Wednesday, February 27, 2013

A Misguided Attack on Corporate Activism

A Misguided Attack on Corporate Activism

Martin Lipton, a founding partner of the firm Wachtell, Lipton, Rosen & Katz, and
the inventor of the poison pill, launched a fierce attack on activist hedge funds in a memo to clients.[1]  Mr. Lipton is, undoubtedly, among the leading legal advisors on mergers and acquisitions.  His memo is one in a series of fusillades fired at hedge fund managers over the years.   As Andrew Ross Sorkin pointed out in Deal Book yesterday morning[2], this salvo is misguided.

Mr. Lipton uses the proxy battle being waged by David Einhorn, CIO of Greenlight Capital, with Apple as the prime example of the unwarranted and shortsighted attacks by hedge fund managers on corporations.  Mr. Lipton couldn’t have picked a more inappropriate example.  He asserts that Mr. Einhorn is trying to tell Apple how to run its business.  That’s decidedly not what Mr. Einhorn is trying to accomplish.  Rather, he’s attempting to get Apple to do something constructive with the $137 billion in cash on the company’s balance sheet.  Apple has amassed more cash than any company can invest productively, and Mr. Einhorn as an owner would like to see the cash returned to investors.  Moreover, as Mr. Sorkin points out, there’s nothing short-term about Mr. Einhorn’s ownership of Apple or his suggested strategy.

Meeting With KKR: Nothing to Report (2003)

In discussing his perspective with Mr. Sorkin, Mr. Lipton also sites the recent battle over Herbalife between William Ackerman, the CIO of Pershing Square Capital Management, and Carl Icahn as another example of shareholder democracy run amok.  Mr. Ackerman contends that Herbalife is a pyramid scheme and has taken a large short position in the stock.  Mr. Icahn has made a bet that Herbalife’s profits are real and sustainable.  While the debate between Ackerman and Icahn[3] is messy and vitriolic, it is what is investing is all about and how markets function.  Moreover, it has little to do with shareholder democracy.

Mr. Lipton is confusing shareholder democracy with short-termism. Short-termism is rapid-fire trading by institutional investors, characterized by holding periods that can be as short as a few milliseconds or as long as a few weeks.  Frankly, these types of investors don’t have much use for corporate governance or shareholder democracy.  I do agree, however, with Mr. Lipton that this short-term mentality is bad and counter-productive. 

However, giving institutional investors and money managers greater access to proxies and an easier road to electing alternative slates of directors is anything but a short-term strategy.  With highly competent lawyers like Mr. Lipton opposing every move, shareholder democracy is a cumbersome and expensive undertaking for any investor who has the gumption to attempt it.  I would like to see investors hold stocks for far longer and care much more deeply about voting proxies, evaluating executive compensation, and weighing the qualifications of board members.

I’m sure Mr. Lipton’s memo was well received by his corporate clients.  Unfortunately, the memo does little to advance the debate on either shareholder democracy or short-termism.

[1] Mr. Lipton posted the substance of his memo on the Harvard Law School Forum on Corporate Governance and Financial Regulation.
[3] Dan Loeb, CIO of Third Point, LLC, also thinks Ackerman is wrong as has built a large long position in Herbalife

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