Resistance, when it comes to activist investors, may indeed be futile.
Martin Lipton, the most prominent of the go-to lawyers companies hire when they come under attack from hedge funds, sent a memo to clients on Wednesday saying that he thinks more companies should think out about settling early, rather than taking up a fight with activists.
Lipton, whose firm Wachtell Lipton Rosen & Katz has represented more companies in battles against activists than any other, said that even when companies win, a long, drawn out proxy fight may prove more damaging than having to cede a board seat to an activist early on.
Lipton’s memo was a general directive on how companies should deal with activists. But it was written in response to the ongoing fight between DuPont and billionaire investor Nelson Peltz, who has been trying to force his way on to the chemical giant’s board. Earlier in the week, influential proxy advisory firm Institutional Shareholder Services recommended that DuPont shareholders elect Peltz and one of the nominees put forth by Peltz’s hedge fund, former GE executive John Myers. On Wednesday, another proxy advisory firm, Glass Lewis, backed Peltz’s nomination to DuPont’s board, but not Myers or any of Trian’s other nominees. Trian has put forth four nominees for DuPont’s board, which shareholders are scheduled to vote for on May 13.
(Update: Lipton has posted the full memo here.)
DuPont continues to fight Peltz. Executives have been on the road trying to convince shareholders that the company has the right strategy and that Peltz, who has pushed for the company to be split into parts, would be a distraction and bad for shareholders if he were to join the company’s board. But sources close to the company say DuPont may make a settlement offer in the next few days. The company says it has been open to a settlement from the beginning.
In a follow up e-mail to the memo, obtained by Fortune, Lipton wrote that he doesn’t endorse Nelson Peltz, his tactics, or ISS’s recommendation to elect him to DuPont’s board. Lipton also said that he wasn’t taking a position in the fight between Peltz and DuPont, and that he thinks DuPont has an “outstanding CEO and board of directors.” But Lipton does say that the failure to recognize the reality that shareholder activists increasingly have the backing of proxy advisory firms and big investors will only lead to more activist attacks against companies.
“I’m not doing my job if I don’t alert them to the current state of the world, even if I don’t like it and don’t agree with it,” wrote Lipton in the follow-up e-mail.
The memo, which was titled “Some Lessons from DuPont-Trian,” is gently worded, but could still signal a major shift in the growing battle between corporate America and increasingly hostile shareholders. It’s a sign that the balance of power is shifting, or perhaps already has, to the hedge funds.
Lipton is one of the most outspoken critics of shareholder activism. Loud mouth hedge fund manager Bill Ackman recently challenged him to a $1 million debate on the subject. Lipton has not responded.
Lipton has spent his career defending companies, first from corporate raiders in the1980s and 1990s and, more recently, from activist investors like Ackman and Carl Icahn. The fact that he is, albeit modestly, waving a white flag is notable.
Lipton’s follow up e-mail to his memo is below:
From: Lipton, Martin
Sent: Wednesday, April 29, 2015 3:59 PM
As you and [redacted] both know, I hold you both in the highest regard and it pains me that I have caused you to send me your email. I would like to explain and hope that you understand that my memo does not take a position, it solely and only reflects what the ISS report says and the current state of the institutional investor attitude toward activist hedge funds and toward Mr. Peltz. The fact that you, [redacted] and I don’t agree with Mr. Peltz and the investors does not mean that we should close our eyes. The failure of companies to recognize the realities of the current state of corporate governance, the current policies of ISS and institutional investors and the overall activist phenomenon, is what opens the door to attacks by activist hedge funds. For more than 40 years, I’ve been advising companies as to how to avoid and deal with corporate raiders and activist shareholders. I’m not doing my job if I don’t alert them to the current state of the world, even if I don’t like it and don’t agree with it.
I’m sorry that you have misread my memo:
1. It does not, and I do not, endorse Nelson Peltz. I have been battling with him for many years and do not approve of his proxy fight tactics.
2. My memo does not take a position. It states and explicates what ISS said and what major institutional investors are saying and doing.
3. My memo clearly infers that I recognize DuPont has an outstanding CEO and board of directors.
4. My memo, like all of my memos of this type, are for the purpose of alerting clients to the realities of what is happening in the markets, the courts and legislative and regulatory bodies.
5. While you don’t find the ISS rationale for a split vote compelling, in the corporate world we must understand and take into account the ISS policies and actions and respond accordingly. To not do so, invites disaster.
6. My memo was not intended to, and does not, endorse the ISS recommendation; nor was it intended to endorse it, Mr. Peltz or his proxy fight. It solely and only reflects the fact that ISS took the position it took and what ISS said were the reasons.
7. I know Ellen Kullman and several of the DuPont directors and have the highest regard for them.
Warm regards to you and [redacted],