Table Of ContentINSTITUTIONAL
INVESTOR
ACTIVISM
INSTITUTIONAL
INVESTOR ACTIVISM:
HEDGE FUNDS AND
PRIVATE EQUITY,
ECONOMICS AND
REGULATION
Edited by
WILLIAM W. BRATTON
and
JOSEPH A. McCAHERY
1
3
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Preface
Since the 1960s, institutional investing has been an important element of financial markets.
The increase in institutional ownership was accompanied by an enhanced role played by
institutions in monitoring companies’ corporate governance behaviour. In fact, hedge funds
and private equity firms have achieved a degree of success in actively shaping the business
plans of target firms, encouraging corporate restructurings, mergers, increased leverage,
dividend recapitalizations, and the replacement of management and board members. Yet,
with the passage of time, activist shareholders have encountered opposition from lawmak-
ers, analysts, and some sectors of the business community.
The global turbulence in the credit markets, triggered by the turmoil in the subprime
mortgage market in the United States in 2007, was significant for activist investors. As has
been widely noted, not only did the crisis end the private equity bonanza, but it contributed
to an even steeper decline in hedge fund activism. The experience of the last decade lends
support to the view that there are immense swings in shareholder activism. Fortunately,
governments have recently promulgated some reforms that affect activist investors. Indeed,
the effect of the reforms in some countries, such as the US, has led to lowering the costs of
activism and increasing the ability of institutional investors to vote. And there is evidence
that the huge rebound in activism after 2012 has led to the improved performances of target
companies and significant returns for investors in activist hedge funds.
Most of our focus in this book is on role of the hostile activist shareholder that has been
taken up by a set of hedge fund and private equity firms. These activists typically target and
research companies, take large positions in their stock, criticize their business plans and
governance practices, and confront their managers, demanding action enhancing share-
holder value. Our aim here is to explore the implication that hedge fund activists, vulture
funds, and private equity, taken together, may have revolutionized shareholding and lend-
ing, and thereby solved layers of agency problems without any assistance in the form of reg-
ulatory reform. Many of the chapters in this collection offer sustained insights into these
important questions about the role and lessons of activist shareholders for corporate gov-
ernance and regulation.
This volume emerged out of a March 2007 Conference on Activist Investors, Hedge Funds
and Corporate Governance, organized by the University of Amsterdam Center for Law and
Economics, Vanderbilt University School of Law, and the European Corporate Governance
Institute in Amsterdam. We are grateful to the Amsterdam Center for Corporate Finance
for their support of our examination of the economic and governance effects of institu-
tional investor engagement in Europe and the US. We were also fortunate to have received
vi Preface
financial assistance from the Netherlands Ministry of Economic Affairs, Agriculture and
Innovation and the Netherlands Ministry of Finance.
We would like to thank the many individuals who have provided us with helpful advice
and encouragement. We would particularly like to thank John Armour, Lucian Bebchuk,
Marco Becht, Arnoud Boot, Mike Burkart, Brian Cheffins, John Coffee, Jill Fisch, Merritt
Fox, Leo Goldschmidt, Henry Hu, Rajkamal Iyer, April Klein, Paul Koster, Florencio López
de Silanes, Ronald Masulis, Enrico Perotti, Ludo Phalippou, Theo Raaijmakers, Robert
Rasmussen, Luc Renneboog, Edward Rock, Zacharias Sautner, Dirk Schoenmaker, Armin
Schwienbacher, Randall Thomas, Robert Thompson, Erik Vermeulen, Michael Wachter,
Jaap Winter, Guy Wyser-Pratte, and Emanuel Zur. We would also wish to acknowledge our
gratitude to Irene Wamelink for her work in organizing the conference. During the course of
editing the collection, we benefited from the administrative and financial support provided
by the Department of Business Law at Tilburg University and the University of Pennsylvania
Law School. We would like to thank our authors for their contributions to the volume.
We would also like to extend our thanks to those who have helped us in preparing the
collection. We are grateful to James J. Risser for his expert assistance in preparing the manu-
script for submission to the press. We thank Barend van Drooge, Olaf van Pennen, Natashka
Ramada, and Stanislav Wald for their able research assistance. We owe special thanks to our
editor at Oxford University Press, David Musson, for his long-standing support, and helpful
comments and feedback in preparing the collection. Finally, we thank the Institute of Law
and Economics at the University of Pennsylvania and the Center for Company Law, and
Tilburg Law and Economics Center (TILEC) for the stimulating environments that they
provide.
Acknowledgements
Stuart L. Gillan and Laura T. Starks, ‘The Evolution of Shareholder Activism in the United
States’. Reprinted from Journal of Applied Corporate Finance (© 2007, John Wiley and Sons)
with permission of John Wiley and Sons.
Lucian E. Bebchuk, ‘The Myth of the Shareholder Franchise’. Reprinted from Virginia
Law Review, Volume 93, 2007 with permis sion of Virginia Law Review.
John Armour and Brian Cheffins, ‘The Rise and Fall (?) of Shareholder Activism by Hedge
Funds’. Reprinted from Journal of Alternative Investments, Volume 14, No. 3, 2012, with per-
mission of the author.
Marcel Kahan and Edward Rock, ‘Hedge Funds in Corporate Governance and Corporate
Control’. Reprinted from University of Pennsylvania Law Review, Volume 155, 2007 with
permis sion of University of Pennsylvania Law Review.
Marco Becht, Julian Franks, Colin Mayer, Stefano Rossi, ‘Returns to Shareholder
Activism: Evidence from a Clinical Study of the Hermes UK Focus Fund’. Reprinted from
Review of Financial Studies, Volume 22, No. 8, 2009 with permission of Oxford University
Press, Inc.
Alon Brav, Wei Jiang, Frank Partnoy, and Randall Thomas, ‘Hedge Fund Activism,
Corporate Governance, and Firm Performance’. Reprinted from Journal of Finance
(© 2008 The American Finance Association), with permission of John Wiley and Sons.
April Klein and Emanuel Zur, ‘Entrepreneurial Shareholder Activism: Hedge Funds and
Other Private Investors’. Reprinted from Journal of Finance (© 2009 The American Finance
Association) with permission of John Wiley and Sons.
William Bratton and Michael Wachter, ‘The Case Against Shareholder Empowerment’.
Reprinted from University of Pennsylvania Law Review, Volume 158, 2010 with permission
of University of Pennsylvania Law Review.
Douglas G. Baird and Robert K. Rasmussen, ‘Antibankruptcy’. Reprinted from Yale Law
Journal, Volume 119, 2010 with permis sion of Yale Law Journal.
Henry T. C. Hu and Bernard Black, ‘Debt, Equity and Hybrid Decoupling: Governance
and Systemic Risk Implications’. Reprinted from European Financial Management with per-
mission of John Wiley and Sons (© 2008 Henry T. C. Hu Journal compilation, Blackwell
Publishing Ltd).
Wei Jiang, Kai Li, and Wei Wang, ‘Hedge Funds and Chapter 11’. Reprinted from
Journal of Finance with permission of John Wiley and Sons (© 2012 the American Finance
Association).
viii Acknowledgements
Steven N. Kaplan and Per Strömberg, ‘Leveraged Buyouts and Private Equity’. Reprinted
from Journal of Economic Perspectives, American Economic Association, Volume 23, No. 1,
with permission of American Economic Association
Lucian A. Bebchuk and Robert J. Jackson, Jr., ‘The Law and Economics of Blockholder
Disclosure’. Reprinted from Harvard Business Law Review, Volume 2, 2012 with permis sion
of Harvard Business Law Review.
Peter Cziraki, Luc Renneboog, and Peter G. Szilagyi, ‘Shareholder Activism through
Proxy Proposals: The European Perspective’. Reprinted from European Financial
Management with permission of John Wiley and Sons (© 2010 Blackwell Publishing Ltd).
Jill E. Fisch, ‘The Destructive Ambiguity of Federal Proxy Access’. Reprinted from Emory
Law Journal, Volume 61, 2012 with permis sion of the author and Emory Law Journal.
Ludovic Phalippou, ‘Performance of Buyout Funds Revisited?’ Reprinted from Review of
Finance, Volume 18, 2014 with permis sion of Oxford University Press, Inc.
Dan Awrey, ‘The Limits of EU Hedge Fund Regulation’. Reprinted from Law and Financial
Markets Review, Volume 5, No. 2, with permission of Hart Publishing Ltd (an imprint of
Bloomsbury Publishing plc).
Contents
List of Figures xiii
List of Tables xv
Table of Cases xix
List of Contributors xxiii
1. Introduction 1
William W. Bratton and Joseph A. McCahery
PART I THE DISEMPOWERED SHAREHOLDER
2. The Evolution of Shareholder Activism in the United States 39
Stuart L. Gillan and Laura T. Starks
3. The Myth of the Shareholder Franchise 72
Lucian A. Bebchuk
4. Shareholder Activism through Proxy Proposals:
The European Perspective 105
Peter Cziraki, Luc Renneboog, and Peter G. Szilagyi
PART II HEDGE FUND ACTIVISM
A. Patterns and Policy Questions—Dark Sides and Light Sides
5. Hedge Funds in Corporate Governance and Corporate Control 151
Marcel Kahan and Edward B. Rock
6. The Rise and Fall (?) of Shareholder Activism by Hedge Funds 206
John Armour and Brian Cheffins
B. Ownership Stakes, Operating Results, and Financial Returns
7. Returns to Shareholder Activism: Evidence from a Clinical
Study of the Hermes UK Focus Fund 223
Marco Becht, Julian Franks, Colin Mayer, and Stefano Rossi
