DuPont proxy win may encourage other CEOs to say ‘no’ to activists

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BOSTON | BY SVEA HERBST-BAYLISS  Wed May 13, 2015 4:18pm EDT

May 13 Corporate America may find fresh courage to say “no” to deep-pocketed activist investors after the chief executive of DuPont, one of the world’s biggest chemical companies, beat back the year’s most prominent challenge to management on Wednesday.

Nelson Peltz, who runs the $11 billion Trian Management hedge fund, was dealt a rare setback when investors, including pension fund Calpers, sided with DuPont CEO Ellen Kullman to rebuff his attempt to win four board seats and press the company into breaking itself up.

The outcome underscores how a CEO with strong allies among its largest investors can fend off activist advances, and could provide a model for how corporate leaders handle future battles waged by hedge funds such as Pershing Square Capital Management, Starboard Value, and ValueAct.

“Companies will be more emboldened by this and more willing to stick to their convictions and strategies, and not necessarily rush into a negotiated settlement,” said Damien Park, managing partner at consulting firm Hedge Fund Solutions, which helps companies defend against activists.

Analysts said Kullman’s open dialogue with big shareholders, including Vanguard, State Street and BlackRock, was instrumental in DuPont’s victory over Peltz, who had the support of prominent shareholder advisory firm ISS.

In the past, companies seeking to avoid the cost and distraction of proxy battles have tended to accept agitators onto their boards before a full vote by shareholders. DuPont spent $15 million trying to fend off Peltz, whose fund spent $8 million on its campaign, according to each side.

For example, Peltz’s partner Ed Garden joined the Bank of New York Mellon board last year, and Third Point’s Daniel Loeb got three seats on auction house Sotheby’s board. This year Pershing Square negotiated two board seats at animal health company Zoetis shortly after buying a $2 billion stake.

Companies that have taken a harder line have often been stung. In a recent example, Jeff Smith’s Starboard last year succeeded in replacing all 12 directors at Darden Restaurants, which owns Olive Garden, prompting analysts to say boards no longer have the luxury of ignoring investors who call for spinoffs and buybacks.

Wednesday’s loss for Peltz could reshape that thinking, by showing that CEOs who have established support among big investors for their management plans have a chance at blocking activists in some cases.

“One takeaway is that while activists on average are successful, they are not successful in each and every case,” said Darren Novak, a managing director at Houlihan Lokey who advises companies in activist shareholder situations.

Harvard Business School professor William George said Peltz’s loss “will give CEOs the courage to stand up to activists who advocate short-term actions that aren’t in the company’s best long-term interest”.

To be sure, advisers and analysts said companies with clear management flaws still offer the activist industry fertile ground to force change.

“There are lots of broken companies out there that activists can focus on, and this has got to be viewed as a unique situation where Peltz went after a company that’s well run but he thought he could run better,” said Wes Hall, founder of advisory firm Kingsdale Shareholder Services. “Everyone has won some (corporate battles) and lost some. Life goes on.”

Dedicated activist hedge funds boasted record inflows in 2014 of $14.2 billion, and the roughly 70 funds in their ranks hold a combined $119.2 billion in assets, Hedge Fund Research data show. (with additional reporting by Lewis Krauskopf and Nadia Damouni in New York, Swetha Gopinath in Bangalore and Tom Hals in Wilmington; Editing by Richard Valdmanis and Peter Galloway)




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