The 2017 Proxy Season. Globalization and a new normal for shareholder activism

Transcription

1 The 2017 Proxy Season Globalization and a new normal for shareholder activism

2 ii THE 2017 PROXY SEASON Published by J.P. Morgan s M&A team in July 2017 Corporate Defense and Shareholder Activism David Hunker Head of Shareholder Activism Defense E: david.a.hunker@jpmorgan.com T: Global Mergers & Acquisitions Hernan Cristerna Global Co-Head of M&A E: hernan.cristerna@jpmorgan.com T: Kurt Simon Global Chairman of M&A E: kurt.simon@jpmorgan.com T: Chris Ventresca Global Co-Head of M&A E: christopher.ventresca@jpmorgan.com T: Anu Aiyengar Head of North American M&A E: anu.aiyengar@jpmorgan.com T: David Freedman Head of M&A Capital Markets E: dfreedman@jpmorgan.com T:

3 THE 2017 PROXY SEASON 1 Contents 1. Executive summary proxy season key takeaways 4 Notable emerging trends 4 Implications for companies proxy season key takeaways 6 Normalization of shareholder activism across global markets 6 Smaller funds drove 2017 campaign activity 8 Institutional investors have become activists 9 Companies continued to settle rather than engage in proxy contests Notable emerging trends 13 Companies targeted multiple times 13 M&A-focused activism 13 Larger, well-known activists re-engaging 15 Higher prioritization of environmental, social and governance issues Preparing for and responding to shareholder activism J.P. Morgan M&A advisory solutions and shareholder activism expertise 18 Please note: Use of this material is subject to the important disclaimers set out on the inside back cover.

4 2 THE 2017 PROXY SEASON 1. Executive summary The just-concluded 2017 proxy season (typically defined as the 12 months ending June 30) began slowly, but ended with a number of high-profile, mega-cap campaign announcements, some of which are still ongoing at the time of writing. Following a slowdown in activity in 2016 that was driven by volatility in the equity and commodity markets, 2017 promised to be a rebound year for activist activity. However, the number of activist campaigns was relatively flat. This should not be viewed as a sign of the demise of shareholder activism. Rather, it demonstrates how shareholder activism has evolved from a niche strategy pursued by a limited number of high-profile hedge funds to a widely accepted approach to investing pursued by institutional investors and hedge funds alike across global markets. Even as activism seems to have reached a steady state, with direct activist assets under management (AUM) plateauing around $121 billion 1 as of March 31, activists still launched 327 public campaigns 2 against U.S. companies during the 2017 proxy season. During that same period, investors announced 119 and 86 campaigns in Europe and Asia, respectively. That compares with 62 and 14 campaigns five years ago. In Australia, where activists have started targeting higher-profile companies, 74 campaigns were launched during the 2017 proxy season, double the number launched there five years ago. 3 Exhibit 1 Global campaign volume versus number of activists a, b Number of campaigns Number of unique activists a Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger. b Number of unique activists represents total named activist investors involved in campaigns during a given year. Sources: SharkRepellent and Activist Insight, as of June 30, Source: HFR Q1 Global Hedge Fund Industry Report. 2 Source: FactSet SharkRepellent, as of June 30, Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger. 3 Sources: FactSet SharkRepellent and Activist Insight, as of June 30, Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger.

5 THE 2017 PROXY SEASON 3 Campaign volume and AUM tell only a small part of the story of the 2017 proxy season however. Smaller funds and non-traditional activists including pension funds, mutual funds, index funds and individual investors drove a large share of campaign activity. The largest asset managers and pension funds vocally outlined their corporate governance priorities in letters to CEOs and via publicly released policy statements, openly threatening to use their votes to force change where companies were not being proactive. In particular, investors made increased calls for board diversity and expansion of shareholder powers, such as proxy access, annual director elections and other shareholder-friendly governance changes. Continuing a longer-term trend of multi-demand, value-oriented agendas, 2017 campaigns covered a wide range of objectives related to the strategic direction and asset mix of target companies. Seasoned activists ran public campaigns targeting CEOs, while concurrently advocating plans for changes to corporate structure and/or operational improvement. Campaigns against announced M&A transactions either criticized the offer price as insufficient to catalyze a higher price (a strategy known as bumpitrage ) or criticized the fundamental rationale for the deal to pressure the acquirer to abandon the deal entirely. These campaigns to block announced deals constituted 20% of total global value demands during the 2017 proxy season. 4 Although 606 campaigns were launched globally, many lasted only briefly with the parties agreeing to settlements shortly after, or even concurrently with, the public campaign announcement. In the U.S., 68 total proxy contests were initiated in the 2017 proxy season. Of the 54 contests that were completed by June 30, 19 went to a shareholder vote, 19 were settled and 16 were withdrawn. Nevertheless, the percentage of campaigns (with or without a proxy contest) in which activists obtained at least one board seat increased to 46%, from 41% in 2016 and 29% in This is a direct result of the increasing rate of settlements, with companies continuing to choose to give activists board seats rather than engage in a protracted activist campaign or proxy fight. An activist initiating a campaign during the 2017 proxy season faced nearly the same odds of success and failure in obtaining at least one board seat, regardless of whether the campaign ended via settlement or proxy contest. While this dynamic has further emboldened activists in making their public demands, it has also caused some concern among long-term institutional investors. Index investors, in particular, have expressed frustration with the number of rapid settlements over the past couple of proxy seasons, viewing them as a usurpation of their right to elect directors. Three of the largest index investors, representing more than $8 trillion of AUM, have publicly urged portfolio companies to solicit their feedback before settling and/or to adhere to specific guidelines for negotiating settlements that are designed to align activists interests with those of other shareholders. Failure to do so risks investors voting against incumbent directors following any unacceptable settlement. 4 Sources: FactSet SharkRepellent and Activist Insight, as of June 30, Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger. 5 Source: FactSet SharkRepellent, as of June 30, 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.

6 4 THE 2017 PROXY SEASON 2017 proxy season key takeaways Normalization of shareholder activism across global markets. Shareholder activism has become an accepted strategy across global markets with investors using activist tactics to bring about change, even in regions once believed to be either unfriendly to activist shareholders or structurally difficult for activists to execute the strategy. Smaller funds drove 2017 campaign activity. Nearly two-thirds of all 2017 U.S. campaigns targeted companies with market caps below $500 million. 6 Smaller funds were most active this past season, focusing on smaller-cap companies where they can build significant positions and gain more leverage over management and boards. A number of these funds were also new to the shareholder activism strategy; nearly one-fifth of U.S. campaigns during the 2017 proxy season were originated by first-time activists. 7 Institutional investors have become activists. As shareholder activism continued to mature as a strategy, traditional long-only funds further embraced activist tactics. Actively managed funds displayed a willingness to publicly support activist campaigns and, on occasion, partnered with activists to target one of their portfolio companies. Companies continued to settle rather than engage in proxy contests. Continuing a trend from recent proxy seasons, only 19 of the 54 completed U.S. campaigns involving a proxy contest went to a shareholder vote, as many companies opted to settle with activists prior to a vote. In the proxy contests that did go to a vote, activists saw success in 47% of situations. 6 Notable emerging trends Companies targeted multiple times. As shareholder activism continues to mature, activists are launching campaigns at companies that are current or previous activism targets. In 2017, approximately 20% of companies targeted in the U.S. had been targeted by an activist during the proxy seasons. 6 M&A-focused activism. Activists of all sizes are launching campaigns advocating for the sale of a target company or demanding a higher price as shareholders of the acquisition target, with varying degrees of success. More than 500 M&A-related campaign demands were made by activists globally during the 2016 and 2017 proxy seasons, representing approximately 75% of total value demands for that period. 8 Larger, well-known activists re-engaging. Many of the larger, well-known activists spent last year preserving capital and evaluating potential new targets. As fund performance stabilized, they turned their attention back to new targets. These activists tend to run lengthier, multifaceted campaigns against larger-cap targets, advocating for complex strategy or operational changes that often include a change in the company s leadership. Higher prioritization of environmental, social and governance (ESG) issues. While governance has been in focus for some time, increased attention will be paid to environmental and social issues. As assets continue to flow more broadly from active investing strategies to passive ones, the largest passive managers will further flex their voting power at portfolio companies on those ESG issues that they view as critical to their customers long-term returns. 6 Source: FactSet SharkRepellent, as of June 30, Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger. 7 Source: FactSet SharkRepellent, as of June 30, Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger. Excludes campaigns by individual investors. 8 Sources: Activist Insight and FactSet SharkRepellent, as of June 30, Represents the following campaign demands: block transaction, break up company, divest assets/divisions, seek sale/merger/liquidation and review strategic alternatives.

7 THE 2017 PROXY SEASON 5 Implications for companies Activist investors will continue to seek opportunities across global markets, taking advantage of both the presence of supportive U.S.-based institutional investors and the increasing receptivity of non-u.s. investors to the strategy. In addition, institutional investors and asset managers around the globe will increasingly turn to activist-style tactics to advocate for their own agendas. Against this backdrop, management teams and boards must balance actively engaging with shareholders with running the day-to-day operations of the company to create long-term value for all shareholders. Activist campaigns can be highly disruptive to companies, particularly if the management team and board are not prepared: 1 Campaigns absorb considerable amounts of senior management time 2 Activists do not adhere to a finite timetable 3 The board may lose control of the company s strategic narrative 4 Activist campaigns often lead to the arrival of other activists on the shareholder register 5 Activists may try to force a transaction, potentially at the wrong price and time To preempt this type of potentially damaging disruption, companies today must tailor their shareholder communications to proactively address the arguments from a shareholder activist. They should prepare for robust investor engagement and regularly review their corporate governance practices as well as structural vulnerabilities to confirm that the current strategy maximizes long-term shareholder value.

8 6 THE 2017 PROXY SEASON proxy season key takeaways Normalization of shareholder activism across global markets Global campaign volume dipped by 6% in 2017 after several years of steady growth. Nearly every region experienced a modest decline in new campaigns announced during the 2017 proxy season versus The U.S. market in particular seemed to be settling into a new normal. In total, 606 new campaigns were announced globally during this proxy season, with the U.S. still seeing the largest share of activity. 9 Exhibit global activist campaigns by region a 327 campaigns / 54% 119 campaigns / 20% 86 campaigns / 14% 74 campaigns / 12% a Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger. Sources: FactSet SharkRepellent and Activist Insight, as of June 30, Sources: Activist Insight and FactSet SharkRepellent, as of June 30, Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger.

9 THE 2017 PROXY SEASON 7 Activists have been subject to the same headwinds affecting the broader hedge fund industry, which has suffered six consecutive quarters of outflows through March 31, 2017, totaling $77 billion, as investors shift assets to lower-fee, passively managed vehicles. 10 In addition, several well-known activists suffered significant losses on high-profile campaigns during the 2015 and 2016 proxy seasons and thus spent the first half of the 2017 proxy season rationalizing portfolios and preserving capital. The 50 most prominent activists, as defined by FactSet s SharkWatch50 list, announced 114 campaigns only 35% of total U.S. campaigns during the 2017 proxy season, 11 a further indication of the increase in activism by long-only institutional investors. While overall campaign activity declined modestly, there was a global uptick in value demands versus governance-focused demands, compared with prior years. This would indicate that activism has shed some of its novelty in newer markets, giving activists further confidence to run campaigns with more sophisticated themes. Exhibit global proxy season by campaign demand Governance, 61% Block transaction, 7% Break up company, 5% Capital structure, 5% Return cash, 7% Review strategic alternatives, 6% Seek sale, 8% Add independent directors, 3% Board seats (activist group), 29% Compensation-related enhancements, 7% Other governance enhancements, 7% Remove director(s), 12% Remove officer(s), 3% Create REIT, 1% Sources: FactSet SharkRepellent and Activist Insight, as of June 30, Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger. 10 Source: HFR, Q Global Hedge Fund Industry Report. 11 Source: FactSet SharkRepellent, as of June 30, Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger. FactSet s SharkWatch50 is a rolling compilation of the 50 most significant activist investors, selected based on the following criteria: number of campaigns, size of targeted companies, severity of tactics employed, success rate, % of total stakes taken that result in activism, frequency of 13D filings and size of fund.

10 8 THE 2017 PROXY SEASON Smaller funds drove 2017 campaign activity With some of the larger activist hedge funds on the sidelines, smaller and non-traditional activists initiated most of the new campaign activity this proxy season. These investors primarily focused their efforts on smaller-cap targets, which require a lower capital outlay to build a significant stake and may be more inclined to settle, rather than fight a costly and distracting proxy contest. A number of these investors were also new to the shareholder activism strategy, with 19% of U.S. campaigns announced by first-time activists. 12 Exhibit 4 a, b, c, d U.S. activist campaigns by market cap ( proxy seasons) Micro cap Small cap Mid cap Large cap Mega cap a Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger. b Activist type defined as: hedge funds, investment advisers, mutual fund managers and public pension funds. c Market cap sizes defined as: micro cap, <$250mm; small cap, $250mm-$2bn; mid cap, $2bn-10bn; large cap, $10bn-50bn; mega cap, >$50bn. d Excludes companies for which market capitalization is unavailable at time of campaign announcement. Source: FactSet SharkRepellent, as of June 30, Many larger companies have taken steps over the past few years to remove potential low-hanging fruit campaign demands by updating their corporate governance practices to be in line with the broader market. As a result, activists have migrated down market to seek out a new opportunity set, where poor corporate governance practices may be used as a lever with shareholders. In Europe and Asia, both domestic and U.S.-based activists launched a number of highly publicized campaigns against larger targets. This was driven by: the presence of global institutional investors on these companies shareholder registers (many of which already have a track record of supporting shareholder activism in the U.S.); the resolution to a number of local macro issues that had increased downside uncertainty previously (Brexit, etc.); and a continued warming to a shareholder-centric model of corporate governance. 12 Source: FactSet SharkRepellent, as of June 30, Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger. Excludes campaigns by individual investors.

11 THE 2017 PROXY SEASON 9 Institutional investors have become activists During the 2017 proxy season, institutional investors mutual funds, investment advisers and pension funds announced 44 campaigns, representing approximately 13% of total U.S. campaign volume. 13 While these investors have historically focused on governance issues as defined in their respective proxy voting policies, more than half of the 44 campaigns were instead aimed more generally at maximizing shareholder value, which hedge fund shareholder activists have traditionally used to agitate around a wide range of strategic and corporate actions. Over the past two proxy seasons, institutional investors have started to redefine their role in public equity markets. While the largest names still subscribe to proxy advisor research and ultimately supported management in roughly two-thirds of proxy contests, they used their votes to influence portfolio companies more often (and more publicly) in 2017 than ever before. 14 They agitated against announced M&A transactions to demand higher offer prices. They partnered with activist funds to launch proxy contests. They publicly sided with activists seeking to remove CEOs. One long-only fund even created an extensive white paper on a portfolio company to pitch to activists in an effort to entice them to initiate a campaign. Most institutional investors have completed the build-out of internal corporate governance and proxy voting teams to ensure voting consistency across investment vehicles and to optimize the power of their institutions aggregated votes. This will continue to grow in importance for companies outside the U.S. as these investors take larger and larger positions in European, Asian and Australian markets. Our clients are the definitive long-term investors. As a fiduciary acting on behalf of these clients, BlackRock takes corporate governance particularly seriously and engages with our voice, and with our vote, on matters that can influence the long-term value of firms. With the continued growth of index investing, including the use of ETFs by active managers, advocacy and engagement have become even more important for protecting the long-term interests of investors. 15 Larry Fink, Chairman and CEO, BlackRock 13 Source: FactSet SharkRepellent, as of June 30, Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger. 14 Source: Proxy Insight voting data, as of June 30, Source: Larry Fink s Annual Letter to CEOs, BlackRock company website, Jan. 24, 2017.

12 10 THE 2017 PROXY SEASON Exhibit 5 Top 15 institutional investors voting behavior at proxy contests ( ) a Institutional shareholder AUM ($tn) # of proxy contests voted Support for dissident slate b Full slate / Partial slate BlackRock % 15% 24% Vanguard Group % 15% 24% SSgA Funds Management Fidelity Management & Research Co % 8% 15% 8% 8% BNY Mellon % 16% 32% Goldman Sachs Asset Management Deutsche Asset & Wealth Management % 28% 22% 50% 31% 69% Northern Trust Investments Norges Bank Investment Management Wellington Management T. Rowe Price Associates Franklin Templeton Investments AllianceBernstein Dimensional Fund Advisors CalPERS % 14% 29% 11% 11% 21% 33% 17% 50% 17% 17% 33% 21% 21% 42% 16% 16% 32% 23% 13% 36% 23% 17% 40% Note: Numbers may not sum due to rounding. a Includes non-u.s. proxy contests and campaigns. b Support for dissident slate refers to board-related proxy contests only. Sources: FactSet and Proxy Insight, as of June 30, With the advent of proxy access, institutional investors will only become more active, as they are the shareholders most likely to meet the consecutive and minimum ownership thresholds required to nominate director candidates on company proxy statements. Proxy access will provide opportunities for these long-term shareholders to nominate new directors with the same convenience and cost as submitting a shareholder proposal for the company proxy statement today. In contrast, shareholder activists that fail to meet the same proxy access ownership thresholds will still need to produce a separate proxy card and incur the associated costs, if they wish to run an opposing slate of directors. This may lead to more collaboration between activists and institutional investors, as activists seek investors who meet the company s proxy access requirements as partners on director nominations.

13 THE 2017 PROXY SEASON 11 Companies continued to settle rather than engage in proxy contests Activists gained at least one board seat in 46% of the 153 campaigns completed thus far during the 2017 proxy season, versus a success rate of only 29% in 262 campaigns in Exhibit 6 Outcomes for proxy fights that went to a vote Vote winner % 47% Dissident Split Management Activist at least partially successful 55% 42% 45% 28% 42% 69% 3% 53% 3% 5% # proxy fights announced # proxy fights completed # completed proxy fights that went to a vote Note: With companies settling more rapidly, fewer campaigns involve a proxy contest and fewer contests actually reach a vote. Completed indicates a proxy fight was withdrawn, was settled or a winner has been announced; for a non-proxy fight activist campaign, there has been a logical conclusion (e.g., value demand was granted, activist withdrew demands or sold stake, etc.). Source: FactSet SharkRepellent, as of June 30, Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger. In short, when launching a campaign in 2017, an activist faced almost equal odds of success and failure in gaining board representation. Activists success rate has increased every year since Immediately following the financial crisis, when the strategy was still relatively new, activists fought against a corporate raider stigma that made it difficult to find supportive shareholders and win proxy contests. Companies were often able to simply ignore activists or push them to a shareholder vote where the outcome was uncertain. As activists began demonstrating success through increases in share prices of target companies (at least in the short term), attitudes began to change and shareholders became more receptive to activism as a strategy. The business media began covering campaign developments closely and companies began to fully appreciate activist investors growing power with shareholders, preparing response plans and bolstering structural defenses. Today, with the strategy now widely accepted and shareholder support for activism at an all-time high, many companies have opted to settle rather than engage in a distracting proxy contest. 16 Source: FactSet SharkRepellent, as of June 30, 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. Completed indicates a proxy fight was withdrawn, was settled or a winner has been announced; for a non-proxy fight activist campaign, it means there has been a logical conclusion (e.g., value demand was granted, activist withdrew demands or sold stake, etc.).

14 12 THE 2017 PROXY SEASON In the 35 settlements with activist hedge funds disclosed in the U.S. during the 2017 proxy season, companies granted an average of 1.7 seats to activists. In exchange, activists agreed to an average standstill duration of 1.4 annual meeting cycles. 17 Institutional investors became more focused on settlement terms this past proxy season. One large index fund released guidelines on structuring settlements while another communicated to portfolio companies that they should solicit its feedback before settling with an activist. Failure to follow these guidelines in negotiating an activist settlement risks seeing these shareholders vote against incumbent directors at the next annual meeting. This will likely remain an area of focus for long-only investors that, while receptive to shareholder activism, remain wary of individual activists motives in pushing for short-term value creation. 17 Source: Per company SEC filings in campaigns against U.S. companies with > $250mm market cap initiated by activist hedge fund investors, as of June 30, Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s) and remove officer(s). Note: Excludes vote/activism against a merger and activism against funds. Some standstill provisions are formulated such that they may terminate early if a dissident director resigns.

15 THE 2017 PROXY SEASON Notable emerging trends Companies targeted multiple times As the strategy has matured, shareholder activists have begun to take a second look at companies that other activists had previously targeted. Of the campaigns announced in the 2017 proxy season, approximately 20% were at companies that had been targeted by an activist at least once in the previous five proxy seasons. In fact, within just the 2017 proxy season, 30 U.S. companies were targeted by more than one campaign. 18 This trend will likely continue, as a new activist employs unique tactics and brings new perspectives to a campaign. Executives and boards that have experienced one activist may discover that a response playbook that worked in the past will not be effective against a different activist with a different campaign thesis. Thus, it remains important for companies to regularly evaluate their vulnerabilities and update their response plans, as well as periodically brief their boards on current trends in activism and corporate governance best practices. M&A-focused activism Activist campaigns related to M&A transactions have gained both boards and the market s attention in recent years. Activists can affect a company s M&A strategy in a number of ways. They often push for the company to commence a review of strategic alternatives, including a possible sale and/or breakup. They can take a position in the target of an announced acquisition and demand a higher offer price ( bumpitrage ), or take a position in the acquirer s stock and attempt to block the transaction. M&A-focused demands in the U.S. totaled 129 during the 2017 proxy season. 19 While one would expect M&A-related activism to be closely correlated with announced M&A transaction volume, the level of M&A campaign activity has historically been more volatile (Exhibit 7). 18 Source: FactSet SharkRepellent, as of June 30, Represents the following campaign types: board control and representation, enhance corporate governance, maximize shareholder value, remove director(s), remove officer(s) and vote/activism against a merger. 19 Source: Activist Insight, as of June 30, Represents the following value demands: block transaction, break up company, divest assets/divisions and seek sale/merger/liquidation, and review strategic alternatives.

16 14 THE 2017 PROXY SEASON Exhibit 7 a, b, c U.S. M&A-related activist campaign volume versus U.S. M&A transaction volume ( ) % % 0% % % Activist M&A campaign value demands M&A transactions % change in activist M&A campaign value demands % change in M&A transactions -60% Note: M&A activists change tack quickly with the ebbs and flows of U.S. M&A transaction volume. a Represents the following value demands: block acquisition/agitate for lower price (shareholder of acquirer), block merger/agitate for higher price (shareholder of target), break up company, divest assets/divisions, review strategic alternatives, seek sale/merger/liquidation. b % change rebased to 0% in 2012 proxy season. c M&A activist campaigns include only U.S. activist campaigns; M&A transactions reflect only transactions above $500 million, with at least one U.S. party involved. Source: FactSet, as of June 30, This consistently higher volatility of M&A-related activist campaign activity would seem to indicate that M&A-related activism is to some extent a momentum trade, appealing to those activists that seek to catalyze a short-term positive event for the stock with a clear exit opportunity.

17 THE 2017 PROXY SEASON 15 Larger, well-known activists re-engaging Several of the more prominent activists were still retrenching and stemming limited partner redemptions at the start of the 2017 proxy season, but have since re-emerged to seek new investment opportunities. While these funds may have suffered from recent underperformance, their well-known names and established track records have enabled them to survive recent challenges, although many at smaller scale. These established funds are running longer campaigns focused on operational improvement or a sale, which in many cases include calls for changes in management. Operational demands may cover cost-cutting measures, changes in the strategic direction of the core business, supply chain improvements and capital structure optimization focused on positioning the company for growth (rather than simply returning capital to shareholders). Exhibit 8 illustrates the global growth of operational campaigns over the past five years; this trend is expected to continue. This style of activism has inherently higher barriers to entry given the time required to implement any of the activist s suggestions, making it attractive for patient, well-capitalized funds. In addition to needing a longer investment horizon, an activist will either have to successfully persuade a management team and board that its operational direction is the right one or, alternatively, will have to seek board change with an eye toward replacing management to implement the new strategy. This requires that the activist already possess significant credibility with the company s shareholders as well as the ability to attract top-tier leadership talent to offer a replacement for the incumbent directors and management. Exhibit 8 Growth in operational demands CAGR: 36.4% Note: Number of demands related to business strategy (i.e., focus on core business, cost-cutting and other operational changes). Source: Activist Insight, as of June 30, 2017.

18 16 THE 2017 PROXY SEASON Higher prioritization of environmental, social and governance issues While the campaigns that focused on M&A and resulted in CEO replacement garnered headlines, the 2017 proxy season also saw a renewed focus on key corporate governance principles and a heightened focus on environmental and social issues by institutional investors. The largest U.S. state-affiliated pension funds continued to submit proposals to companies to declassify boards and amend bylaws to allow for proxy access. Institutional investors across global markets also led a number of campaigns against incumbent directors and advisory votes on executive compensation ( say-on-pay proposals). Some of the largest global asset managers and sovereign funds have recently issued public statements laying out their ESG voting priorities. As the third largest asset manager in the world and a significant shareholder, we consider ourselves stewards of the assets we manage on behalf of our clients and firmly believe that investing in gender diversity will benefit our clients and the economy over the long term. 20 Stephen Tisdalle, Chief Marketing Officer, State Street Global Advisors, April 2017 Institutional investors also are beginning to draw a much harder line on public companies disclosure of environmental risks and planning. While they will focus first on industries most affected by energy policy and climate change, more and more of these funds limited partners, including college endowments, wealthy individuals and others, are pushing for greater disclosure around overall corporate sustainability efforts. 20 Source: Fearless Girl: State Street Global Advisors CMO On The Rationale, The Controversy And What s Next, Forbes, April 21, 2017.

19 THE 2017 PROXY SEASON Preparing for and responding to shareholder activism Preparing for and responding to a shareholder activist requires a multifaceted approach. Not only do companies need a playbook for dealing directly with the activist, they should also employ a fully integrated communications plan designed to effectively convey the company s strategy for maximizing shareholder value to all shareholders. This plan should also demonstrate the shareholder friendliness of the company s corporate governance structure and practices. J.P. Morgan has a dedicated team with extensive experience focused on advising companies in preparing for and responding to shareholder activism. Exhibit 9 Best practices to prepare for and respond to an activist approach Prepare and launch Apply pressure Take action Research Build stake Privately Publicly Force change Proxy fight Potential activist actions 1 Speak with competitors, industry experts, former/current employees, suppliers and customers Contact shareholders to assess likelihood of support Accumulate ownership through a mix of equity and derivatives, avoiding regulatory disclosure for as long as possible prior to launching campaign Approach management privately with demands Request meeting with the board to present thesis Request board seats privately Publicly release detailed analysis via a letter or presentation (white paper) Publicly criticize management and board performance Discredit current board as entrenched and ignoring shareholder interests Nominate opposing slate of directors Attempt to oust key members of management, including the CEO Engage in litigation Work with a strategic partner to catalyze a sale or make an offer for the company 1Company actions Analyze all potential vulnerabilities Thoroughly evaluate shareholder base Address potential governance lightning rods Create a detailed break glass response plan Perform regular monitoring and periodic vulnerability assessments to ensure that the company will not be caught off guard Objectively evaluate merit of activist proposals in creating long-term value Evaluate activist s attack based on its modus operandi and history Meet with activist Understand major shareholders viewpoints Execute break glass plan and coordinate with advisers to maintain control of the public narrative Prepare response materials, in the form of investor presentations and fight letters Tailor messaging for ALL stakeholders Meet with major shareholders To achieve the best possible outcome, clearly and consistently communicate to the market how company intends to create shareholder value

20 18 THE 2017 PROXY SEASON 5. 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/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: Defense preparations for publicly announced and non-public approaches Dedicated shareholder activism advice Advisory services for 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

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