Dealing with Shareholder Activism

1. Dealing with Shareholder Activism • 26th Annual Tulane Corporate Law Institute • March 27, 2014 • David A. Katz (moderator)Wachtell, Lipton, Rosen & Katz • Daniel H. BurchMacKenzie Partners, Inc. • Christopher CernichInstitutional Shareholder Services, Inc. • Joele FrankJoele Frank, Wilkinson Brimmer Katcher • Victor I. LewkowCleary Gottlieb Steen & Hamilton LLP • Steve WoloskyOlshan Frome Wolosky LLP

2. Three Basic Types of Activists • Governance activists • Social issue activists • Economic activists

3. Governance Activists • Principal areas of reforms include: • Risk Management • Executive Compensation • Board Structure • Director Elections • Takeover Defenses • Evolving governance regime is derived from federal legislation, SEC rulemaking, state corporate legislation, stock exchange rules, shareholder proposals, “best-practice” standards and judicial decisions, principally those of the Delaware Court of Chancery. • Economic activists often use governance as a means to an economic end

4. Top 10 shareholder proposals in 2013 Source: SharkRepellent Russell 3000 data as of December 31, 2013 – compiled by Credit Suisse. (1) Includes proposals that went to a vote. Does not include pending proposals.

5. Social Issue Activists • Corporate social responsibility is a major concern for companies and boards. • Over 350 “environmental and social” Rule 14a-8 shareholder resolutions proposed during the 2013 proxy season, including: • Political contributions and activity (115) • Environmental issues (including climate change, energy, other) (80) and sustainability (36) • Human rights (25) • Board diversity (24) • Animal welfare (15) • Sexual orientation nondiscrimination/EEO reporting (13) • Enhanced focus on political spending in light of the Supreme Court’s 2010 Citizens United decision (and affirmation in 2012). • Petition for rule-making by academic group (including Bebchuk) on political spending disclosure under consideration by SEC. • For the 2013 proxy season, ISS updated its voting policy on social and environmental proposals with a case-by-case recommendation considering whether implementation is likely to enhance and protect shareholder value and a number of enumerated factors. • United Nations blueprint to promote human rights in the conduct of global business.

6. What do the typical Economic Activists want? • Objective: to make the company engage in “value-maximizing” activity (but short-term demands often conflict with long-term value creation). • Performance is not a defense. One-third of targets outperformed their peers in the 12 months preceding an activist attack. • Size is not a defense. Since January 2011, over 75 instances of activist campaigns targeting companies with $10 billion+ in market capitalization. • Economic activism often piggybacks on governance activism. Governance issues offer “levers” for activists to compel events at target companies, and governance activism has made economic activism more effective (e.g., by eroding takeover defenses).

7. TBU periodically The current Economic Activist landscape The activism platform • Activists are “value investors on steroids” • New funds recently formed by second generation activists include Marcato, Sachem Head and Sarissa • Pershing Square and Third Point have formed permanent capital vehicles • Activism is a mature asset class generating uncorrelated returns Few companies are invulnerable • Well “connected” Boards or insider ownership are only limited deterrents against shareholder activism • Activists have targeted large cap companies with small stakes, including Microsoft, Apple, P&G and Hess Mainstream activism • Mainstream investors are increasingly working with activists behind the scenes in a symbiotic relationship • Reduced stigma is associated with supporting activists publicly and privately • Support of mainstream investors is critical in large cap activism Recent developments • Reduced stigma associated with activism is reflected in high-quality dissident Board candidates • Settlements continue to be the preferred outcome for most activists and target companies Selected activist campaigns (LTM) (1) Source: Public filings – compiled by Credit Suisse (1) Market capitalization at time of announcement.

8. Shareholder Activism: Size/Performance are No Longer a Defense

9. Shareholder Activism: Growing Resources • Heightened levels of activist activity set to continue. • More capital, more campaigns. Estimated Activist Fund Assets Under Management ($ billions)

10. The number of activist campaigns has increased • “Desperate” activists respond to 2008 meltdown • Activist campaigns (2000 – 2013) The birth of modern-day activism Source: SharkRepellent. – compiled by Credit Suisse Note: Data as of December 31, 2013.

11. Activist 13Ds over time • 13Ds filed by known activists with specific demands (2007 – 2013) Source: 13D Monitor as of December 31, 2013 – compiled by Credit Suisse Note: Includes initial 13Ds filed by known activists with specific demands as defined by 13D Monitor.

12. Proxy fight statistics post–2008(1) Proxy fight outcomes Dissident election Settled without board seats 12% Total: 468 proxy fights Total: 160 elections Dissidents won at least one seat in ~45% of all proxy fights by either settlement or shareholder vote Source: SharkRepellent data as of December 31, 2013 – compiled by Credit Suisse. (1) Includes proxy fights from January 1, 2009 to September 30, 2013.

13. The number of proxy fights rose in 2013, following a decline after the financial crisis • Proxy contests(1) (39%) 17% (2) Source: SharkRepellent data as of December 31, 2013 – compiled by Credit Suisse. (1) Campaigns where formal notice of dissident proxy is publicly disclosed. (2) Seeking more than half of the Board seats.

14. Shareholder support for dissident nominees has increased in recent years • Vote results (4) 47 32 57 56 22 42 40 Average ~46% of fights won at least 1 seat 57% 57% 47% 45% 45% 38% 35% (3) (2) (1) Anecdotal evidence indicates many “vanilla” investors wonder “what’s the harm?” of seating a shareholder “watch dog” on the board Source: SharkRepellent data as of December 31, 2013 – compiled by Credit Suisse. (1) Includes winning half of the seats sought and campaigns which were settled prior to a vote and after an ISS recommendation was issued. (2) Includes campaigns that were settled prior to a vote and after an ISS recommendation was issued. (3) Includes campaigns that were withdrawn prior to a vote and after an ISS recommendation was issued. (4) Includes 4 campaigns settled post ISS recommendation: Sandridge Energy, Ferro Corp., Hess Corp., Tessera Technologies.

15. ISS has recommended in favor of dissidents approximately 50% of the time • ISS vote recommendations 47 57 56 40 22 32 42 54% 50% 42% 42% 35% 30% 26% (2) (1) In essence, obtaining ISS support is a “coin flip” Source: SharkRepellent and ISS data as of December 31, 2013 – compiled by Credit Suisse. Note: Percentages based on the total number of proxy fights where FactSet captures the ISS recommendation. (1) Includes supporting half the dissident slate. (2) Proxy fights that went to a vote with no ISS recommendation. ISS does not cover targets that are LLPs, LLCs, privately held, or have no ISS clients as investors.

16. Given the relative dissident success in contests, it’s not surprising that many targets have decided to settle • “Settlement fever” 38% 44% 41% 47% 32% 42% 37% The expense and bandwidth requirements of a full campaign are onerous for companies and activists Source: SharkRepellent data as of December 31, 2013 – compiled by Credit Suisse.

17. Numerous Factors Drive Vulnerability to Activists Strategic attractiveness Financial performance “Hidden” values Capital market receptivity Potential buyer appetite Factors affecting potential vulnerability Ownership profile Trading performance/market valuation Structural defenses Other liabilities (environmental, litigation, pension/ESOP) Change-in-control provisions

18. Activists often make multiple demands Activist campaign menu Selected Campaigns The easiest activist strategy – quick capture of a takeover premium provides attractive returns over a short term using leverage • Commence a process to sell the company • Break-up companies to unlock “hidden” value • Elimination of the “conglomerate discount” • Focus on high ROIC “core” businesses • Hold up transactions for sweeteners (“bumpitrage”) or block deals (“snap-back trade”) M&A activism An easy strategy – run a simple screen to identify targets • Return capital to shareholders (share buyback, special dividend) • Record high cash on balance sheets, but subject to repatriation tax leakage Balance sheet activism The hardest and rarest strategy – requires industry experience and patience • Focus on income statement (“private equity disintermediation”) • Change management, including direct attacks on CEO (“alpha by decapitation”) • Rationalize cost structure (SG&A, R&D) and maximize ROIC “Operational” activism A means to an end, not an end in itself • Replace directors via a proxy fight or public or private pressure • Push for governance “best practices” Governance activism The more actionable value levers, the more attractive the target

19. Recent activist campaigns for board control (select examples) • GrafTech / Milikowsky Group • Directors Nominated: 5 (of 7) director candidates nominated by dissident • Ownership Stake: 11.2% stake • Rights Plan: Expired prior to fight; not renewed • Current Status: Ongoing; Milikowsky claims he was forced off the Board on insider trading-related charges and plans to fight for his own Board seat • Cliffs Natural Resources / Casablanca Capital LP • Directors Nominated: 6 (of 11) director candidates nominated and proposed CEO put forth by dissident • Ownership Stake: 5.2% stake • Rights Plan: No • Current Status: Cliffs postponed the record date for its 2014 annual meeting; Cliffs disclosed that it offered Casablanca to appoint two directors on the Board and a third mutually agreed upon director to be named at a later date; Casablanca rejected the settlement offer and its proceeding with proxy solicitation • CommonWealth REIT / Corvex / Related • Directors Nominated: 7 (of 7) director candidates nominated by dissident • Ownership Stake: Dissidents together have a 9.6% stake • Rights Plan: 10% • Current Status: Corvex / Related received written consents from 81% of shareholders to remove entire CWH Board of Trustees • Health Management Associates / Glenview • Directors Nominated: 8 (of 8) director candidates nominated by dissident • Ownership Stake: 15% stake in HMA and 9.6% in Community Health • Pill: 15% • Current Status: Glenview's consent solicitation seeking to remove all HMA directors and replace them with 8 dissident nominees was successful; HMA ultimately entered into a definitive merger agreement with Community Health • Aaron’s / Vintage / Starboard • Directors Nominated: Vintage nominated 5 (of 10) director candidates nominated; Starboard later nominated 4 (of 10) director candidates • Ownership Stake: Vintage and affiliate funds owns 10.1%; Starboard position not public • Pill: No • Current Status: Pending • Intevac / Voce / Becker Drapkin • Directors Nominated: Voce nominated 3 of (7) director candidates; Following Voce’s nominations, Becker Drapkin approached the Company regarding interest in Board nominations • Ownership Stake: Voce has an 0.49% stake in Intevac, Becker Drapkin has a 4.5% stake • Pill: No • Current Status: Ongoing; Intevac agreed to add Matt Drapkin to the Board; Voce decided to move forward with nomination of three director candidates …In addition to a significant number of private situations - While settlements are generally on the rise, activists seeking control are more resistant to a settlement - - In the 11 contests where Board control was at risk, ISS supported partial dissident slates in seven contests, a full dissident slate in two contests, and management’s full slate in two contests -

20. Shareholder Activism in M&A Situations • How will significant shareholders respond to the announced transaction? • Does the merger agreement provide any conditions that an activist can exploit? • Supermajority shareholder approval requirements • Class votes • Appraisal rights conditions • Third party consents as a condition • Special regulatory approvals • Be wary of games played with appraisal rights • Analyze the situation like you would with a potential interoper • Is there any particular “hold-up” value?

21. What to do before the activist shows up • Establish and leverage core team • Management, lawyers, bankers, IR/PR, proxy solicitors • Conduct regular update calls • Assess and address vulnerabilities • Operational / strategic weaknesses • Structural defenses • Corporate governance policies • Key proxy deadlines • Track peer performance • Proxy advisory firms (e.g. ISS) and activists use relative performance to make their case • Key metrics include: 1-, 3-, 5-yr stock performance, ROI, executive compensation comparisons, governance policies • Consider need to ramp up IR / PR efforts and sharpen roadshow presentation • Goal is to ensure large base of supportive investors and other third parties • Use planned events (e.g. earnings) to reinforce progress against benchmarks and metrics • Consider increasing frequency of momentum (“positive”) announcements – operating milestones, key hires, new guidance, etc.

22. What to do before the activist shows up(cont’d) • Identify and cultivate third party supporters • Institutional investors • Sell-side / industry analysts • Customers, business partners • Business / trade organizations • Traditional shareholder advocates (aka the “corporate governance gurus”) • Refresh media relationships • Conduct interviews around planned corporate events (e.g. earnings) or other “easy wins” (e.g. project announcements) • Identify spokespeople and conduct training as appropriate • Independent board representative(s) will be needed in addition to management Simply good investor relations – blocking and tackling

23. Advance preparation is critical • Stay one step ahead • Core hedge fund strategy is to create a wedge between the company and its shareholders through embarrassment or suggestion of ideas that management supposedly missed • Look at your business the way a short-term financial investor would • What past decisions (e.g., acquisitions) is the activist likely to focus on? • What value does the activist perceive; what approach does the activist propose for “unlocking” value? • Analyze “capital allocation” strategies and alternatives (“excess cash” on balance sheet) • Much better if done during “peacetime” • Build and maintain credibility with shareholders and analysts before activists surface • Consider the takeover landscape in your industry • Who might be tempted to acquire you for operational or synergy reasons or as a result of industry dynamics?

24. Advance preparation is critical (cont’d) • Be alert to early warning signs, such as: • Extremely pointed questions during Q&A • Analyst reports suggesting structural changes • Changes in shareholder base – stealth acquisitions • What has the activist done in the past? • Be ready for the first phone call • Company can spend years recovering from mistake made in the first conversation • Establish internal and external teams, including advisors

25. Activist Hedge Fund “Playbook”

26. What can the Board expect? • Opposition • Company, Board and management team go under a microscope • Greater scrutiny by investors and media • No strategy or statement goes unchallenged • Directors and management open to public criticism • Similar to a political campaign • Battle for shareholder support / votes • Rhetoric can often be heated • Third party advocates needed • Strategic, “rapid response” communications required • Critical to stay on message and control the forum for delivery • Need optimal coordination to succeed Everything you say can and will be used against you in the court of shareholder opinion

27. What can the Board expect? (cont’d) • Taking the “high road” on the record is key to the public relations strategy • Need to maintain consistency of message along with rapid response • Deal with responses to dissident’s attack points – initially indirectly and at times more pointedly • Board will be kept informed of dissident activity and proxy communications • Press releases, media coverage, analyst reports, SEC filings, etc. • Key strategic discussions to be made in close cooperation with the Board • Board representatives should join management in attending ISS meeting and select investor meetings • Screen phone calls (office and cell) • Dissidents may try to contact Board members directly, all conversations are “on the record” and any comments may be used by dissidents in their proxy materials • Preference is for all communications to be channeled through designated spokespeople • Board meeting calendars should remain confidential • Individual directors may be targets of attacks • Like the Company, directors may be put under the microscope • Responses to be coordinated by Company and advisors

28. IR Tactics and Considerations • Regular, targeted one-on-one meetings • Major vehicle for communicating with investors and sell-side analysts • No substitute for in-person meeting with a CEO and / or executive team • Controlled forum for delivering messages • Large format or group meetings must be carefully considered • Limit group meetings (including dinners and lunches) • Level of control is significantly diminished • Company can be exposed to a “mob” mentality • Easy for opposition to cause trouble • Sell-side needs to be educated

29. Key documents in a proxy contest • Shareholder “fight” letters • Proxy cards sent by dissident and Company to shareholders multiple times, accompanied by “fight letters” • First fight letter includes multiple themes; subsequent letters often single-themed • Can be used as press releases or 8-K filings • Consider whether Company letters are public or private (can also use PRs to send to reporters) • SEC filings • Letters, press releases, presentations, statements can all be filed as 8-K (Company), 13-D / 13-DA (dissident) or 14A (both Company and dissident) • 8-K filings are used to “lower the volume” • Presentations • Used in meetings with investors and proxy advisory firms • Helps educate media and other key constituencies

30. Key documents in a proxy contest (cont’d) • Press releases • Primary and fastest method to reach all audiences and directly communicate key messages • Standby statements • Responsive • Ancillary communication materials • Special section on Company website – op-eds, letters to / from government officials, community leaders, potential third-party supporters, retirees, other constituencies, etc.

31. IR / PR Strategy • One-on-ones with major stockholders • Brief reporters • Telephone campaign (if appropriate) • Final calls / visits with major investors Typical Proxy Fight Timeline File definitive proxy materials, issue press release with 1st fight letter; Mail “stop look listen” letter 45 to 40 Days Mail 2nd fight letter, issue press release 38 to 32 Days 31 to 24 Days Mail 3rd fight letter, issue press release ISS meetings; Glass Lewis outreach; issue press release with 4th fight letter 21 to 14 Days ISS, Glass Lewis decisions: Both parties likely to issue press releases upon decisions 14 to 7 Days Mail 5th fight letter, issue press release 10 to 7 Days Issue open stockholder letters as press releases, as appropriate 5 to 2 Days Stockholder meeting Day 0

32. Dealing with Economic Activism Effectively • Continue to focus on the business • Renew focus on investor relations • Anticipate threats • Review advance notice deadlines for shareholder proposals and nominations to strike the right “balance” • Financial preparedness • Legal/structural preparedness • Focus on the activist’s agenda, 13D and track record and consider advantages of early engagement with the activist • Be prepared to expose fight; do not allow activists to frame the public agenda • Litigation is commenced infrequently – hard to sue a shareholder • Negotiation may be a productive path – not all settlements public – consider the alternatives

33. Responding to the Activist’s Approach • Key judgment to make is can/will the activist pursue a takeover bid or is it simply seeking to influence policy? • Establish a single point of contact and maintain a unified front • Consider advantages of engaging with the activist early – ignoring them will not make them disappear • Communicate open-mindedness and flexibility • Prepare to explain the rationale for the company’s strategy; demonstrate preparedness • Be willing to listen • Be willing to negotiate and/or cooperate if circumstances warrant • But do not allow activists to wrap themselves in “moral high ground” of corporate governance – expose short-term motives. • Activists’ bark is often louder than their bite • Be sure to consider what is ultimately at stake • Always think about the record you are creating – how will it play in a proxy contest?

34. Fiduciary Responsibilities of a Board When Responding to Activists • Board as negotiating representative • Board cannot be passive –should be active and engaged • Smith v. Van Gorkom: a shareholder vote does not absolve the Board • Cannot negotiate effectively unless you have the power to walk away • “Just Say No” • Directors’ duty in context of a decision to sell control is to obtain the highest value reasonably available for shareholders (the Revlon rule) • Takeover defenses enhance Board’s negotiating power • Board’s responses to activists and proposals not seeking a takeover are subject to business judgment rule, with the Board able to take into account the long term interests of the corporation and its shareholders • If an activist gains minority representation on the Board, the Board still should attempt to make decisions collectively and collegially, and act as a group – board counsel can play a critical role here

35. Influential & “independent” outsiders are often key voices in determining outcomes • Institutional Shareholder Services (ISS) • Leading proxy advisory firm in terms of size and influence • More than 1,200 clients: institutions, mutual funds, corporate and public pension funds, hedge funds, college endowments and other ISS followers • Many institutions strictly follow ISS recommendations when voting their shares • Reviews issues separately with both sides in a proxy contest before releasing its recommendation to clients • ISS report will be issued approximately 10-14 days before meeting • Often ISS can significantly influence 20-30% of the vote in a proxy contest • Recently began opining on tender offers • Glass Lewis & Co. • Major competitor of ISS, now owned by Ontario Teachers’ Pension Plan Board • Many of the largest institutions, mutual funds, index and public pension funds subscribe to Glass Lewis (generally also subscribe to ISS) • In 2010, Glass Lewis acquired the #3 player, Proxy Governance • Hosts a public forum called “Proxy Talk” – both sides speak to Glass Lewis clients in select proxy contests (aka public debate) • Glass Lewis can influence 10% or more of the vote in a proxy contest • May make different voting recommendations in proxy contests from ISS, but still favors minority representation for dissident shareholders\ • Egan-Jones Proxy Services • Provides voting recommendations on a few companies • Usually does NOT meet with either side in proxy contests, but may have conference calls ISS has generally supported hostile transactions, recommended AGAINST management-supported transactions opposed by hedge funds or other shareholders, and recommended FOR hedge fund minority slates

36. Proxy Advisory Firms: Is Influence Peaking? • In July 2013, SEC Commissioner Daniel Gallagher expressed concern about the influence wielded by proxy advisory firms and lamented the SEC’s role as a “significant enabler” of the tendency of institutional investment advisers to “view their responsibility to vote on proxy matters with more of a compliance mindset than a fiduciary mindset.” This was followed by an SEC roundtable. • On March 19, 2014, SEC Chair Mary Jo White disclosed that the SEC will soon review recommendations for possible regulatory action targeting proxy advisory firms • Similarly, the Canadian Securities Administrators (CSA), an umbrella organization of Canada’s provincial and territorial securities regulators, recently issued an update on their ongoing, consultative process concerning possible regulation of proxy advisory firms. • The CSA expects to publish a policy-based approach for comment in the 1Q2014 that would “promote transparency and understanding” and provide guidance on recommended practices and disclosure. • Yet, even as the SEC takes note of proxy advisory firms’ influence, the power of ISS and Glass Lewis seems to be waning, at least slightly. • With respect to say-on-pay votes, for example, 261 companies received negative ISS recommendations in 2013, yet only 18% failed to win majority approval. • Moreover, while in 2012, 100 companies reacted to negative vote recommendations from proxy advisors by filing supplemental materials, in 2013, only 59 companies did so. • In addition, some major institutional investors (e.g., BlackRock) are increasingly internalizing the function of proxy analysis and vote determinations.

37. ISS proxy fight recommendations are highly consistent with shareholder vote preferences • 2013 ISS vote recommendations vs. vote results Contrary to conventional wisdom, ISS recommendations are generally in line with the shareholder consensus Source: SharkRepellent data as of December 31, 2013. Note: Includes 36 U.S. contests where ISS provided a vote recommendation for meetings since January 1, 2013. Includes contests that were settled or withdrawn.

38. The recommendation of ISS will be important in a proxy contest • ISS governance proxy fight analytical framework – three key questions: • Have the dissidents met their burden of proving some Board change is warranted? • If so, is the dissident slate more likely to help create shareholder value? • Majority contests: the dissidents should provide a detailed plan, which ISS will compare with the incumbent plan ISS can impact up to 30% of the vote, so navigating the ISS process, personnel and proxy fight analytical framework is key to success

39. ISS examines a wide range of factors when evaluating proxy fights • ISS proxy fight factors • Long-term performance (TSR vs. market and peers) • Earnings and cash flow trends (with emphasis on long-term trends) • Strategic track record of the incumbents (missteps question credibility) • A crucial business model inflection point (may warrant new blood) • Strong Board oversight (vs. an “imperial” CEO) • Board accountability (e.g., anti-takeover provisions, ignoring the will of shareholders) • Corporate governance “best practices” • Nominee experience, track record and independence • Ability to work constructively with incumbents (skeptical about disruption argument) • Length of ownership (“owners” versus “renters”), but ISS doesn’t blame the messenger • Market reaction to dissident filing No one factor predominates – it’s a sliding scale based on specific and unique facts

40. Dissident Director Compensation Bylaws • Practice of activist hedge funds engaged in proxy contests offering special compensation schemes to dissident director nominees has increased and become even more egregious. • In order to proactively address the threats posed by such schemes to the integrity of the boardroom and board decision-making processes, in 2013, 40 companies adopted bylaws that would disqualify candidates that are party to any such arrangements. • In January 2014, ISS announced a new policy position that appears designed to chill efforts to protect against “golden leash” incentive schemes. • In a new FAQ, ISS warned that if a board adopts “restrictive director qualification bylaws” designed to prohibit “golden leashes” without submitting them to a shareholder vote, ISS “may” recommend a withhold vote against director nominees “for material failures of governance, stewardship, risk oversight, or fiduciary responsibilities.” • However, ISS noted that it has not recommended voting against directors at companies which have adopted bylaws precluding director nominees who fail to disclose third-party compensatory payments. • Following the announcement by ISS of its new policy, at least 19 companies subsequently repealed their dissident director conflict bylaws and multiple others are considering doing so.

41. Does Shareholder Activism = Shareholder-Managed Governance?? • Director-managed or shareholder-managed governance • “The business and affairs of every corporation … shall be managed by or under the direction of a board of directors…” (Delaware General Corporation Law § 141(a)) • “Shareholder power to adopt governance arrangements should include the power to adopt provisions that would allow shareholders … to initiate and vote on proposals regarding specific corporate decisions. Increasing shareholder power to intervene … would improve corporate governance and enhance shareholder value” (Bebchuk). • Shareholder activist objectives and impact • Key shareholder activist governance objectives: • Institute majority voting in director elections • Declassify board of directors • Reduce/rescind supermajority vote provisions in charter and bylaws • Allow shareholders the right to call special meetings • Require independent board chairman • Governance activism erodes takeover defenses and board functionality • Additionally, governance issues offer “levers” for activists to compel events at target companies