 12 to 18 months, new managers continue to successfully attract funds and wade into the fray.

• Activism has become far more prevalent in international markets, with much of the growth in 2016 campaign volume originating in Europe and Asia.

• While U.S. activists’ presence has grown in international markets, local activists have led some of the most high-profile international campaigns of the season.

• Major institutional investors have become more engaged in dialogue on both sides of the table — supporting dissidents in proxy contests and shareholder proposals, as well as pushing back on the wave of quick-fire settlements.

Notable emerging trends

• As the number and types of activists increase, their target universe has expanded to include companies of every size, as well as those with nontraditional share/voting structures.

• With many companies seeking quick settlements, activists continue to be very successful in gaining board seats.

• Activists are running more short-selling campaigns and releasing white papers and public statements in the same way that they do for traditional campaigns, except omitting any path to value creation.

• Actively managed funds, and hedge funds in particular, have begun to feel pressure from investors questioning their relative performance and high fees versus cheaper passively managed alternatives.

• Regulatory and legislative authorities are taking a hard look at activists’ disclosure requirements, both under the Hart-Scott-Rodino Act (HSR) and Securities and Exchange Commission (SEC) filing rules, with potentially significant consequences for activists and their targets alike.

Implications for companiesActivist investing has evolved into a global strategy in which fund managers compete for institutional investor mindshare and advocate for increasingly complex agendas. As activist-style engagement continues to originate from both existing and new activists as well as other traditional long-only investors, companies must adapt their activism preparation and response tactics accordingly. Responding to shareholder criticism will increasingly become an inevitable part of management and board responsibilities. Companies that recognize this now and are most proactive in addressing potential areas of vulnerability will be best positioned to communicate with all shareholders effectively and efficiently.


1. 2016 proxy season key takeaways

Campaign demands in the U.S. continue to shift from capital allocation to overall corporate strategy In the current slower growth macro environment, companies have been returning unprecedented amounts of capital to shareholders via dividends and share buybacks. In Q1 2016, S&P 500 companies executed $159 billion in gross buybacks, bringing the trailing 12-month total to a record $595 billion.2

On the heels of the post-Brexit rally, the S&P 500 is trading at roughly 20 times the trailing 12-month P/E multiple.3 At that valuation, long-term investors are starting to consider the expected returns on share buyback programs case by case to determine whether they actually do maximize shareholder value. For target companies that have already implemented such programs, or for companies that might earn a higher return for their shareholders from other uses of cash, activists must bring more creative strategies to the table. Over the past few years, activists have been announcing campaigns with demands ranging from transformational merger and acquisition (M&A) transactions to detailed operating improvement plans.

Exhibit 1 breaks down 616 campaign demands across the 354 campaigns that were announced during the 2016 U.S. proxy season. Corporate strategy demands involving breaking up the company, divesting assets, executing mergers, making strategic acquisitions or selling the company constituted approximately 32% of all campaign demands. This compares with capital structure demands (primarily dividends and share buybacks), which represented only 13% of all campaign demands in 2016.

2016 proxy season campaign demands

Activist board seats 31%

Other value demands 2%

Compensation 8%

Opposition to announced deals 4%

Value demands 51%

Corporate strategy 32%

Capital structure 13%Other corporate governance 10%

Total number of 2016 campaign demands: 616*

Source: FactSet’s SharkRepellent U.S. campaign data, as of June 30, 2016

* Represents the following campaign types and demands: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger; excludes demands unique to publicly traded investment vehicles, the removal of takeover defenses and social/environmental/political issues.

Exhibit 1

2 J.P. Morgan data.3 FactSet market data, as of July 21, 2016.


New managers continue to wade into the frayDespite the setbacks experienced by certain high-profile activists over the past 18 months and $5.4 billion in limited partner withdrawals from the strategy over the past two quarters,4 new entrants continue to launch campaigns. First-time activists constituted a full 30% of the total campaigns announced in the U.S. during proxy season 2016 versus 20% in proxy season 2015.

The composition of this new crop of activists defies the traditional activist profile. Many were newly formed hedge funds, but others included private equity firms with residual, post-IPO ownership stakes, public pension funds and former executives with significant positions in the stock who disagreed with their successors on the company’s strategic direction.

Even constituencies with only indirect influence, such as academic groups and organizations representing labor unions, are participating in shaping the modern corporate culture. Their campaign demands differ greatly from traditional activists, given that they are typically not motivated by short-term stock price appreciation. Instead, such entities seek to raise the profile of specific environmental, social and corporate governance issues by writing letters to management and/or shareholders, as well as spearheading shareholder proposals across a broad swath of target companies each proxy season.

Exhibit 3, which breaks down campaigns over the past two proxy seasons by FactSet’s SharkRepellent activist ratings, further highlights the role of less experienced activists. “Very high” denotes funds in SharkRepellent’s running list of top 50 activists; “high” refers to funds designated as a “known activist” (typically those that have engaged in at least five campaigns) and “medium or lower” covers less experienced activists. Less experienced activists have consistently fueled growth in U.S. campaign volume over the past few years, but the 2016 proxy season saw an increase of 15 percentage points in their contribution as they announced nearly 200 campaigns.5

4 Global Hedge Fund Industry Report — Second Quarter 2016, HFR (www.hedgefundresearch.com). Note: In distinguishing activist strategies within the broader category of event-driven hedge funds, HFR defines activists as those that would expect to have greater than 50% of their portfolios in activist positions over the cycle.

5 FactSet’s SharkRepellent U.S. campaign data, as of June 30, 2016.

First-time activists

20%30%

80%70%

First-time activists Non first-time activists

20152016


Exhibit 2

Activist campaign breakdown by FactSet ranking

45%

13%

36%42%

8%

57%

Very high High Medium or lower

20152016


Exhibit 3

Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s) and officer(s), and vote/activist against a merger; excludes campaigns run by individual investors unaffiliated with the target companies. Note: “Very high” denotes funds in SharkRepellent’s running list of top 50 activists; “high” refers to funds designated as a “known activist” (typically those that have engaged in at least five campaigns) and “medium or lower” covers less experienced activists.


DEVELOPING MORE MATURE

Campaign volume is growing in every region outside the U.S.Shareholder activism has grown in every geographic region over the past two years, but not at an equal pace. On one end of the spectrum, in the U.S., activism has matured into a widely accepted, well known investing style. In the past three proxy seasons alone, investors have launched over 1,000 campaigns targeting U.S. public companies.6 While the U.S. market is clearly the most mature, international campaign activity is growing rapidly — 227 campaigns launched across Europe, Asia and Australia during the 2016 proxy season, representing 39% year-over-year growth from 2015.7

Global activism heat map

Sources: FactSet’s SharkRepellent, Activist Insight and Mergermarket, as of June 30, 2016Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s) and officer(s), and vote/activist against a merger.

Exhibit 4

6 FactSet’s SharkRepellent U.S. campaign data as of June 30, 2016. Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s) and officer(s), and vote/activist against a merger.

7 International campaign data extrapolated from FactSet’s SharkRepellent, Activist Insight and Mergermarket as of June 30, 2016. Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s) and officer(s), and vote/activist against a merger.


In Europe, campaign volume grew at the fastest rate, with a 62% increase year-over-year, as activists launched nearly 100 campaigns in the 12 months ended June 30, 2016. European activism differs from the U.S. strategy due to a combination of cultural, structural and regulatory factors. These differences manifest in the types of campaign demands and tactics favored by activists in each region. Over the past two proxy seasons, demands for “board representation” and “maximizing shareholder value” constituted 44% and 25%, respectively, of all campaigns launched in Europe. While these two campaign types also dominate in the U.S., they have tended to unfold somewhat differently in Europe. In the more typical European campaign cadence, activists have historically favored engaging privately with boards and gaining representation first rather than disclosing detailed plans for improving and/or transforming their targets upon the initial campaign announcement.

Activism in Australia and Asia is continuing to develop. Campaign volume in Asia grew by 46% year-over-year to 54 campaigns announced during the 2016 proxy season, while Australia saw 74 campaigns over the same period, representing a year-over-year increase of 10%. In these regions, campaign demands have aimed primarily at changes related to capital allocation policy, governance and board representation to drive shareholder value. As with Europe, there are nuanced differences in how activism is currently being conducted in each region. In Asia, 40% of campaigns over the past two proxy seasons were aimed at “maximizing shareholder value,” most often by returning cash to shareholders. In Australia, 79% of campaigns over the same period sought either “board representation” or to “remove a director(s),” given Australian rules on board spills and say-on-pay.

International campaign volume breakdown by region

61

37

9962%

67

54

74

Europe Asia Australia

20152016

46%

10%

Sources: FactSet’s SharkRepellent, Activist Insight and Mergermarket, as of June 30, 2016

Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s) and officer(s), and vote/activist against a merger.

Exhibit 5


Exhibit 6

Campaigns launched during the 2016 proxy season by region

Foreign 46% Domestic

54%

Asia

Foreign 19%

Both 1%

Domestic 80%

Europe

Foreign 18%

Australia

Domestic 82%

Sources: FactSet’s SharkRepellent, Activist Insight and Mergermarket, as of June 30, 2016

Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s) and officer(s), and vote/activist against a merger.

Institutional investors are an integral part of the shareholder democracyMany U.S. activists, and particularly the more established funds, market their investing style as a “private equity approach to public markets.” However, institutional investors evaluate each activist’s proposal case by case to determine whether it will maximize long-term shareholder value, and cast their votes accordingly.

Across all regions, local activists dominated 2016 campaign activity. While U.S. activists are also increasingly turning to international markets for fresh campaign targets, domestic activists are leading the charge, especially in Europe and Australia. These activists have the benefit of existing relationships with the largest domestic institutional shareholders and a higher level of comfort operating in their respective jurisdictions. However, as the U.S. market continues to mature and more U.S. companies implement preparedness plans to bolster their defenses, U.S. activists will likely seek to further establish their footprint abroad. And as international shareholder registers begin to more closely resemble those of U.S. companies, U.S. activists will look to capitalize on this receptive audience as a friendly base abroad.

Select institutional investors’ voting at contests: 2015-16 proxy seasons

Blackrock Vanguard State Street Fidelity BNY Mellon Deutsche Bank Franklin Templeton T. Rowe Price

AUM: $4.7tn AUM: $2.9tn AUM: $2.2tn AUM: $2.0tn AUM: $1.7tn AUM: $1.2tn AUM: $0.8tn AUM: $0.6tn

16%

20%

13%

16%

13%

16%

25%

25%

25%

25%

7%

21%

33%

25%14%

Voted for at least one dissident nominee but not all Voted for entire dissident slate

36%29% 29% 28%

14%

50%

58%

50%

Source: Proxy Insight voting data, as of June 30, 2016

Exhibit 7


Top 25 institutional investors’ voting by proxy season

25%19%

56%

2014 2015 2016

Voted for partial dissident slate Voted for entire dissident slate Voted for management slate

22% 18%

60%

15% 15%

70%

Source: Proxy Insight voting data, as of June 30, 2016, for index comprising the 25 largest institutional investors by AUM

Exhibit 8

However, it is important to note that major institutional investors have continued to increase their engagement on both sides of the table. In support of activists, they voted for dissident nominees in 30% of 2016 proxy contests, authored shareholder proposals, invited activists to target portfolio companies where they felt that management had not adequately responded to shareholder concerns and even launched a few full-scale campaigns of their own.

Conversely, as companies have become quicker to settle, some large institutional investors are now requesting that companies solicit their feedback before ceding board seats, arguing that by bypassing the annual meeting, activists are infringing on shareholders’ right to elect directors.


2. Notable emerging trends

As the number and types of activists increase, their target universe is also expandingActivists now target companies of every size. The largest well-capitalized funds are turning their attention to large and mega-cap targets where they can build multibillion-dollar positions at an attractive cost basis and promote sophisticated corporate strategy agendas. New entrants, on the other hand, have primarily targeted micro and small-cap companies where they can acquire significant stakes without making outsized capital outlays, and are likely to gain more traction with management teams and boards that have not previously faced activist campaigns.

In every segment of the market, activists continue to drive M&A activity, prompting new strategic review processes, as well as publicly scoring management teams on the value creation and realization of promised synergies from prior transactions.

Even companies with controlling stakes and/or nontraditional share structures can be targeted. Nearly 80% of the 30 largest institutional investors, representing over $35 trillion in AUM, state in their proxy voting policies that they are, on principle, opposed to share structures where economic ownership is not proportionate to voting rights. Of that group, three-quarters indicate that they expect to oppose dual-share structures categorically. The remainder generally oppose the concept, but review related votes case by case. Many of these proxy voting guidelines also go one step further and indicate that managers expect to proactively use their votes to dismantle these structures.8

In this environment, with the backing of the institutional shareholder base, activists are launching campaigns at companies with nontraditional share structures, laying the groundwork with governance demands and, once they have gained traction, advocating for corporate strategy and capital allocation policy changes.

8 Proxy Insight and proxy voting policies on individual investor websites.

THE 2016 PROXY SEASON | 1110 | THE 2016 PROXY SEASON

Campaigns resulting in board representation as a % of all campaigns with settlements and votes: 2012-16 proxy seasons

71%

29%

63%

37%

61%

39%48% 51%

52% 49%

2012 2013 2014 2015 2016

At least one seat for activist No seats for activist

259 227 258 264 172Completedcampaigns*

+2,200 bps from 2012

Source: FactSet’s SharkRepellent, as of July 21, 2016

* Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s) and remove officer(s); excludes vote/activism against a merger.

Note: “Completed” means a proxy fight was withdrawn or settled or a winner has been announced; or for a non-proxy fight, activist campaign has reached a logical conclusion (e.g., value demand was granted or activist withdrew demands or sold stake). One and 16 proxy fights still pending for the 2015 and 2016 proxy seasons, respectively, as of July 21, 2016.

Exhibit 9

This increase in the rate of settlement has affected proxy fight outcomes over the past few years as well. In the years leading up to and including 2014, activists, as a group, were steadily improving their proxy win record. But starting in 2015 and continuing through this season, companies became quicker to settle campaigns, particularly those where they believed the activist was likely to win board seats anyway if the campaign advanced all the way to a proxy vote. That trend toward settlement has meant that campaigns that do progress to a proxy vote tend to be the weaker ones that management teams feel confident they can win. Hence, the management proxy win rate has almost doubled from 36% of total proxy fights in 2014 to 68% thus far in the 2016 proxy season.

Aided by the trend toward quick settlement, activists have succeeded in gaining board seats As activists have multiplied and campaign volume has increased in the U.S., companies have become more wary of the potential impact and uncertainty of taking on a proxy fight. In the past couple of years, many have instead chosen to settle with activists, offering them board seats in exchange for standstill agreements and withdrawal of dissident proxy cards, among other terms. During the full-year 2015 proxy season, activists gained at least one board seat, either through a settlement or through proxy vote, in 48% of all completed campaigns.

That pattern seems to be holding true in 2016. So far this proxy season, activists have won at least one board seat in 51% of campaigns completed to date. Conversely, activists’ success rate was only 29% as recently as 2012.


Exhibit 10

Outcomes for proxy fights that went to a vote*: 2014-16 proxy seasons

Dissident

Vote winner

ManagementSplit

45%52%

3%

2015

28%

68%

4%

2016

61%36%

3%

2014

Total # of proxy fights

# of proxy fights that went to a vote

88

28

103**

31

90**

25

Source: FactSet’s SharkRepellent, as of July 21, 2016

* Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s) and remove officer(s), and vote/activism against a merger.

** One and 16 proxy fights still pending for the 2015 and 2016 proxy seasons, respectively, as of July 21, 2016.

Short selling has become an entrenched subset of shareholder activismIn addition to expanding their target universe, activists are also expanding beyond their traditional “solution” oriented strategies. Short sellers bet against stocks in the hope of profiting if the companies’ share prices decline. Public short-selling campaigns are a natural outgrowth of traditional activism. They stem from the same types of criticism and research theses but stop after outlining the target company’s failings, indicating that it is too late to save the company.

While short selling has always been part of the U.S. equity markets, the practice of running full-scale, public short-selling campaigns has gained prominence only in the past few years. This style of campaign originated in Asia and Europe, where public short sellers borrowed tactics from the traditional activism playbook to highlight alleged accounting discrepancies at companies in those regions. Now, they have expanded their target universe to include U.S. companies and other areas of criticism.

Two major differences distinguish a short-selling campaign from a traditional activist campaign: The activists do not typically disclose the size of their short positions, and they do not need to offer any solutions or alternative strategies to earn their required returns. In the past year, equity markets have become more sensitive to these differences, and not quite as quick to accept activists’ claims.

However, there is a strong historical correlation between stock price underperformance and public short-selling campaigns. In the public short-selling campaigns launched since 2011, stocks lost, on average, 1.9% in the five days following an announcement, and consistently underperformed during the ensuing one-year period, dropping, on average, by 20%.


Activists launch and conduct public short-selling campaigns using tactics similar to traditional campaigns. They often announce their positions and argue their cases to the market at conferences where business media are sure to be present. They simultaneously release white papers laying out their short theses in greater detail, and may also publish additional materials on dedicated websites aimed at investors and the media. Unlike in traditional campaigns, they tend to be more aggressive in their criticism because the end goal is not to influence the board or implement changes, but rather to simply convince the market that the stock is overvalued.

Given the growth in this style of activism, companies should now be ready to respond to a short seller as well as a traditional activist. This entails preparation of a response plan that contemplates not just a vocal and opinionated shareholder offering an alternative strategy, but also an investor who is publicly betting against the company. As such, management teams and boards need to be able to quickly articulate the fundamental value proposition of the company’s business model to the market, as well as future drivers of incremental shareholder value.

Activist short campaigns announced in the U.S.

2215

10794

140

69

2011 2012 2013 2014 2015 2016

Exhibit 11

Targets by market cap9,10

<$1bn64%

>$10bn8%

$1bn-$10bn28%

Change in stock price following short campaign announcement: 2011-1611

From date of short campaign announcement

+5 days +30 days +90 days +180 days +365 days

Average (1.9%) (3.9%) (7.3%) (11.2%) (19.9%)

Median (1.1%) (2.2%) (7.9%) (13.8%) (26.4%)

9 Market capitalization at time of short announcement. 10 Six targets excluded where market capitalization data was unavailable. 11 Includes 2009-Q2 2016 campaigns where data over all time periods was available.

Sources: Activist Insight, FactSet’s SharkRepellent data, as of July 21, 2016

Note: Dates shown are annual proxy season periods.


Activist funds — and hedge funds more broadly — are feeling pressure from institutional clients Against a backdrop of recent underperformance by several high-profile activists, institutional investors have been challenging hedge funds on their fees relative to performance. Many limited partners argue that they could have earned the same or better returns by investing in passively managed index funds at a fraction of the cost. A few pension funds and traditional long-only investors have even built out their own internal teams to conduct activist campaigns independently. These campaigns have tended to focus primarily on corporate governance proposals, such as amendments to proxy access bylaws, wherein shareholders seek to gain access to the company’s proxy statement in order to nominate directors.

Total estimated activist hedge fund AUM ($bn)

46.836.2

65.5

50.9

119.2 122.9

93.1

112.5112.6

2009 2010 2011 2012 2013 2014 2015 Q1 2016 Q2 2016

Compound annual growth rate 2009–15: 22.6%

8.5%

Source: Hedge Fund Industry Q2 2016 report © HFR, Inc.

Exhibit 12

In this environment, individual fund managers have to differentiate themselves from their peers, not just by generating alpha, but also by running public campaigns with quantifiable results.

In addition, if activists continue to pursue a “private equity approach to public markets,” it will become even more important for them to persuade both fellow shareholders and prospective limited partners of the longer-term benefits of their involvement. To this end, some activists have started tracking and marketing the performance of their target companies, not just during their holding periods, but even after they have exited those positions.


Activists are facing increased scrutiny from regulatory and legislative authoritiesBoth the U.S. DOJ and FTC are evaluating activist investors’ disclosure requirements under HSR, and even are beginning to impose fines for violations. Under the HSR Act, investors planning to acquire stock worth more than $78.2 million are required to seek prior approval from regulators. However, this reporting is not required if purchases of less than 10% of a company’s outstanding shares are made “solely for the purpose of investment.” In July, the DOJ settled with a prominent activist with respect to its accumulation of stock in two oilfield services companies seeking to merge, which the activist claimed had been “solely for the purpose of investment.” Given that the activist was engaged in discussions with both companies’ respective management teams and boards, the DOJ contended the activist had invested with the intent of exerting influence on the merger, and thus, should have complied with the HSR reporting requirement.

Congress is also considering tightening certain disclosure requirements that directly affect activists. Senators Bernie Sanders and Elizabeth Warren, among others, are sponsoring the Brokaw Act, a bill that would shorten the SEC’s Schedule 13D filing window from 10 to two days. Although it was recently placed on hold in the Senate, if passed, this legislation would materially reduce activists’ ability to build significant ownership positions in secrecy.

In response to these actions and corporate lobbying efforts, several prominent activists announced in May that they had collectively formed a lobbying group to advocate on their behalf in Washington. The Council for Investor Rights and Corporate Accountability (CIRCA) is the “first coordinated effort by activists to make their case to lawmakers and the American public that their investment strategy helps, rather than harms, companies and the U.S. economy.”12 The group does not plan to fund any super PACs or become involved in the presidential election, but rather, hopes to exert influence over the longer term in Washington and promote the positive role of activists in maintaining a healthy corporate culture.

In addition to CIRCA, activists have also been joining forces with governance experts in the academic sphere, influential public company CEOs and board members and other thought leaders to create guidelines or “best practices” for companies’ engagement in the context of the modern shareholder democracy.

12 “Activists Have a New Target: Washington,” Wall Street Journal, May 16, 2016.


3. Implications for companies

In the past, proactive companies prepared for activists by hiring advisors to identify potential vulnerabilities, by briefing the board, and by developing a “break glass” plan to be implemented if and when an activist should launch a campaign against the company. But activism has evolved into more complex strategies employed by a wider set of actors, and companies must adjust their approaches accordingly.

Communicate proactively and clearly with shareholders Good communication with shareholders has been an essential part of the shareholder activism preparation process for years. But companies now also need to consider including other stakeholders in the course of their regular external outreach. A robust communications plan should address multiple potential constituencies:

Institutional investor governance teams

In contrast to just a few years ago when many large institutional investors outsourced voting decisions to proxy advisors such as ISS and Glass-Lewis, the largest institutional investors have now built out internal corporate governance teams tasked with making voting decisions and ensuring consistent voting across investment vehicles, where appropriate. Depending on the asset manager, the team may operate independently from fund investment professionals or, alternatively, may work in concert with them to make voting decisions. Regardless, it is critical for companies to understand how these teams think about corporate governance issues and to engage with them as part of their regular outreach efforts.

Portfolio managers

While large institutional investors have hired in-house teams, many long-only fund managers often still retain some input over voting decisions. As activism has proliferated, portfolio managers have become increasingly comfortable supporting activists and their campaigns. A number of fund managers have developed relationships with established activists and are increasingly expressing concerns about portfolio companies directly to activists (in addition to or instead of to the company). Actively managed fund managers, ultimately, can and do vote with their feet regardless of their fund’s proxy voting decision process. As such, companies need to ensure that this group understands their overall strategy, is supportive and feels that its voice is being heard.

Exhibit 13

Institutional investor governance teams

Portfolio managers Key non-shareholder influencers

Stakeholder constituencies


Key non-shareholder influencers

Key non-shareholder influencers include proxy advisors, corporate governance experts, influential reporters and academic subject matter specialists. Because so much activism occurs in the public spotlight, companies need to determine who these thought leaders are and, to the extent it makes sense, keep them engaged on an ongoing basis. In the event of an activist campaign, having these relationships also helps the company ensure that its side of the story is fairly portrayed. If the campaign comes down to a closely fought proxy contest or involves a short position, non-shareholder influencers may play a significant role in persuading undecided shareholders.

Think strategically about all external communications While it is still critical to understand how an activist might attack the company and to prepare a plan for responding to an activist campaign, management and boards should also strive to view the company’s long-term communications plan through the lens of activism. The advent of activism among nontraditional constituencies, including non-shareholder influencers, requires that the company not only prepare for the traditional activist but also take a strategic approach to normal course shareholder communications and ongoing media engagement. To that end, companies should seek to consistently convey the following key points across all of their external communications platforms:

1. Well-developed corporate strategy

• Communicate financial and strategic priorities to investors effectively and consistently.

• Tell the company’s story, beyond reporting results, by highlighting its strong trajectory and any company “wins,” with a focus on being a responsible steward of shareholder capital and proactively addressing inefficiencies.

2. Board and senior management engagement

• Demonstrate management and director commitment to maximizing long-term shareholder value.

• Engage regularly with shareholders and key influential third parties (media, academics, industry icons, etc.).

3. Appropriate corporate governance structure

• Demonstrate record of self-assessment and proactive change.

• Recognize corporate governance trends and avoid becoming a governance laggard.


Proactively address corporate governance lightning rods Virtually all activist campaigns involve criticism of a company’s corporate governance. No matter what the specific campaign demands are, the activist’s starting premise is likely to be that the management team and board have not acted to fully maximize shareholder value during their tenure. Heightened board scrutiny can make directors particularly vulnerable during activist campaigns, especially if the activist is trying to gain board seats. Directors should be prepared to have their collective competence and credibility challenged. Individual directors may also be singled out and targeted by attacks that can quickly turn personal and impugn reputations.

To demonstrate their commitment to corporate governance excellence, companies should undertake periodic self-assessments to evaluate board composition and various hot-button corporate governance issues. Doing this proactively removes potential toeholds for activists who might otherwise include corporate governance changes as a valid campaign objective. It has become even more important today, as the top activists have access to a stable of well-qualified board candidates with expertise across industries, which comforts shareholders in ousting directors from boards with governance issues.

Finally, companies should communicate to the broader shareholder base that they are regularly performing this type of self-evaluation, and that management and the board are focused on good corporate governance.

Be ready to engage if and when activists show upCompanies must be willing to engage in constructive discussions with shareholders, including activists. However, it is important to prepare in advance for any prospective interaction with an activist as these discussions can rapidly transform into hostile situations. This shift can happen so quickly that companies may not have the time to build out an internal framework for responding to every stage of the campaign, thus opening the door to confusion among management and the board and potentially giving the public perception of a disorganized response.


In planning for a potential activist campaign, companies should consider the following five best practices:

Exhibit 14

Best practices for preparing for activists

• Establish internal activism team including key members across corporate functions and operating segments

• Engage roster of best-in-class activism advisors – Investment bank – Public relations firm – Attorneys – Proxy solicitor

1 Establish external and internal working teams

• Update financial projections by segment, with reflection on peer benchmarking

• Consider the strategic importance of each segment and whether the market gives the company “full credit” for the value of the current corporate structure

• Determine optimal capital structure

2 Evaluate strategic planning through the lens of an activist

• Analyze vulnerabilities and produce a mock activist attack deck• Prepare standard responses to anticipated campaign attacks• Prepare internal and external communication materials

3 Complete scenario planning/fire drills

• Directors should be prepared for spotlight by activist• Banker and lawyer updates with directors – Current environment – Fiduciary duty – Legal considerations• Proactively determine governance deficiencies and adopt

required policies

5 Board should receive updates at least annually

• Closely monitor shareholder base on an ongoing basis• Understand shareholder motivations

4 Monitor shareholder base


4. J.P. Morgan M&A advisory solutions and shareholder activism expertise

We advise corporations and institutions of all sizes on their most complex strategic needs, in their home markets and around the world.

Clients benefit from customized solutions combining:

• In-depth knowledge of sector and market dynamics with M&A bankers based locally in most major markets globally.

• Innovative advice on valuation, transaction structures, and deal tactics and negotiations.

• Rigorous execution delivered with responsive and agile service.

• Ability to partner with product experts across our full range of competencies, including comprehensive financing through our debt and equity issuance platforms, as well as derivatives and treasury services, including escrow services.

J.P. Morgan provides M&A advisory solutions across the full strategic life cycle of our clients:

Shareholder strategy

J.P. Morgan has an extensive record of helping clients prepare for and respond to shareholder activism. Our size and scale, wide array of product offerings and experience enable us to provide a differentiated approach to shareholder activism defense for clients, including:

• Defense preparations for publicly announced and non-public approaches.

• Dedicated shareholder activism advice.

• Advising corporate clients only.

− J.P. Morgan does not advise shareholder activists on activist campaigns.

− Interests are fully aligned with company interests and enhancing long-term shareholder value.

• Experience with all major activists in some of the most sophisticated campaigns around the world.

− Deep understanding of potential activist tactics.

− Firsthand experience of what works when defending against an activist.

Strategic expansion

• Acquisitions, including cross-border opportunities.

• Mergers and joint ventures.

Enhancing business value

• Corporate combinations.

• Divestitures.

• Capital restructuring projects.

• Spinoffs and other repositionings.


This material (including market commentary, market data, observations or the like) has been prepared by personnel in the Mergers & Acquisitions Group of JPMorgan Chase & Co. It has not been reviewed, endorsed or otherwise approved by, and is not a work product of, any research department of JPMorgan Chase & Co. and/or its affiliates (“J.P. Morgan”).

Any views or opinions expressed herein are solely those of the individual authors and may differ from the views and opinions expressed by other departments or divisions of J.P. Morgan. This material is for the general information of our clients only and is a “solicitation” only as that term is used within CFTC Rule 1.71 and 23.605 promulgated under the U.S. Commodity Exchange Act.

RESTRICTED DISTRIBUTION: This material is distributed by the relevant J.P. Morgan entities that possess the necessary licenses to distribute the material in the respective countries. This material is proprietary and confidential to J.P. Morgan and is for your personal use only. Any distribution, copy, reprints and/or forward to others is strictly prohibited.

This material is intended merely to highlight market developments and is not intended to be comprehensive and does not constitute investment, legal or tax advice, nor does it constitute an offer or solicitation for the purchase or sale of any financial instrument or a recommendation for any investment product or strategy.

Information contained in this material has been obtained from sources believed to be reliable but no representation or warranty is made by J.P. Morgan as to the quality, completeness, accuracy, fitness for a particular purpose or non infringement of such information. In no event shall J.P. Morgan be liable (whether in contract, tort, equity or otherwise) for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained herein and such information may not be relied upon by you in evaluating the merits of participating in any transaction. All information contained herein is as of the date referenced and is subject to change without notice. All market statistics are based on announced transactions. Numbers in various tables may not sum due to rounding.

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The 2016 Proxy Season - J.P. Morgan Homebut the 2016 proxy season saw an increase of 15 percentage points in their contribution as they announced nearly 200 campaigns.5 4 Global Hedge