What Exactly Is an Activist Investor?

To alter how a publicly listed company is operated, an activist investor, often a specialist hedge fund, purchases a sizeable minority position in the business.

The objectives of the activist investor might range from being as basic as offering management advice to being as glorious as forcing a sale of the business, divestments or restructuring, or even the removal of the board of directors.

Activist investors seldom purchase complete or majority holdings in corporations, unlike private equity firms that buy and reorganize businesses to profit when sold again.

Instead, they appeal to other stockholders and corporate insiders via open communications and closed-door meetings. An activist investor may initiate a proxy fight to elect new directors if such efforts are unsuccessful in getting the firm to comply with their demands.

Knowledge of activist investors

Investors who support dissident board candidates elected to combat climate change are frequently referred to as shareholder activists. This phrase is also used to describe those who petition corporations to improve working conditions for the foreign workers of their contractors.

However, many activist investor campaigns merely aim to increase shareholder value, and most of them are the work of hedge funds that specialize in the particular combination of public pressure, covert lobbying, and industry knowledge needed.

Activist hedge funds may hold highly concentrated shares and augment them with extra leverage through derivatives like stock options to cover the significant expense of such campaigns, in contrast to public pension funds and mutual funds that sometimes participate in activism. Activist hedge funds typically purchase a stake in an underperforming company just before calling for change, as opposed to institutional investors who occasionally become activists after holding a disappointing investment for years, hoping to profit from the turnaround and price increase that results.

Instead of institutional investors, activist hedge funds are also more prone to use aggressive strategies, such as poison-pen letters to management, unfavorable public reports, and proxy battles to remove incumbent directors.

The Arguments Activist Investors Use

A Schedule 13D form, which must be submitted to the Securities and Exchange Commission (SEC) within ten calendar days after purchasing 5% or more of a company’s voting class shares, is often used by investor activists to announce their campaigns.

Instead, qualified institutional investors and passive investors—those not attempting to purchase or exert influence over the company—may file a Schedule 13G with fewer disclosure and criteria restrictions.

Calendar 13D Filers must provide information about their motivations for buying the stock and any future intentions they may have for the business, such as capitalization, dividends, asset sales, and other strategies.
An activist investor can make their case for change at the targeted firm during the first 13D filing. The filing also limits the activist’s ability to change their intentions for the firm and their investment behind closed doors. According to current SEC regulations, any changes to the facts stated on Schedule 13D must be notified in an updated filing “promptly.”

Institute for European Corporate Governance. In “Governance by Persuasion: Hedge Fund Activism and Market-Based Shareholder Influence,”

Activist investors may remark on a company’s reaction to their proposals through revised Schedule 13D filings. For instance, when Carl Icahn-affiliated funds disclosed a nearly 10% investment in Netflix, Inc. (NFLX), the business adopted a poison pill, and the funds submitted an updated disclosure. They called the poison pill “an example of poor corporate governance.”

Activist shareholders may also publicly argue their case in news releases to other shareholders, send terse letters to current management, or privately persuade institutional investors to support them.

The Prospects for Shareholder Protest

In May 2022, Carl Icahn lamented that “activism is dying,” in contrast to his previous reputation as a few-holds-barred investor.

The proposed modifications to the Schedule 13D disclosure requirements for 2022 have raised concerns among some, and Elliott Investment Management openly said that the new regulations “will virtually shut down activism.”
The SEC has suggested reducing the Schedule 13 initial reporting date from 10 calendar days to 5 in February 2022, with changes required within a day of a meaningful change rather than “promptly” as they are today. If approved, the plan would require 13D filers to disclose derivative holdings (such as options) that provide an economic stake in the firm without the shareholder rights connected to outright stock ownership. Perhaps more controversially, investors would no longer need to agree to coordinate their actions and be recognized by the SEC as a unified group for Schedule 13D reporting purposes under the proposed regulations.

Additionally, 15 rules have been put out to make it more difficult for activist shareholders to thwart a company’s pro-ESG or environmental activities. Gary Gensler, the Securities and Exchange Commission chairman, stated that the new stricter criteria will address “an information asymmetry” between activist investors and other shareholders.

According to critics, the new regulations would make activism unprofitable by making it more difficult and expensive for activist investors to amass sizable interests and prevent shareholder communication.

Shareholder activism does not seem to be slowing down despite these suggested regulation changes (at least not yet). For instance, activist investor Nelson Peltz reportedly made more than $150 million by purchasing Disney (DIS) shares in November 2022. This action sparked a proxy battle against the returning CEO, Bob Iger; however, this brief battle was dropped after Iger unveiled a restructuring plan that is anticipated to save the media giant $5.5 billion in costs and eliminate 7,000 jobs. Peltz has praised Iger and his management team and expressed pleasure with the company’s orientation and change of course.

ValueAct Capital Management, a San Francisco-based activist hedge fund, purchased a stake in Spotify Technology SA (SPOT), a streaming media provider, in early 2023 to reduce expenses and simplify management.

ValueAct has also declared a significant stake and board seat in SalesForce (CRM), which has at least five significant activist investors holding long holdings and is expected to implement cost-cutting measures in early 2023, including the layoff of 10% of the workforce.
Markets have responded favorably to the presence of activist shareholders in all three of these situations, with the ensuing increase in share prices.

Do Activist Investors Ever Reach Agreements With Businesses?

Yes, because investing in activists is not a zero-sum endeavor. Since incumbent management and activist investors have a stake in the company’s success, they may sometimes come to an amicable solution. These agreements often provide the activist investor a seat on the board of directors in return for a commitment to back the company’s management and director nominations for a certain period. The agreements may also outline management’s actions in response to activist investor demands. At the same time, it includes standstill clauses that forbid the activist investor from expanding their ownership interest or mandate that they maintain a certain minimum stake.

The death of shareholder activism?

Although some worry that newly suggested SEC regulation changes may stifle activist investment, it has not yet been shown to slow down. Due to COVID-19 regulations, activist investors saw a decline in 2020 and 2021 before rebounding above 2019 levels. In fact, in 2022, shareholder activism activities surpassed previous highs.

Despite potential regulatory impediments, some forecast that this intention will continue until 2023 and beyond; nevertheless, only time will tell.

Do activist investors make a profit?

The agency dilemma encountered by shareholders whose interests don’t always align with those of firmly established management teams has sometimes been successfully addressed by activist investors. For themselves and other stockholders, they have undoubtedly added value. However, it is difficult to categorize activist investment as beneficial or harmful. Activist investors prioritize their interests and reap most of the wealth they create. Companies may be prevented from making necessary long-term investments due to their relatively short-term concentration on tactics likely to increase the share price, such as the return of cash to shareholders in the form of dividends or share buybacks.

Which activist investor produces the biggest first gains in share price?

We may look at SEC reports and public remarks made by these investors to understand whether activist investors have been the more effective dollar-for-dollar and what other reasons may lead certain stocks to grow in addition to an activist buying a position. For instance, Elliott Investment Management asserts that on the day the business made its position public, the value of its investments increased by an average of 8% on the target company’s stock. Elliott claims that due to its activist activities, the market values of the firms it targeted grew by more than $30 billion.

Who Invests in Activist Funds the Most?
The following table lists the top activist shareholders by assets under management (AUM) as of Q1 2023, with Third Point Partners of New York City at the top:

Activist investors must often fully use their shareholder rights to attract the attention of incumbent management and win over other shareholders when they use their sizeable but usually relatively tiny minority shares to agitate for change at publicly traded corporations. Activists sometimes demand drastic cost-cutting measures, such as firing employees, streamlining management, and closing underperforming businesses. Their strictness encourages other businesses to adopt shareholder-friendly practices. However, they are not always correct, and whatever public benefit they provide could be a byproduct of their quest for personal and client wealth.

Conclusion

• To alter how public corporations are operated, activist investors purchase minority holdings in such businesses.
• They could engage in a proxy battle for board seats if they cannot convince the corporate management.
• Institutional investors sometimes participate in activist investment, while certain hedge funds specialize.
• The goal of activist investors may be to increase shareholder wealth or to promote a company’s social obligations.
• Critics claim that the SEC’s proposed stricter disclosure regulations for activist investors may make activism unprofitable.