Dutch and US Lawmakers React to Hedge Fund Activists
Far from the halcyon image of a young boy admiring Dutch tulips, hedge fund activism has some lawmakers seeing red.
In response to our July 5, 2008 post about CSX ("CSX Battles Hedge Funds - A Cautionary Tale for Pensions"), Peter at riskfriends.net writes the following:
<< TCI also played a major role in the take over of ABNAMRO and benefited with an incredible return on investment (almost 100 percent). In the Netherlands legislation is being prepared to reduce impact of these activist inveztors that immediately profit by simply sending a warning letter to the board of a company. >>
Credit to Peter for directing us to the Governance Focus blog post entitled "Dutch taskforce wants to tighten corporate governance" (June 7, 2008). According to the cited June 5,2008 Reuters article with the same title, Dutch lawmakers seek to equalize what they perceive as an unlevel playing field across shareholders. In "Dutch corporate governance review mulls over M&A 'put up or shut up' clause" (Thomson Financial News, June 4, 2008), the head of the Corporate Governance Code Monitoring Commission, Mr. Jean Frijins, posits the need for more transparency as relates to corporate takeover attempts.
Stateside, TheDeal.com reports on US Senator Chuck Schumer's letter to SEC Chairman Cox, asking why the court failed to penalize either The Children's Investment Fund or 3G Capital, having concluded that the "group" violated securities laws by not disclosing their partnership, pursuant to Schedule 13D rules. Jurists did however allow TCI and 3G to vote their shares (direct and indirect via equity swaps). See "Schumer may propose bill concerning CSX ruling" by Ron Orol, June 18, 2008. Oral is the author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World (John Wiley & Sons, 2007).
As I wrote yesterday, this case is noteworthy for numerous reasons, not the least of which is the fact that derivatives (equity swaps here) are clearly changing the corporate governance landscape. Significant questions remain about what constitutes "appropriate" transparency (already a hot button issue for pensions, endowments and foundations that invest in hedge funds, not all of which provide "enough" detail about their holdings). Just as important, what is the proper role of activist money managers? Are they doing existing shareholders a favor by shaking up things, urging existing managers to improve performance (however "performance" is defined) or creating chaos? While each situation differs, their clout is far from non-trivial.
This blogger does not have sufficient information to make a judgment about the CSX case. On a more general note, however, it would be enlightening to understand how pension plan fiduciaries (defined benefit or defined contribution) vet corporate governance risk before allocating monies to a particular stock, bond or hedge (private equity) fund. Unless the plan's corporate governance policies are made available (if they exist at all), we learn only from reading headlines and court filings, after the fact.
Wouldn't it better for investment fiduciaries to ex-ante publish how they monitor and manage "beneficial ownership" issues, especially in the event of a takeover?
Editor's Note: Click to read the "Final Judgment, CSX v. The Children's Investment Fund."
