Carl Icahn

The Corporate Governance Argument At Spinoffs

This will be somewhat controversial, but a conversation needs to be started about whether newly spunoff companies truly deserve a chance on their own.

While it might be true that some companies thrive after being spunoff, there’s a decent argument about whether corporate governance rules should be changed for spinoffs. Right now, it’s fairly difficult to take on a newly spunoff company given staggered boards and bylaws that prevent large shareholder to call a special meeting.

However, many younger or newly spunoff companies could actually benefit from an activist intervention? Carl Icahn is at the forefront of trying to change the bylaws of newly spunoff companies. He got a win with Manitowoc (NYSE: MTW) agreeing to ease the restrictions when it comes to having an activist involved with a newly spunoff company. He’s pushing for the same at Gannett Co. (NYSE: GCI).

As we’ve noted before, corporate governance for spinoffs is ripe for change. Consider this: 55% of 2014 spinoffs stagger their director elections, making a board coup a yearslong effort and nearly two-thirds of 2014 spinoffs don’t give investors the right to call special meetings. The thesis here is whether spinoffs should have stronger corp governance to give them time to figure things out, or should they be subject to activists and takeovers like normal companies?

Fulfilling a company’s material need for in-house re-evaluations, or a fresh perspective is not always welcomed, but usually very much needed.

We think the message is being conveyed wrong, when it comes to activists in spinoffs. As the old adage teaches, “it is not what you say but how you say it.”

Activist investing is spreading around the globe, including the recent reluctant participation of Japan. The country’s historical and cultural tradition is not adapt to change. Now, however, Japanese companies are availing themselves of the “activist investing sword.” Still, they emphasize that they do so “in the most polite way”. Only Japanese fund managers could use those two expressions in the same context.

One is reminded of the adage about winning more with honey than vinegar. Or, a first carrot, then stick approach. Something that, perhaps, much of the media would like to see U.S. activists employ more. Regardless, activist investing is here to stay for now. If Japan is opening its mind to the idea of activists, why can’t we get corporate governance at spinoffs right?

So, in closing, one of the more notable trends to watch for in 2015 is activists taking on newly spunoff companies. With corporate governance laws being challenged, this could be another area of “low hanging fruit” for activist investors to pick.