Chapter 13 – Shareholder Activism and Impact on Corporations
Q1. Which type of company makes an easier target for an activist investor and why: a
company that has adopted a majority voting standard, or a company with a plurality
voting standard?
A. An activist investor would most likely have an easier time influencing a company
with a majority voting standard. With the elimination of the broker vote, brokers,
Q2. Suppose Company A submits a corporate governance proposal to destagger its
board. Under current regulations, would brokers be permi&ed to vote their
customers’ shares without voting instructions?
A. Brokers would not be allowed to vote their customers’ shares as the NYSE no
Q3. What’s the bene.t of staggering the election of board of directors?
A. More difficult for an activist to pursue a proxy .ght that signi.cantly changes the
Q4. Cumulative voting is the practice of allowing shareholders to cast all of their votes for
a single nominee for the board of directors when the company has multiple openings
on its board. Does this practice help or hinder activists?
A. This strengthens the ability of motivated minority shareholders, like activists, to
Q5. Describe what is meant by a “13D le&er”
A. Answer: A 13D le&er is a tool used by an activist investor (e.g., Icahn, Loeb) to
force corporate change. 13Ds are .lings that must be made with the SEC when
Q6. If Company A owns Company B’s stock (which is currently trading at $30) and A
purchases a two year put on B’s stock with a strike price of $25 and sells a two year
call on B stock with a strike price of $34, what is this equity derivative structure
called? What are its bene.ts and disadvantages?
A. Equity Collar. Bene.ts include: downside protection on B shares below $25,
potential to avoid disclosure, a smaller upfront cash investment (creating
Q7. What timing mismatch issue exists for activist hedge fund investment strategy?
A. Most hedge funds have short investment horizons and corresponding short
lock-up periods of one year (although some activist funds have longer lock-up
Q8. Activist funds need to devote more time and resources to investments compared to
most other fund strategies. What added risk does this produce for activist funds?
A. More porColio concentration – Funds are more susceptible to large losses, even
Q9. Describe a total return swap (sometimes called an equity swap) and the bene.ts of
this strategy for a hedge fund.
A. A total return, or equity swap, allows a hedge fund to receive the total returns of
a company’s stock in exchange for paying a Libor + 50 b.p. (or some other agreed
upon spread) to a counterparty. The counterparty hedges itself by buying stock
in the market aGer borrowing the purchase price for the stock from a lender. A
Q10. In the legal ba&le between CSX, TCI and 3G, the SEC and the Federal Court judge that
presided over the lawsuit held di”ering views of the case. Which had a more
rules-based approach and which had a more principles-based approach?
A. Rules-based: SEC; Principles-based: federal judge