The next chapter in our Practical Guide to the Regulation of Hedge Fund Trading Activities has been released.
What do passive hedge funds need to consider when switching to an active role with the management of specific portfolio companies?
Chapter 6: When Passive Hedge Funds Decide to Become Activist walks through ways that a historically passive fund can begin to take active steps with a portfolio company, ranging from dipping its tow in the water by making its views public and stopping there, through middle-ground options, up to a full blow proxy contest.
A Practical Guide to the Regulation of Hedge Fund Trading ActivitiesWhen Passive Hedge Funds Decide to Become Activist
Passive hedge funds increasingly are taking on activist roles at one or more portfolio companies. While this is an expected part of a broader trend toward increasing shareholder activism, such funds are not typically interested in becoming activist funds generally, but rather in using all the tools available to rectify perceived deficiencies at an under-performing portfolio company. Hedge funds are the most active proxy contest dissidents, representing more than half of campaigns brought against Russell 3000 companies in 2018. Many, if not most, of these insurgent hedge funds are “activist” funds, although passive hedge funds have increasingly considered activist roles with respect to specific portfolio companies.
This article is the sixth chapter of a series of articles on regulatory issues impacting hedge fund equity trading (the “Trading Manual Series”). As compared to the first chapter in that series, which addressed scenarios where a fund inadvertently drifts into “activist” status for regulatory purposes, this chapter addresses scenarios where the fund makes a deliberate decision to assume an activist role and to address regulatory issues.
There are a variety of methods for a hedge fund to assume an activist role. A hedge fund could take a limited approach and merely engage privately with management or publicly criticize management. Neither strategy would trigger the SEC’s proxy rules, although the efforts could require the fund to file a Schedule 13D to replace a pre-existing 13G filing. Along the same lines, the fund may follow a proxy rule exemption to announce how it intends to vote on the company’s — or another shareholder’s — proxy proposal, and why. Or the fund could play a larger role, by launching what we describe below as a “mini-proxy contest,” or even a full- scale proxy contest, or a tender offer.