offensive shareholder activist

8/11/2019 Offensive Shareholder Activist

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OFFENSIVESHAREHOLDERACTIVISMINU.S. PUBLIC

COMPANIES, 1900-49

John Armour*and Brian Cheffins**

October 2009

Abstract

Offensive shareholder activism involves buying up sizeable stakes in underperforming companies

and agitating for changes predicted to increase shareholder returns. Though hedge funds are currentlyhighly publicized practitioners of this corporate governance tactic, there has been no analysis of the extentto which managers of U.S. public companies were faced with challenges of this nature during the first halfof the 20th century. This paper correspondingly examines instances during this period where investorsengaged in offensive shareholder activism, based on a hand collected dataset of proxy contests occurringbetween 1900 and 1949. Our findings indicate that offensive shareholder activism, while notcommonplace, did occur and was considerably more prevalent in the 1930s and 1940s than in earlierdecades. We explain our results by reference to a simple model of offensive shareholder activism and arguethat the ebb and flow of takeover activity may have been the primary determinant of the trends we observe.

(This is a preliminary draft. Please do not cite without seeking prior permission of the authors.)

* Lovells Professor of Law and Finance, University of Oxford; ECGI.** S.J. Berwin Professor of Corporate Law, University of Cambridge; ECGI. The authors are grateful for financialsupport provided by the organizers of the Origins of Shareholder Advocacy conference and would like to thank Kristinvan Zwieten for research assistance.

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I. INTRODUCTION

Carl Icahn, 1980s corporate raider and currently operator of Trian Partners, a major activist hedge

fund, spelled out his business philosophy in a late 1970s memo to prospective investors in Icahnsinitial investment partnership:

It is our contention that sizeable profits can be earned by taking large positions inundervalued stocks then attempting to control the destinies of the companies in question by: a)trying to convince management to liquidate or sell the company to a white knight; b) waging a

proxy contest; c) making a tender offer and/or; selling back our position to the company.1

Others subscribed to what Icahns biographer labelled the Icahn Manifesto well before Icahnhimself. During the 1950s and 1960s, a key aspect of the business model of Hunt Foods, led byNorton Simon, was to search out and buy into companies where the stock was low and its assets high.According to SimonsNew York Timesobituary:

Mr. Simon was perennially on the outlook for promising investments, and over the years hebought interests in dozens of companies. He would look for companies whose profits were being

held down by stodgy executives and whose stock was undervalued and widely held. When hespotted a likely target, he would buy stock, generally quietly, sometimes on his own, sometimesthrough the Hunt company. Then, armed with a substantial block of shares, he would start tellingmanagement what it should do to improve operations.2

The investment philosophy Icahn and Simon put into practice will be familiar to contemporaryreaders. Icahns hedge fund was one of a highly publicized cohort of hedge funds operating in the2000s that sought to profit by buying up sizeable stakes in underperforming companies and agitatingfor changes predicted to unlock shareholder value. Steel Partners II, Jana Partners and Pirate Capitalare examples of investment funds that engaged in Icahn-style shareholder activism on multipleoccasions during the mid-2000s.3

The fact that the offensive form of shareholder activism in which hedge funds engage hashistorical antecedents implies the underlying strategy has constituted over time a viable approach toprofiting by investing in shares. But for how long? Has offensive shareholder activism been aconstant with U.S. corporate governance back through time? Or is it merely a recent phenomenon? Ifso, why? Why didnt potential antecedents to Norton Simon, Carl Icahn and todays activist hedge

funds realize healthy risk-adjusted returns could potentially be obtained by buying up sizeable stakesin public companies and agitating for change?

In this paper, we address these questions, focusing on U.S. public companies in the first half ofthe 20th century. In so doing we are exploring largely uncharted waters, as there is virtually nosecondary literature on shareholder challenges to incumbent management teams for this period.4 1900

is a logical departure point for our enquiry, as by this point in time industrial companies had begun totransform equity markets formerly monopolized by railway securities. 1950 is an apt end pointbecause it is well-known to those familiar with the history of U.S. corporate governance that during

1 From Mark Stevens, King Icahn: The Biography of a Renegade Capitalist(1993), quoted in Ken Auletta, TheRaid: How Carl Icahn Came Up Short, New Yorker, March 20, 2006, 132.

2 Eric Pace, Norton Simon, Businessman and Collector, Dies at 86, New York Times, June 4, 1993, A22. Seealso David C. Smith, Not-So-Simple Simon, Wall Street Journal, March 4, 1965, 1; Thomas W. Bush, Hunt FoodsNorton Simon: Is He a Raider or Builder?, Los Angeles Times, September 11, 1966, J1.

3 William W. Bratton, Hedge Funds and Governance Targets (2007) 95 Georgetown L.J. 1375, 1429-32(identifying interventions occurring in U.S. public companies, 2002-06).

4 George J. Stigler and Claire Friedland, The Literature of Economics: The Case of Berle and Means, (1983)26 Journal of Law and Economics 237, 248 (discussing the 1920s and 1930s, with particular reference to the unfriendlymerger).


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the 1950s various white sharks waged frequent high-profile proxy battles to challenge managers ofmajor public companies.5

It is not obvious a priori whether offensive shareholder activism would be prevalent or not duringthe first half of the 20 thcentury. Until the enactment of federal securities regulation in the mid-1930s,

potential activists could build up stakes in potential targets in pretty much complete secrecy and could,with legal impunity, rely on price-sensitive, confidential information they might obtain to buy upshares at a bargain price. It is also potentially significant that, at least according to received wisdom,the takeover bid was not a feature of pre-1950 U.S. corporate governance. Takeover bids potentiallyimpinge upon the sort of intervention todays activist hedge funds engage in because companies thatconstitute the obvious candidates for a value-enhancing shareholder insurgency firms that areunderperforming in the sense they are failing to maximize shareholder returns due to managementfailing to exploit financial or strategic opportunities available to unlock shareholder value and lack ashareholder with sufficient voting clout to exercise a de facto veto over corporate change also

constitute the most obvious targets for disciplinary takeover bids. Assuming that takeover bids werein fact not part of the corporate governance landscape prior to 1950, this would have left the field clearfor investors minded to engage in offensive shareholder activism.

On the other hand, until periodic disclosure of financial data was statutorily mandated by the

Securities and Exchange Act of 1934, investors inclined to engage in offensive shareholder activismcould not readily crunch publicly available company-specific data to uncover potential targets andinstead would have had to rely on less formal informational channels. Moreover, ownership patternsof public companies could have been a deterrent. In firms where there is a shareholder with a largeenough ownership block to dictate the outcome of shareholder votes, then other investors whoaccumulate sizeable stakes will lack leverage to bring about change. Such investors have muchgreater potential for change in firms lacking a blockholder, but this was the exception, rather than therule, even in the largest public companies at the beginning of the 20 thcentury and arguably wellbeyond that.

To gauge how prevalent offensive shareholder activism was during the first half of the 20 th

century, we rely on a hand-collected list of proxy fights we have compiled by carrying out searches ofseven major daily newspapers contained in the ProQuest Historical Newspaper database, including the

New York Times and the Wall Street Journal. For the proxy contests we have found, we haveclassified the nature of the shareholder insurgency along a number of dimensions, including whetherthe activism was offensive in the way we use this term or was defensive, in the sense that the

shareholders involved were protecting interests arising due to a pre-existing stake in the company.

Our data indicate that proxy fights were generally uncommon up to the 1930s and offensiveshareholder activism rarer still. In the 1930s and 1940s, proxy fights occurred with growing regularityand, while offensive activism was only involved in a minority of instances, it became increasinglyprevalent as well. We seek to account for these trends by drawing upon a simple theoretical model ofoffensive shareholder activism that accounts for the costs and benefits involved and by explaining how

takeover bids can substitute for and displace this corporate governance tactic.

As we point out, an increase in the supply of suitable targets helps to explain the trends we find,in that the number of companies with publicly traded shares was considerably larger in the 1930s and

1940s than was the case in 1900 and ownership dispersion was more substantial. As for the factorsthat would have affected the willingness of potential activists to step forward, mandated periodic

disclosure may have played a role, though the fact that during the 1930s proxy contests involvingoffensive shareholder activism were as common before the Securities and Exchange Act of 1934 as

5 Steve Fraser, Wall Street: A Cultural History (London: Faber and Faber, 2005), 431-32; Diana B. Henriques,The White Sharks of Wall Street: Thomas Mellon Evans and the Original Corporate Raiders (New York: Scribner,2000).

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after suggests there was more to the story. We find that intervention by institutional investors was ararity throughout the entire first half of the 20thcentury, which casts doubt on an oft-cited theory thatthe Investment Company Act of 1940 discouraged activism by institutional shareholders. On the otherhand, data we have compiled on bids for control using open market purchases of shares, again usingthe Proquest Historical Newspaper database, indicates the operation of the market for corporate

control was a pivotal determinant of levels of offensive shareholder activism.

The paper is organized as follows. Part II focuses on our 1900-49 proxy contest dataset,describing its construction, summarizing our findings and accounting for shareholder challenges tomanagement our dataset did not capture. Part III provides a theoretical overview of factors likely toinfluence levels of offensive shareholder activism, doing so primarily in terms of a supply side (theavailability of opportunities for shareholder activists to exploit) and a demand side (factors affectinginvestors ability or willingness to exploit those opportunities that do exist). Part IV applies Part IIIstheoretical insights to explain the patterns of offensive shareholder activism revealed by our ProQuest

data. Part V concludes.

II. PROXYCONTESTDATASET, 1900-49

As of 1900, the start date for our dataset, U.S. stock markets were poised to undergo dramatic

changes. During the opening decades of the 20thcentury, the number of individuals owning sharesgrew markedly. According to one estimate, while only a half million Americans owned shares ofpublicly traded companies as of 1900 and only 2 million did so in 1920, there were 10 millionindividuals owning stock by 1930.6

As investors piled in, their investment options multiplied. Not only did the number of companies

with publicly traded shares multiply, a market dominated by railways became much more diverse. 7

Data available for the New York Stock Exchange illustrate both trends. Not only did the number ofcompanies listed grow rapidly over the same period, the focus shifted markedly from railway stocks toindustrials (Fig. 1). The trends were similar with trading volume (Fig. 2)

6 Jonathan Barron Baskin and Paul J. Miranti, A History of Corporate Finance, (Cambridge: CambridgeUniversity Press, 1997), 190. Other estimates vary substantially, but the trend is the same.

7 On pre-1900 dominance of the stock market by railroads, see Maury Klein, The Life & Legend of E.H.Harriman(Chapel Hill, N.C.: University of North Carolina Press, 2000), 204-5.

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FIGURE1: NUMBEROFCOMPANIESLISTEDONNYSE, 1900-30 (BYSECTOR)

Source: Derived from data set out in OSullivan (2007), 499.8

FIGURE2: SHARETRADINGVOLUME, 1900-29

Source: Derived from data in Wall Street Journal, 1929, 19309

The changes were by no means restricted to the New York Stock Exchange. The number ofcompanies traded on the New York Curb market, the forerunner to the American Stock Exchange,

8 Mary OSullivan, The Expansion of the U.S. Stock Market: Historical Facts and Theoretical Fashions,(2007) 8 Enterprise & Society 489.

9 Trading in Rails and Industrials, Wall Street Journal, January 1, 1929, 16; Trading in Rails and Industrials,Wall Street Journal, January 1, 1930, 19.

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grew from 157 in 1908 to 711 in 1920 and again to 1,582 in 1930. 10 Likewise, the number of stockstraded on major regional exchanges more than doubled from 732 in 1900 to 1,505 in 1930.11

To what extent did offensive shareholder activism feature as the stock market was transformed?Shareholder intervention of this sort was by no means unprecedented before 1900. Werner and Smith,

in their history of Wall Street between 1790 and 1840, indicate that there occasionally were proxybattles when rival factions vied for control of companies. 12 Boyer has argued that Jay Gould, aprominent robber baron during the second half of the 19 thcentury, was the consummate example ofthe active shareholder,13looking constantly for weak spots in which to buy a sufficiently largeminority stake to obtain leverage to orchestrate changes designed to result in a rise in the share pricethen exit at a profit.

While offensive shareholder activism existed prior to 1900, little is known about how prevalent itmight have been during the opening half of the 20 thcentury. To our knowledge there have not beenany empirical studies of shareholder activism for this period. There has also been very littlecommentary in the secondary literature, and what has been said has been contradictory. Hendersonand Lasher, in a historically-oriented 1967 study of U.S. stockholders, said that up to 1920 there werevery few successful revolts by small stockholders and that In the ebullient 1920s and the depressed1930s, uprisings among stockholders were few and far between. 14 On the other hand Pound, in a

1993 law review article, claimed citing Henderson and Lasher that The early 1900s saw asignificant number of formal, broad-based proxy contests at major corporations.15

To gain a sense of the prevalence of shareholder activism during the first half of the 20 thcentury,we used the ProQuest Historical Newspapers database to compile a hand-collected dataset of proxyfights arising from 1900 through 1949. Our search strategy was as follows. For each year in thisperiod, we searched all reports in the Atlanta Constitution, the Boston Globe, the Chicago DailyTribune, the Los Angeles Times, the New York Times, the Washington Post and the Wall Street

Journalfor the terms proxy fight, proxy battle, proxy contest, proxy solicitation, consentsolicitation, solicit proxies, soliciting proxies, and solicitation of proxies.16 We then examinedthe newspaper reports in more detail to determine whether proxy fights actually occurred in each case.From these reports, we gathered details on the name of the target company, the nature of the issues atstake, the identity of the leading activist, and the outcome, assessed in term of the success of the

challenge launched. Our original searches generated a dataset of 270 proxy contests. Follow upsearches of ProQuest and the secondary literature resulted in us finding 16 additional proxy contests,which we examined along the same dimensions, making a total of 286.17

We know from aggregate data published by the S.E.C. that our dataset does not provide fully

10 OSullivan, Expansion, supra note xx, 504, 510. On the Curb being the forerunner to the American StockExchange, see Robert Sobel, The Big Board: A History of the New York Stock Market (New York: Free Press, 1965),199.

11 OSullivan, Expansion, supra note xx, 512. These figures do not include companies traded on the LosAngeles and San Francisco stock exchanges.

12 Walter Werner and Steven T. Smith, Wall Street (New York: Columbia University Press, 1991), 126.13 Allen D. Boyer, Activist Shareholders, Corporate Directors, and Institutional Investment: Some Lessons from

the Robber Barons, (1993) 50 Washington & Lee Law Review 977, 1009; see also Julius Grodinsky, Jay Gould: HisBusiness Career 1867-1892(Philadelphia: University of Pennsylvania Press, 1957), 22-23.

14 Carter F. Henderson and Albert C. Lasher, 20 Million Careless Capitalists(Garden City, N.Y.: Doubleday &Co., 1967), 75, 201.

15 John Pound, The Rise of the Political Model of Corporate Governance and Corporate Control, (1993) 68NYU L. Rev. 1003, 1014.

16 The search terms are those employed in Michael J. Fleming, New Evidence on the Effectiveness of the ProxyMechanism, Federal Reserve Bank of New York Research Paper No 9503 at 3 (1995),http://www.newyorkfed.org/research/staff_reports/research_papers/9503.pdf(accessed April 1, 2009).

17 Proxy contests were not added where the same company and same activist were in the original database, albeitin a different year.

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comprehensive coverage of all proxy contests in U.S. public companies. The Securities Exchange Actof 1934 granted the S.E.C. power to prescribe rules governing proxies to the extent necessary toprotect investors and the public interest.18 From the time the S.E.C. first issued proxy rules in 1935,those soliciting proxies in companies listed on a national stock exchange were obliged to discloseprescribed facts to the recipients and the solicitation sent to shareholders had to be filed with the

S.E.C.19 The S.E.C. published aggregate statistics on non-management proxy solicitations, typicallythe forerunner to a full-fledged proxy contest, in each of its Annual Reports from 1943-1977,

inclusive,20meaning there is a seven year overlap with the ProQuest dataset. For this period, therewere 192 non-management proxy solicitations filed with the S.E.C. and 96 proxy contests in ourdataset, with the discrepancy being roughly the same throughout the period (Fig. 3).

FIGURE3: NUMBEROFPROXYCONTESTS, PROQUEST/S.E.C., 1943-49

Source: ProQuestHistorical Newspapers database, S.E.C. Annual Reports

Beginning in the mid-1950s the S.E.C.Annual Reportscontained detailed aggregate data on proxycontests disclosed to the S.E.C., such as the numbers of fights about control and outcomes. No suchinformation is provided, however, for the 1940s. In addition, the S.E.C. Annual Reports do notprovide names of target companies nor any details about the activist. As a result, our dataset, thoughnot fully comprehensive, offers a unique perspective on shareholder activism during the first half ofthe 20thcentury.

In our dataset, the number of proxy contests was constant at a low level throughout the openingthree decades of the 20thcentury and then increased significantly in the 1930s and 1940s (Fig. 4). The

trend was evident right at the beginning of the 1930s. The New York Times indicated in April 1930that there were ten public companies involved in proxy contests or court battles launched bydisgruntled stockholders, saying the disagreements were a good omen for business because those who

18 Sec. 14(a), 15 U.S.C. 78n; 48 Stat. 895 (1934).19 Regulation of Proxy Solicitation by the Securities and Exchange Commission (1938-39) 33 Illinois L. Rev.

914, 924.20 SECAnnual Reportsare available at http://www.sec.gov/about/annrep.shtml(accessed April 10, 2009).

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owned shares were taking a livelier interest in their investments.21

FIGURE4: PROXYCONTESTS, 1900-49 (INCLUDING16 ADDEDTOTHEORIGINALSAMPLE)

Source: ProQuestHistorical Newspapers database

Having built up a dataset of proxy contests, we analyzed the cases along a variety of dimensions.One was to identify the primary activist. We used three basic categories: individuals, financial firmsand non-financial companies. In a majority of instances the lead activist was an individual. This

pattern prevailed throughout the full sample period (Fig. 5). With activists in the financial category,most often the protagonist was a stockbroker or investment bank. In these cases, a common scenariowas that the activist marketed the securities of a company, things went wrong and disgruntled

investors turned to the firm to protect their interests.22

21 Fights for Proxies in Ten Companies Waged; Wall Street Thinks it a Good Business Omen, New YorkTimes, April 6, 1930, 41.

22 On this scenario, see Securities and Exchange Commission,Report on the Study and Investigation of the Work,Activities, Personnel and Functions of Protective and Reorganization Committees, Part I: Strategy and Techniques ofProtective and Reorganization Committees (Washington, D.C.: U.S. Government Printing Office, 1937), 675(testimony of Grayson M.-P. Murphy).

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FIGURE5: IDENTITYOFACTIVISTS, 1900-1949


We included institutional investors in our financial category, but in only eight of the 89instances where the primary activist fell into the financial category did an institutional investor haveany sort of prominent role. Five of these cases occurred in the 1930s, with two (Gulf States Steel andYoungstown Sheet and Tube) arising in 1930 when Otis & Co., an investment bank dominated byfinancier Cyrus Eaton and sponsor of Continental Shares, a major investment company, led thecharge. Otis and Eaton were forced to walk away from Continental Shares in 1931 as Eatonsfinancial empire was sideswiped by the Depression.23 The other instances involved investmentcompanies, the forerunner of todays mutual funds.24

We also sought to establish whether the principal insurgent in each case was engaged in what weterm offensive or defensive shareholder activism, with the intent being to focus on the former inmore detail. Though our usage of the terms offensive and defensive is, to our knowledge, novel,the fact that all activism is not created equal has been recognized previously. Kahan and Rock, forinstance, have distinguished hedge funds on the one hand from mutual funds and pension funds on theother in a way that illustrates the offensive/defensive dichotomy:

Mutual fund and public pension fund activism, if it occurs, tends to be incidental and ex post:when fund management notes that portfolio companies are underperforming, or that theirgovernance regime is deficient, they will sometimes be active (footnote omitted). In contrast,hedge fund activism is strategic and ex ante: hedge fund managers first determine whether acompany would benefit from activism, then take a position and become active.25

Mutual funds and pension funds are by no means the only type of shareholder to engage in

defensive shareholder activism. Instead, the label is apt for any investor who owns a sizeable stake ina company and subsequently relies on shareholder rights to take rearguard corrective action. Anexample is John D. Rockefeller, who organized a successful proxy fight at Standard Oil of Indiana in

23 On the inter-relationship between Cyrus Eaton, Otis & Co. and Continental Shares, see Marcus Gleisser, TheWorld of Cyrus Eaton (South Brunswick N.J.: A.S. Barnes, 1965), 39-40, 64-66.

24 Infra note xx and related discussion.25 Marcel Kahan and Edward B. Rock, Hedge Funds in Corporate Governance and Corporate Control, (2007)

155 University of Pennsylvania Law Review 1021, 1069.

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1929.26 After Colonel Robert Stewart, the chairman of the company, became implicated in the TeapotDome political scandal, Rockefeller asked him to resign. Stewart refused. Rockefeller, who owned15% of the shares, launched a proxy fight in which he put forward an insurgent slate of directorschallenging those backed by Stewart and the rest of the management team. Rockefeller, who had thesupport of the Standard Oils bankers and various insurance companies that owned shares, prevailed in

a hotly contested vote.

We relied on newspaper reports derived from our Proquest searches to distinguish offensive fromdefensive shareholder activism. A hallmark of defensive activism is pre-existing involvement with thecompany, since that is what makes the activism defensive. Correspondingly, when newspaperreports indicated that those initiating a challenge to the incumbent directors were long-time investorsin the target company or had served as either a director or senior executive, we deemed the incident tobe defensive in orientation. With remaining activism incidents we looked for reports of theacquisition of substantial amounts of shares by new investors shortly prior to and around the time of

the proxy battle, as this is a tell-tale sign of an offensive intervention. Where newspaper reportsindicated that such stake-building occurred, we deemed the proxy contest to be an example ofoffensive shareholder activism.

The fact that we treated evidence of stake-building as a pre-requisite for offensive shareholder

activism means that there were numerous incidents we deemed not to qualify where the partyinitiating the challenge was neither a former director or executive nor had a sizeable pre-existingownership stake. For example, instances where a stockbroker or investment bank that marketed thetarget companys securities in a prior public offering and subsequently stepped forward on behalf ofinvestors after things had gone awry were deemed not to be offensive. This occurred, for example,with the investment firm J.S. Bache, which took a lead role in three proxy contests in our dataset(Central Leather in 1911, Fox Film Corp. in 1930 and Panhandle Producing and Refining Co. in1946). Another scenario we deemed not to constitute offensive shareholder activism was where alawyer took the lead in organizing a proxy challenge on behalf of shareholders of long standing, withthe idea being to receive a cash payment as part of a settlement with management or as fees for

services rendered to a stockholder committee.27 This accounts, for example, for the involvement oflawyer Samuel Zirn in three proxy contests in our dataset (Moto Meter Gauge and Equipment

Corporation in 1931, R. Hoe & Co. in 1934 and R. Hoe & Co. again in 1936).28

Based on our assessment of the offensive nature of the shareholder activism involved withproxy challenges in our dataset, only a minority of instances 61 out of 286 qualified, an average of

1.22 incidents per year (Figure 6). As with proxy contests more generally (Fig. 4), instances ofoffensive shareholder activism were considerably more common in the 1930s and 1940s than in theopening decades of the 20th century. 49 of the 61 instances of offensive activism in our datasetoccurred during these decades, yielding a per annum average of 2.45. Offensive activism wasparticularly conspicuous by its absence in the 1920s, with only a tiny number of challenges beinglaunched despite the aggregate number of stocks traded on the NYSE, the Curb and regional stockexchanges increasing from 1278 in 1910 to 2497 in 1915 and again to 4360 in 1930.29

26 Henderson and Lasher, supra note xx at 75-77.27 On this scenario, see S.E.C., Report on Protective Committees, supra note xx, 675, 866-67, 878-79.28 On Zirns involvement in the 1934 and 1936 proxy contests, see S.E.C., Report on Protective Committees,

supra note xx, 774-75, 803-9.29 Calculated from figures provided OSullivan, Expansion, supra note xx, 499, 507-8, 511-12 (using 1911

figure for the Curb rather than 1910 and excluding the Los Angeles and San Francisco stock markets). 1910, 1915 and1930 are the only years for which OSullivan provides figures for the New York Stock Exchange, the Curb and theregional stock exchanges.

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FIGURE6: OFFENSIVE ACTIVISMINCIDENTS, 1900-49


How does the situation compare with today? Given that our dataset focuses on proxy contests,data compiled by Georgeson Shareholder, a provider of shareholder consulting services, is instructive.Georgeson identifies in annual reports on corporate governance available back to 1996 the dissidentsresponsible for proxy battles and other high-profile activist events affecting U.S. public companies.Hedge funds are currently the dominant practitioners of offensive shareholder activism and, among the46 contested proxy solicitations Georgeson listed for 2007, 20 were commenced by 16 different hedgefunds.30 The figures for 2008 were 56, 31 and 18 respectively.31 Offensive shareholder activism thus

is much more common now than it was during in the first half of the 20 th century, though thediscrepancy between the two eras is not of an entirely different magnitude.

Our dataset also likely underestimates offensive shareholder activism occurring in U.S. publiccompanies during the first half of the 20th century. Among the proxy contests in our dataset,newspaper reports of stake-building will inevitably be incomplete to some degree, given that activiststypically would have wanted to keep their buying activities confidential so as to avoid driving up the

share price. Hence, there may well have been proxy contests in our dataset we treated as defensivedue to a lack of the stake-building associated with offensive intervention where this in fact occurred.

Another reason our dataset provides incomplete coverage of instances of offensive shareholderactivism is that our dataset does not capture all proxy fights occurring in publicly traded companies(see Fig. 3). Moreover, even if we had all relevant proxy contests in our dataset there would be gaps.

This is because offensive shareholder activism does not necessarily result in a proxy battle. Indeed,

present-day activist investors typically view proxy contests as something to avoid due to the high costsinvolved.32 Brav, Jiang, Partnoy and Thomas report that in only 13% of instances of hedge fund

30 Georgeson Shareholders,Annual Corporate Governance Review 2007Annual (2008), 48-49. On the identityof the hedge funds in question, see John Armour and Brian Cheffins, The Rise and Fall(?) of Shareholder Activism byHedge Funds, (2009), ECGI Working Paper No. 136, 22.

31 Georgeson, 2008 Annual Corporate Governance Review: Annual Meetings, Shareholder Initiatives, ProxyContests 46-47 (2009). On the identity of the hedge funds in question, see Armour and Cheffins, supra note xx, at 30.

32 Winners and Losers in the Rising Tide of the Proxy Wars, Economist Intelligence Unit, August 23, 2008,

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activism events occurring between 2001 and 2006 did the hedge fund involved launch a proxy contestin order to replace the board.33 Given the magnitude of this discrepancy, there clearly would havebeen instances during the period covered by our dataset where investors would have accumulated asizeable stake in a company with the intention of agitating for change and there would have been nopublic indication of a proxy battle.

An example of this scenario involved Cyrus Eaton and utilities magnate Samuel Insull. 34 Eaton,having founded Continental Shares in 1926 as a medium through which to invest in shares, Swiftly,silently, sharklikebegan acquiring enormous holdings.35 In 1927 and 1928 Eaton targeted Insullsutilities empire, quietly buying large blocs of shares in key firms in the corporate pyramid Insull hadcreated. Eatons exploits do not form part of our dataset because he refrained from launching a proxybattle and indeed shied away from making any overt effort to challenge Insull, saying publicly hebelieved Insull was a top-flight utility operator. Nevertheless, Eaton worried Insull sufficiently forInsull to set up his own investment trusts, Insull Utility Investments and Corporation Securities, to buy

up enough shares to re-establish firm voting control. In 1930, Insulls investment trusts engaged inwhat became known in the 1980s as greenmail, buying up all of Eatons holdings in the Insullcompanies, which had a stock market value of $50 million, for $56 million.

While there no doubt were instances of offensive shareholder activism during the first half of the

20thcentury our proxy contest dataset does not capture, we anticipate that a significant proportion arein fact accounted for. In order to obtain relevant background information for the proxy contests in ourdataset, we ran thorough ProQuest searches on those investors who led the proxy battles Thesesearches should have identified noteworthy instances of activism that were not in our dataset. Thisindeed was how we initially encountered reports of Cyrus Eatons successful greenmailing ofSamuel Insull. Overall, however, our background research uncovered few instances of offensiveshareholder activism unaccompanied by a proxy battle.

There no doubt were practitioners of offensive shareholder activism who managed to avoidbecoming sufficiently entangled in a publicized proxy battles to appear in our dataset, meaning wewould not have done research on them. In anticipation of this possibility, we identified the majorstock market operators of the opening half of the 20 thcentury who were not already included in ourdataset and carried out searches of the ProQuest Historical Newspapers database and the relevant

secondary literature to track down instances of shareholder activism otherwise unaccounted for.36 Thismethodology failed to uncover additional noteworthy instances of offensive shareholder activism, savefor a tiny handful of 1920s interventions by the Fisher brothers discussed in Part IV.B and two proxy

contests not in our original ProQuest proxy contest dataset.

One of the proxy contests involved James Keene, a wizard of Wall Street nicknamed the SilverFox who solicited proxies as part of an unsuccessful 1903 attempt to overturn Union Pacificdominance of the Southern Pacific railway.37 The other involved William Durant, a promoter-mindedautomobile manufacturer who solicited proxies in addition to buying shares from General Motors

Executive Briefing, 1.33 Alon Brav, Wei Jiang, Frank Partnoy and Randall Thomas, Hedge Fund Activism, Corporate Governance and

Firm Performance (2008) 68 J. Fin. 1729, 1739, 1743.34 On the relevant events, see Gleisser, World, supra note xx, 41-43; Forrest McDonald,Insull (1962), 279-81,

287-91; John F. Wasik, The Merchant of Power: Samuel Insull, Thomas Edison, and the Creation of the ModernMetropolis (2006), 166-69, 180-81, 189-90.

35 McDonald,Insull, supra note xx, 279.36 Key examples were Bernard Baruch, Arthur Cutten, the Fisher brothers, the Guggenheim family, Jesse

Livermore, Michael Meehan and John Raskob.37 On Keenes sobriquets, see Bernard M. Baruch, My Own Story (1957), 143. On Keene and the Southern

Pacific, see Richard D. Wyckoff, Wall Street Ventures & Adventures Through Forty Years(1930), 151-53 (discussingevents generally); Southern Pacifics Minority Move, New York Times, May 12, 1903, 3 (indicating Keenes allieshad issued a circular asking for proxies).

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shareholders to re-establish in 1915 dominance of the company he founded but lost control of tobankers in 1910.38 There no doubt were other examples of savvy investors who were able to workunder the radar so as to escape press coverage entirely. However, given the follow up searches wecarried out we anticipate that our dataset captures a significant fraction of offensive shareholderactivism occurring the first half of the 20thcentury.

Assuming that our dataset in fact does provide a reliable proxy for offensive shareholder activismoccurring in U.S. public companies during the first half of the 20 thcentury, our findings pose a seriesof questions that merit further investigation. Why was offensive shareholder activism generally a rareoccurrence in the opening decades of the 20th century? Why did interventions become morecommonplace in the 1930s and 1940s? How did offensive shareholder activism interact with themarket for corporate control famously identified by Henry Manne?39 To address these questions, it isinstructive to identify factors likely to influence levels of offensive shareholder activism. Part IIIoffers the relevant taxonomy, doing so by reference to a supply side, which is governed by the

availability of opportunities for shareholder activists to exploit, and a demand side, whichencompasses factors affecting investors ability or willingness to exploit those opportunities that doexist.

III. OFFENSIVESHAREHOLDERACTIVISM THEORETICALDIMENSIONS

To provide the theoretical background required to address the questions our ProQuest data raises,we consider now when it makes sense for investors to engage in offensive shareholder activism. On acase-by-case basis, the costs and benefits involved will be affected by a range of variables operating atthe firm level.40 However, for our purposesseeking to explain in aggregate terms the paucity ofoffensive shareholder activism at the beginning of the 20 thcentury and an increase in the number ofsuch challenges during the 1930s and 1940systemic factors are of greater interest. To facilitateidentification and analysis of the relevant variables we adopt as a heuristic the market for corporate

influencethat is, a market in which actors engaged in offensive shareholder activism acquiresizeable, but still minority, stakes in public firms. With respect to this market, the opportunities forthe profitable exercise of influence determine the supply side of this market. Conversely, the

demand side of the market depends on the willingness of investors to pursue such opportunities.We have set out elsewhere a fully developed analysis of the market for corporate influence and

offer only a distilled version here.41 We examine in turn the supply side and the demand side. We

then consider the potential impact of the market for corporate control.

A. Supply Side

Investors engaging in offensive shareholder activism typically look for companies that areunderperforming, in the sense that they anticipate it will be feasible to orchestrate changes infinancial policy or strategic direction likely to increase shareholder returns. Feasibility of change willhinge partly on legal arrangements. Shareholder rights are of particular significance, meaning in this

38 Axel Madsen, The Deal Maker: How William C. Durant Made General Motors (1999), 160-61, quotingDurant to the effect that he had the support of Proxies galore; John Chamberlain, Du Pont & GM, Wall StreetJournal, May 9, 1962, 18 (discussing a board meeting where Durant dramatically announced that hecontrolled amajority of the proxies). Other accounts of the battle for control focus exclusively on the purchase of shares.

39 Henry G. Manne, Mergers and the Market for Corporate Control, (1965) 73 Journal of Political Economy110.

40 For a model of the variables likely to influence the probability that a strategic investor lacking any form ofinitial endowment in a company will build up a stake and monitor, see Thomas H. Noe, Investor Activism andFinancial Market Structure (2002) 15 Review of Financial Studies 289, 307-8.

41 See Armour and Cheffins, supra note xx.

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context legal rules governing the scope shareholders have to determine the composition of the board,to exercise a veto over board initiatives, to counteract the advantages management has in securingshareholder support through the solicitation of proxies and to bring a suit challenging allegedmanagerial wrongdoing. Corporate law constitutes the prime determinant of shareholder rights alongthis dimension, and activism should be easier to execute if shareholders acting collectively are well-

positioned to replace incumbent directors and vote their shares unencumbered by delays andtechnicalities.

The feasibility of effecting change will also depend on the ownership structure of potential targetcompanies. Dispersed stock ownership is typically required for intervention to be worth attempting,due to the fact a shareholder activist will most often be unable to make credible proposals for changeif the target company has a shareholder who controls enough votes to veto resolutions. A potentialexception is where doubts exist about a dominant shareholders ability to capitalize on its votingpower. For instance, when James Keene and his stock market pool targeted the Southern Pacific

railway in 1902/03, the Union Pacific held nearly 40% of the shares in the Southern Pacific. 42 In orderto neutralize Union Pacifics voting power, Keene and his party brought a lawsuit in the United StatesCircuit Court to enjoin Union Pacific from voting its shares at Southern Pacifics forthcoming annualmeeting, arguing that Southern Pacific directorate had systematically managed the company for the

benefit of Union Pacific. The case was thrown out on the ground of lack of jurisdiction, promptingheavy losses for Keenes stock market pool and the collapse of two stockbroking firms involved in thecampaign.43 Absent such special circumstances, however, influence strategies will rarely, if ever, beexercised by shareholders in environments where dispersed ownership is lacking.

The feasibility of bringing about change through a proxy contest will additionally be contingentupon how inclined dispersed shareholders will be to listen to an activist, as compared to the firmsincumbent management. General market trends can potentially have an impact here. In a bearmarket, outside investors will be disappointed with shareholder returns and thus will be morefavourably disposed to the entreaties of a shareholder activist than they would be when share pricesare rising.44 For instance, while in U.S. public companies pension funds and mutual funds have

traditionally been loyal to management, the sharp drop in share prices occurring following the collapseof the dot.com stock market boom served to disillusion money managers and meant they were

receptive to arguments advanced by activist hedge funds, thus lending valuable credibility tocampaigns to challenge executives of target companies.45

A bear market can also prompt offensive shareholder activism by increasing the population of

undervalued companies, these being firms with shares trading at prices that fail to reflect intrinsicvalue.46 The prototypical value investor seeks through diligent analysis of corporate fundamentalsto purchase shares trading at a bargain price, the proverbial dollar for 50 cents. 47 An investor inclinedto engage in offensive shareholder activism will typically carry out the same sort of research touncover companies where intervention is likely to be worthwhile. If an activist investor identifies andinvests in a company that is undervalued as well as underperforming and the share price subsequentlyincreases due to a belated reaction by the market rather than due to any prompting by the hedge fund,

42 W.J. Ripley, Railway Speculation, (1911) 25 Quarterly Journal of Economics 185, 205. Other sources saythat Union Pacific had majority control. See, for example, Wyckoff, Wall Street, supra note xx, 151-53; Money

Kings, supra note xx; Keene Pool Fight is Told in Court, Chicago Daily Tribune, April 2, 1903, 1. However, theguaranteed majority was obtained by obtaining proxies: Ripley, op. cit., 206.

43 Two Firms Fail for $7,000,000, Chicago Daily Tribune, July 25, 1903, 1.44 Winners and Losers, supra note xx; William Hutchings, Activists Defy the Market Downturn, Financial

News, June 23, 2008; Long Live Activism, Financial Times, November 5, 2008, 12.45 Armour and Cheffins, supra note xx, 26.46 See generally Armour and Cheffins, ibid., 3-4, 11, 31.47 Bruce C. N. Greenwald, Judd Kahn, Paul D. Sonkin, Michael Van Biema, Value Investing: From Graham to

Buffett and Beyond (Hoboken, N.J.: Wiley, 2004), xv.

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this will be relatively easy money for the activist. Correspondingly, in a stock market slump, theremay be a wider range of targets where intervention will be a worthwhile proposition. As theFinancial Times observed in 2008 in the midst of the sharp decline in share prices associated with thefinancial crisis, the recent share price fall will provide an opportunity for those funds which want tobuy into companies cheaply and try to engineer change.48

B. Demand Side

Even assuming the market for corporate influence has a well-developed supply side numerousunderperforming companies where it is feasible for activism to prompt value-enhancing changes -- it

cannot be taken for granted that what can be termed the demand side will be in operation, in the sensethat potential activists will anticipate their likely net upside is sufficient to justify intervention. Therewill be two primary constraints. One is that an investor engaging in shareholder activism will notcapture all of the benefits generated from orchestrating change. The other is that offensiveshareholder activism is a potentially costly endeavour in which to engage.

The benefits of activism to a targets companys shareholders will be derived from improvements

in shareholder return reflecting changes generated by the activists intervention. From the perspective

of the potential insurgent, however, the upside will potentially be compromised in three importantways. First, shareholder activism is by no means always successful. Among the proxy contests in ourfull 1900-49 dataset, including defensive as well as offensive incidents, the insurgents failed toachieve success (i.e. management implemented some or all of the changes proposed) or partialsuccess (concessions were granted that were not central to the insurgents agenda) in a majority ofinstances (Fig. 7).

FIGURE7: OUTCOMESINPROXYCONTESTS, 1900-49


Second, while activists typically bear all of the costs associated with activism they will receiveonly a fraction of any upside because they will own only a fraction of the target companys shares

48 Long Live Activism, Fin. Times, November 5, 2008, 12.

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(albeit typically a sizeable fraction). Third, the market may be expected to anticipate the activistsefforts once it becomes known they have purchased a stake, thus pushing up the share price andprecluding the activist from benefiting from continuing to buy the shares on the cheap.Correspondingly, the total benefits to corporate performance which will be captured by the activistwill be measured not by the proportion of the shares the insurgent owns at the time of the activism, but

at the time the market first becomes aware of the activists involvement.

Market awareness of an activists stake will partly be a function of regulation. Schedule 13D ofthe Securities Exchange Act of 1934, which requires the filing of an ownership report within 10 daysafter the acquisition of 5% or more of a companys shares, is currently an important constraint onbenefits activist shareholders can anticipate generating. 49 This provision was first introduced by theWilliams Act in 1968, with the ownership threshold triggering a Schedule 13D filing initially being setat 10% before being lowered to 5% in 1970.50 Investors did not have carte blanche to accumulatesizeable minority stakes prior to 1968, however. Instead, beginning in 1935 investors who acquired

10% or more of the shares of a company traded on a national stock exchange were obliged to filepublicly with the S.E.C. a statement of holdings within 10 days following the month in which thestake was acquired and report changes of ownership within ten days following a month in which anychanges occurred.51 Prior to this point in time, the absence of rules compelling disclosure of sizeable

minority stakes should have increased the benefits otherwise available from well-executed offensiveshareholder activism.

In some circumstances activist shareholders may also be able to secure private benefits frominterventions they undertake. Private benefits will be particularly attractive for an activist because, bydefinition, these do not need to be shared with other target shareholders.52 A variety of techniques cantheoretically be employed to extract private benefits in the activist context. For instance, ashareholder activist potentially might use influence to procure a target company to enter intotransactions with entities controlled by the activist on terms favourable to the latter. Anothertechnique, deployed by Cyrus Eaton with the Insull empire and made infamous in the 1980s, isgreenmail, which occurs where a target company makes a focused repurchase of an insurgents

shares at a substantial premium to the market price in order to make them go away.

A more benign scenario will be where the activist is a dominant player in a business enterprise

operating in the same or a related industry and synergies can be achieved by an affiliation between thisfirm and the target. In such circumstances, to the extent there are genuine synergies, the activistsefforts should generate benefits for all shareholders in the target company, not just the activist.

However, there still will be a private benefit aspect, as the firm with which the activist is closelyassociated will reap benefits in which stockholders of the target will not share.

J. Paul Gettys prolonged 1930s activism campaign against Tidewater Associated Oil Company, afirm specializing in oil refining and distribution, illustrates the synergy scenario. 53 Getty companieswere major California-based oil producers and J. Paul Getty wished to invest in an established oilrefining company that badly needed crude oil and had shares selling at a low price. Tidewater fit the

bill. Getty thought Tidewater and the Getty companies would both benefit from an alliance. As Gettysaid (Tidewater) would gain friendship and the support of two large independent producers;

49 15 USC 78m(d).50 Pub. L. No. 91-567, 84 Stat. 1497.51 Securities Exchange Act of 1934, 16(a); R.A. Gordon, Stockholdings of Officers and Directors in American

Industrial Corporations, (1936) 50 Quarterly Journal of Economics 622, 623, n. 3; Kenneth L. Yourd, Trading inSecurities by Directors, Officers and Stockholders: Section 16 of the Securities Exchange Act, (1939) 38 Mich. L.Rev. 133, 135.

52 Edward B. Rock, Controlling the Dark Side of Relational Investing, (1994) 15 Cardozo L. Rev. 987, 1002-3(making the same point about relational investors who acquire a sizeable stake in a company and reputedly seek toimprove performance through monitoring).

53 Ralph Hewins,J. Paul Getty: The Richest American 101-2 (1961).

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economies would be effected; and the Getty interests would benefit from a community of interest witha large refining and marketing organization.54

As for the costs associated with offensive shareholder activism, these can be broken down intotwo basic categories, transaction costs and financing costs. In this particular context, transaction costs

begin with ex ante search costs -- the costs associated with identifying and investigating potentialtargets. Search costs are likely lower now than during the period covered by our dataset. Until the1960s, when securities regulators and courts began to expand regulation of insider trading beyonddealing in shares by corporate insiders,55 an activist likely could rely with impunity on whatevertips directors or executives might provide to identify target companies and buy shares at a discountprice. On the other hand, modern information technology (e.g. the internet and computers) has madeit much easier to find and research seemingly undervalued companies. Similarly, investors nowadayscan typically assume publicly available information is credible and reliable since disclosure isgoverned by detailed legal rules. There was no such guarantee during much of the period covered by

our dataset, as federal regulation of disclosure by public companies was only introduced by theSecurities and Exchange Act of 1934.

Once a suitable target has been found, there will be transaction costs associated with theacquisition of an influential stake. These will encompass the trading fees associated with buying

shares, the time and effort devoted to lobbying management in the first instance, and costs associatedwith any escalating measures, all the way up to launching a proxy fight. Full-scale proxy battles intheir turn necessitate paying professional fees, with beneficiaries including proxy solicitors,investment bankers and lawyers.

The transaction costs associated with offensive shareholder activism encompass in addition thecommunication costs that have to be incurred to persuade neutral shareholders to support proposedchanges concerning the targeted firm. Assuming proper compliance with S.E.C. rules governing

proxy solicitation, technology currently permits contemporary activists to use e-mail, websites andelectronic chat rooms to communicate readily and instantaneously with potential supporters instantlyat modest expense. Before the advent of the internet activists had to mail letters to shareholders or payfor ads in publications such as the Wall Street Journal to make their points.56 The falling cost oftransmitting information to and between shareholders has in turn made it easier for dissidents to

launch and fight campaigns against incumbent managers.57It is unlikely, however, technological improvements would have played a major role in reducing

communication costs during the period we focus on. The U.S. experienced a radio broadcasting boomduring the early 1920s and television first became commercialized in the 1940s.58 The S.E.C.acknowledged the potential impact of the broadcast media in a 1956 overhaul of its proxy regulations,stipulating that radio and television scripts in which an activist shareholder could be construed aslobbying for support from neutral shareholders had to be filed. 59 Nevertheless, only in high profileproxy contests could a potential shareholder activist anticipate reaching investors via radio ortelevision, such as when Robert Young was invited on the popular Meet the Press television program

in 1954 to discuss a much-publicized battle for control of the New York Central Railroad.60

As for financing costs, these necessarily constitute a constraint with most instances of offensiveshareholder activism because potential activists will frequently lack sufficient spare capital to buy up a

54 Hewins, supra note xx, 10255 Liability for Failure to Disclose Under Rule 10b-5, (1968) 20 Stanford L. Rev. 347, 347.56 Winners and Losers, supra note xx.57 Hail, Shareholder, Economist, June 2, 2007, 73.58 On radio, see http://earlyradiohistory.us/sec018.htm . On television, see

http://en.wikipedia.org/wiki/Television_in_the_United_States.59 J. Sinclair Armstrong, Regulation of Proxy Contests by the SEC, (1956) 43 Virginia L. Rev. 1075, 1079.60 Henriques, White, supra note xx, 131.

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significant stake in a public company, at least one traded on a major stock exchange. 61 The risk-bearing costs associated with holding an undiversified portfolio also come into play. Investors mindedto engage in offensive shareholder activism generally must put their eggs in relatively few baskets inorder to accumulate sufficiently sizeable stakes to generate benefits from their efforts. Hence, anactivist must not only have ready access to capital but must be prepared to forego the benefits of risk-

spreading available to passive, diversified investors.62

Market trends can potentially influence how readily potential activists can address wealthconstraints. For instance, activism seemingly should be easier to execute when debt is plentiful andcheap, in the sense the spread between interest rates for safe and risky debt is low. Under suchcircumstances, activist shareholders will be able to borrow readily to build up their war chest and will,in addition, be able to argue plausibly that cash-rich companies should create value for shareholdersthrough greater use of leverage.

Regulation can also have an impact. Those who believe they can generate superior risk-adjustedreturns by engaging in shareholder activism will potentially have the financial resources required toproceed if they manage a large enough fund of other peoples money to acquire sizeable stakes inpotential targets. Laws governing collective investment vehicles can, however, be an obstacle.

Lawmakers, to protect otherwise potentially vulnerable retail investors, might imposerequirements on collective investment vehicles that circumscribe the investment strategies andcompensation practices of approved funds. Regulations of this sort can deter shareholder activism bydiscouraging approved collective investment vehicles from adopting investment strategies required tomake intervention viable (e.g. eschewing diversification to take large stakes in a small number ofcompanies). The Investment Company Act of 1940 and the Investment Advisers Act of 1940, whichintroduced a package of safeguards to protect U.S. investors from misleading and dishonest practicesallegedly engaged in by investment companies in the run up to the 1929 Wall Street crash, contained

features of this sort and are often credited with discouraging regulated investment companies nowknown as mutual funds from engaging in activist investing.63

C. Takeovers

Takeovers constitute a final variable that needs to be taken into account when assessing howcommon offensive activism is likely to be. Offensive shareholder activism again involves theacquisition of a sufficiently sizeable block to capture managements attention. A particularly forcefulstrategy will be to threaten what Gilson and Schwartz term a transfer by vote, this being theobtaining of a decisive influence over corporate policymaking by winning control of the board in aproxy contest.64 The fact a proxy contest is required to achieve corporate dominance in this fashion

implies the activists stake was insufficiently large on its own to determine conclusively the outcome

61 Offensive shareholder activism by wealthy individuals is by no means unknown, now, however. Klein and Zurreport that of 235 activist investors in their sample of entrepreneurial activism events occurring between 2003 and2005, 38 were investment advisors to wealthy investors. See April Klein and Emanuel Zur, EntrepreneurialShareholder Activism: Hedge Funds and Other Private Investors, (2009), unpublished working paper, at 18-24(available at http://www.afajof.org/afa/forthcoming/4442.pdf ), 14.

62

Steven Huddart, The Effect of a Large Shareholder on Corporate Value, (1993) 39 Management Science1407, 1407, 1413, 1415; Ian Ayres and Peter Cramton, Relational Investing and Agency Theory, 15 Cardozo LawReview 1033, 1051 (1994).

63 15 U.S.C. 80a-1 to 80a-64 (Investment Company Act of 1940), 80b-1 to 80b-21 (Investment AdvisersAct of 1940). On the legislations impact on shareholder activism, see Mark J. Roe, Strong Managers, Weak Owners:The Political Roots of American Corporate Finance (Princeton, N.J.: Princeton University Press, 1994), 102-123;Ronald J. Gilson and Reinier Kraakman, Investment Companies as Guardian Shareholders: The Place of the MSIC inthe Corporate Governance Debate, (1993) 45 Stanford L. Rev. 985, 997-1003.

64 Ronald J. Gilson and Alan Schwartz, Sales and Elections as Methods for Transferring Control, (2001) 2Theoretical Inquiries in Law 783, 790.

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of a shareholder vote. To forestall any such uncertainty, an insurgent shareholder can opt instead tocarry out a takeover transaction designed to result in the acquisition of a majority of voting shares.Applying Gilson and Schwartzs terminology, there will be a transfer by sale rather than a transferby vote.65

The manner in which hedge funds currently operate illustrates the distinction. Activist hedgefunds typically show little interest in obtaining voting control of their target companies. This isbecause those in charge specialize in exploiting buying and selling opportunities rather than operatingcompanies and prefer not to tie up capital in the form of majority or sole ownership of companies.66

Nothing as such precludes a shareholder engaging in offensive shareholder activism fromchanging gears and opting to obtain full-scale voting control through a takeover bid. 67 Hedge fund

activists have indeed put forward a tender offer in some instances, even if they rarely end up with amajority stake, with the tender offers they make either fading out as engagement takes its course orbeing beaten out by higher bids.68 On the other side of the ledger, a corporate raider who puts targetcompanies on the back foot by acquiring a sizeable stake, criticizing management and intimating a bidfor voting control may ensue may never follow through with a genuine tender offer. Given this, andgiven that activist shareholders can shift gears and move from lobbying for changes in corporatepolicy to launching a full-scale bid for voting control, offensive shareholder activism and takeovers

control constitute different points on a continuum rather than being fully distinct phenomena.

While offensive shareholder activism and takeovers are intertwined, the latter nevertheless canpotentially crowd out the former. Companies that constitute the obvious candidates for a value-enhancing shareholder insurgency underperforming companies lacking a shareholder with sufficientvoting clout to exercise a de facto veto over corporate change also constitute the most obvioustargets for disciplinary takeover bids. Hence, in those instances where the benefits associated withactivism are likely to be substantial, an investor who might otherwise contemplate launching an

activist campaign might well opt to seek to obtain outright control by purchasing a majority of theshares from existing investors, or a third party might preemptively do the honors. The operation of themarket for corporate control thus potentially impinges upon the market for influence.

At first glance, it might seem takeover bids would crowd out offensive shareholder activismcompletely. One consideration is that a successful shareholder activist must, even with full-scale

board control, split gains generated thereby with other shareholders due to owning only a minoritystake.69 In contrast, a party who launches a successful takeover bid and then buys out all remainingshareholders will be able to secure all post-acquisition gains from improvements in shareholderreturn.70

Takeover bids also might be expected to crowd out offensive shareholder activism because ofsimplicity. In the case of a takeover bid, or at least a cash bid, shareholders can simply take what is on

offer, exit the company and not worry about what the bidder does after obtaining control. Matters aremore complicated when an insurgent shareholder is seeking to use a proxy contest to gain access to

65 Gilson and Schwartz, ibid.790. For a similar exercise in line-drawing, see Pound, Rise, supra note xx, 1007(1993) (distinguishing between the political and takeover models of corporate governance, with the formerincluding an approach in which active investors seek to change corporate policy by developing voting support fromdispersed shareholders, rather than by simply purchasing voting power or control.)

66 Brav et al., supra note xx, 1748; Bruce N. Lehmann, Corporate Governance and Hedge Fund Management,(2006) 91(4) Federal Reserve Bank of Atlanta Economic Review, 81, 90.

67 Kahan and Rock, supra note xx, 1040.68 Bratton, Hedge, supra note xx, 1426-27; Brav et al., Hedge, supra note xx, 1748.69 John Pound, Proxy Voting and the Efficiency of Shareholder Oversight, 29 Journal of Financial Economics

237, 237, 244 (1988) (indicating that in a sample of 100 proxy contests occurring between 1981 and 1984 in whicharound 60 were for control the dissidents owned 12% of the outstanding shares).

70 Jonathan R. Macey, Too Many Notes and Not Enough Votes: Lucian Bebchuk and Emperor Joseph II KvetchAbout Contested Director Elections and Mozarts Seraglio (2007) 93 Virginia L. Rev. 759, 767.

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the board or execute a full-scale transfer by vote. The problem will be signalling credibly thatshareholders will be better off under a new regime.71 If shareholders cannot observe directly themanagerial attributes of shareholder insurgents but anticipate quite sensibly -- that the averagequality of potential rivals is worse than incumbents, the rational strategy will be to opt for the statusquo. Shareholders will also justifiably be sceptical of claims insurgents make of superior managerial

capabilities if the alleged shortcomings of the incumbents are not readily observable by way ofpublicly available accounting and market return information (e.g. because the alleged

underperformance is a product of sins of omission in the form of overlooked new and profitableinvestment opportunities). During the period covered by our dataset, the financial press may havemade the struggle even more uphill for activists. J. Paul Getty, reflecting upon the battle of control forTidewater, complained:

Substantially the United States press thoughtlessly aids an entrenched Board. The presscomes out with headlines that So-and-so is trying to get control. Those who seek reform and

protest against infringements of stockholders rights are pictured as opportunists. The merits arenot discussed.72

Even if shareholders have good reason to believe the changes an activist shareholder advocateswould improve matters at the target company, they may still be sceptical. This is because neutral

investors may fear that the added value will flow directly to the insurgents in the form of privatebenefits of control. Collectively, these factors likely explain why the share price reaction toannouncements of tender offers is, on average, markedly more favorable than it is for announcementsof a proxy contest for board seats.73

Takeovers, however, suffer from difficulties of their own. One is that the financial outlay will begreater.74 Shareholder activism, even in the most extreme form of a proxy fight for board control,does not imply involve a wholesale rearrangement of share ownership. In contrast, with a full-scale

bid for voting control finance must be in place that is sufficient to purchase most, if not all, of acompanys shares at a premium to the market price (a bid will inevitably fail without some sort ofsweetener). Also, successful bidders end up with a lot eggs in one basket. Activist investors, asmentioned, sacrifice at least some of the benefits of risk-spreading by building up sizeable stakes inthe companies they target. Successful bidders face the same difficulty, but in magnified form because

they end up owning most if not all of the shares in the companies they acquire.The foregoing analysis of takeover bids and offensive shareholder activism could be moot for our

purposes. Though in theory the market for corporate control can sideline at least to some degree themarket for corporate influence, the displacement effect will only be substantial if disciplinary-orientedtakeovers occur with some frequency. The scant evidence on point implies takeover bids wereessentially unknown until the mid-1950s did not become a mainstream transaction until the 1960s. A1967Harvard Business Reviewstudy of tender offers that provided year-by-year data did not providefigures for years before 1956, implying there were too few such transactions to keep track of beforethen.75 Likewise, Henriques, in her 2000 study of Thomas Mellon Evans and other corporate raiders

of the 1940s and 1950s, said takeover bids were a new weapon in the early 1960s that brought the

71 Lucian Bebchuk and Oliver Hart, Takeover Bids vs. Proxy Fights in Contests for Corporate Control, (2001)N.B.E.R. Working Paper 8633, 2, 15; Uma V. Sridharan and Marc R. Reinganum, Determinants of the Choice ofHostile Takeover Mechanism: An Empirical Analysis of Tender Offers and Proxy Contests, (1995) 24(1) FinancialManagement 57, 65.

72 Quoted in Hewins,J. Paul, supra note xx, 121.73 Michael C. Jensen and R.S. Ruback, The Market for Corporate Control: The Scientific Evidence (1983) 11

Journal of Financial Economics, 5, 7-8; Sudipto Dasgupta and Vikram Nanda, Tender Offers, Proxy Contests, andLarge-Shareholder Activism, 6(4) Journal of Economics and Management Strategy 787, 803 (1997).

74 Pound, Rise, supra note xx, 1021; Bebchuk and Hart, Takeover, supra note xx, 16.75 Samuel L. Hayes and Russell A. Taussig, Tactics of Cash Takeover Bids, Harvard Business Review, March-

April 1967, 135, 136-37.

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warfare for corporate control into the nuclear age. 76 This implies that during the period covered byour dataset the market for influence operated largely unimpeded by the market for corporate control,which should have fostered offensive shareholder activism. Was the takeover bid as rare as theavailable evidence implies, however? As we will see in Part IV.C, a dataset of takeover incidents wehave compiled suggests unsolicited attempts to secure voting control occurred with sufficient

frequency to have a potential impact on offensive shareholder activism.

IV. EXPLAININGOURRESULTS

A. Supply Side

Having analyzed the market for corporate influence in general terms by reference to its supplyside, its demand side and its interrelationship with the market for corporate control, we will now drawupon our theoretical insights to explain our findings from our Proquest newspaper searches. We willbegin by considering the supply side, which reflects the number of opportunities for the profitableexercise of influence.

Offensive shareholder activism was much more common in the 1930s and the 1940s than inprevious decades (Fig. 6). The trend was partly a product of simple numbers publicly tradedcompanies were more numerous by the middle of the 20thcentury than they were at the beginning. Aswe have seen (Fig. 1), the number of companies listed on the NYSE increased rapidly between 1900and 1930. The trend was the same more generally, as the total number of companies traded on U.S.stock markets, including not only the NYSE but also the New York Curb Exchange and regional stockmarkets, increased from 682 in 1900 to 970 in 1915 and 2,659 in 1930.77

However, the surge in offensive shareholder activism in the 1930s and 1940s was not merely aproduct of the growth in the number of publicly traded companies. If it had been, then the numberincidents of activism should have been markedly higher in the 1920s than was the case in the openingdecades of the 20thcentury, given that the number of public companies grew dramatically that decade.Moreover, the dramatic expansion in the number of public companies came to an end in the wake ofthe 1929 stock market crash, just as levels of offensive shareholder activism picked up. The numberof listed issues on the New York Stock Exchange remained fairly constant in the 1930s, but this wasdue in large measure to a relaxation of standards and poaching listings from the Curb Exchange and

regional exchanges.78 As of the early 1940s, various ailing regional stock exchanges either combinedoperations with other exchanges or closed down completely and trading was so thin on the Curb thatthere were rumours it would abandon the premises it moved into in 1921 and recommence open airtrading.79

Only in the late 1940s did the situation begin to change.80 By 1947 there were 1334 stocks listed

76 Henriques, supra note xx, 245-46; see also at 112 (the vast majority of the mergers and acquisitions thatreshaped the American business landscape in the first decade after the war were friendly purchases, not hostiletakeovers); Franklin Allen and Douglas Gale, Corporate Governance and Competition in Xavier Vives, CorporateGovernance: Theoretical and Empirical Perspectives (Cambridge: Cambridge University Press, 2000), 23, 40 (hostiletender offers first appeared in 1956 and were not widely used until the 1960s); Donald Palmer, Brad M. Barber,Xueguang Zhou, a!em"n #o$!al, %&he 'r"endl$ and Preda(or$ )*+u"!"("on o -arge .#. /orora("on! "n (he 1960!&he (her /on(e!(ed &erra"n 1995 60 )mer"*an #o*"olog"*al e"e 469, 470 reda(or$ a*+u"!"("on! largel$unnon beore (he 1960!.

77 OSullivan, Expansion, supra note xx, 523.78 Robert Sobel,N.Y.S.E.: A History of the New York Stock Exchange (New York: Weybright and Talley, 1975),

68 (indicating the number of listed issues was 2710 in 1929 and 2630 in 1939, which is inconsistent both withOSullivans figures and figures he uses later).

79 Sobel, ibid., 129.80 Sobel, ibid., 173.

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on the New York Stock Exchange, surpassing the previous record of 1308 from 1931. As of 1949,1419 companies were listed and new listings were being approved at a near record rate. However, thesurge would have been too late to influence levels of offensive shareholder activism prior to 1950.

Moving beyond the number of publicly traded companies, since outside investors will logically be

more susceptible to activist persuasion at times share prices are stagnant or in decline, share pricetrends can potentially have an impact on the supply of companies where an investor minded toengage in offensive shareholder activism can potentially secure sizeable benefits throughintervention.81 Our data for the 1920s, 1930s and 1940s conforms to this pattern. During the 1920s,when share prices rose dramatically (Fig. 8), offensive shareholder activism was a rarity. On the otherhand, offensive shareholder activism became more prevalent in the 1930s, when shares performeddismally, and in the 1940s, when share prices did increase but remained well below peaks reached inthe 1920s.

FIGURE8: S&P/COWLESCOMPOSITEINDEX, 1900-4982

Source: Global Financial Data

Share prices and offensive activism trends do not match, however, the predicted trend in the samemanner for 1900 to 1919, albeit based on a tiny sample. During this period (Fig. 9), the sharpest share

price declines in the S&P/Cowles Composite Index occurred between October 1902 and October 1903(75.2 to 55.0), October 1906 to December 1907 (83.6 to 55.7) and December 1916 to December 1917(83.3 to 57.7). None of the nine instances of offensive shareholder activism in our dataset thatoccurred between 1900 and 1919 was reported initially by the press during one of these three bear

markets.Even if potential targets for offensive shareholder activism are underperforming markedly,

decisions to intervene will be dependent upon the feasibility of bringing about change. Legal

81 See supranotes xx-xx and related discussion.82 The Cowles Commission stock market index, which covered up to 1937, covered about 97% of the market

value of all stocks quoted on the New York Stock Exchange. See Jack J. Wilson and Charles P. Jones, A Comparisonof Annual Stock Market Returns: 1871 to 1925 with 1926-85, (1987) 60 Journal of Business 239, 243, n. 7.

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arrangements play a potentially significant role in this context, as activism will be easier to executesuccessfully if corporate law leaves shareholders well-positioned to challenge the incumbent board ofdirectors. To the extent this is correct, the general trend with U.S. corporate law should have been todiscourage offensive shareholder activism, because it was generally manager-friendly during theperiod covered by our dataset.

In the 19th century state corporate legislation was restrictive in many respects. For instance,corporations typically could not repurchase their own equity, could not own shares in othercorporations and could not issue equity without offering it to existing shareholders on a pro rata basis.Over time, state legislatures, envious of financial advantages gained by states with liberal corporationstatutes most prominently New Jersey and then Delaware -- abolished these restrictions.83

Furthermore, shareholder approval requirements associated with amendments to the corporateconstitution and with mergers between corporations were made markedly less strict. By 1910competition between the states was lively and effective, with the result being that corporate statutes

became increasingly lenient regarding the management of business corporations. A critic of the trendobserved in 1937 that states following Delawares lead had created a system which not only isadapted to cope with the rapidly changing conditions of the business environment but also inconsequence thereof, is liable to great abuses. The individual shareholder now has a pig-in-a-poke.

His old vested rights are now gone or going.J. Paul Gettys 1930s activist campaign against Tidewater Associated Oil Company illustrates

how a determined board had legal leverage to hamstring even an investor as savvy as Getty. AfterGetty built up a sizeable stake in Tidewater, the Tidewater board elected William E. HumphreyPresident of the company and expected Humphrey to stand up to J. Paul Getty, and they were notdisappointed. 84 Within a month of taking office in 1934, Humphrey enlisted the help of the mostpowerful possible ally in the oil industry, Standard Oil of New Jersey. In an early version of whattoday would be referred to as a white knight takeover defense, Humphrey arranged for a large blocof Tidewater shares standing in the name of Mission Securities Ltd. to be transferred to Standard Oil,which had been already been purchasing Tidewater shares in the open market. According to a

biography of Getty, The Getty Companies thus found themselves minority shareholders in aStandard-dominated company, instead of influential stockholders in an independent company.85

In 1935 Getty apparently gained the upper hand by buying up via a third party the Tidewatershares Mission Securities Ltd. had held, but, as Gettys biographer said, By a rushed manipulation ofproxy votes by mail, Tidewater managed to introduce three-yearly Directors, thus making it very

difficult to change control of the corporation.86 Humphrey said of Getty subsequently, I fought himall the way. We disagreed on the Directors duties to stockholders and the best interests of theCompany.87 As a Getty biographer observed, The rights and wrongs of these transactions werenever put to a legal test and there is no way of knowing which way it would have gone.88

Humphrey who was to remain President of Tidewater until 1952 said of his protagonist Thegreatness of J. Paul Getty is that he knows how to wait. 89 By 1939, Getty made a favourable peace

with Tidewater management and gained an influential say over managerial policy, and he obtained

83 A.B. Levy, Private Corporations and Their Control, vol. I (London: Routledge & Kegan Paul, 1950), 154-55;Richard M Buxbaum and Klaus J. Hopt,Legal Harmonization and the Business Enterprise: Corporate and Capital

Market Law Harmonization Policy in Europe and the USA (Berlin: Walter de Grutyer, 1988), 119-24.84 Hewins, supra note xx, 105.85 Hewins, ibid., 106.86 Hewins, ibid., 120.87 Hewins, ibid., 112.88 Hewins, ibid., 120.89 Hewins, supra note xx, 125. On Humphreys stint as President see ibid. at 105.

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majority control of the company in 1951.90 Despite Gettys success, in corporate law terms the deckapparently was stacked against insurgent shareholders during the opening half of the 20 th century.Challenges mounted were by no means destined to fail. Instead, among the proxy contests in our full1900-49 dataset the insurgents achieved some measure of success in a sizeable minority of instances(Fig. 7). Nevertheless, the fact that corporate law offered management considerable latitude to

respond to tactics adopted by disgruntled minority shareholders would have deterred activism to somedegree.

As with shareholder rights (or the lack thereof) under corporate law, the ownership pattern in U.S.public companies likely discouraged offensive shareholder activism during the first half of the 20 th

century. Again, dispersed stock ownership is typically a pre-condition for offensive shareholderactivism, due to the fact those agitating for change are unlikely to be able to make credible proposalswhen a company has a shareholder who controls a sufficiently large block of votes to veto unwelcomeshareholder resolutions (see Part III.A). While Berle and Means famously declared in their 1932

classic The Modern Corporation and Private Propertythat a separation of ownership and control wasa hallmark of large U.S. corporations,91the fragmentary evidence available implies blockholders werecommonplace in public companies throughout the first half of the 20 thcentury.

Data compiled by Edward Herman on share ownership in 40 of the largest U.S. corporations as of

1900 for the purposes of his 1981 book Corporate Control, Corporate Powersuggest that at the turnof the 20th century, majority control was prevalent only in industrial companies (Fig. 9). On theother hand management control, implying full-scale dispersion of share ownership was largelyunknown among Hermans industrial companies and existed in only a minority of railway companiesand utilities (Fig. 9).92 Given that larger companies are more likely to have diffuse share ownershipthan their smaller counterparts, as of the turn of the 20 thcentury diffuse share ownership was verylikely the clear exception to the rule among the full range of publicly traded companies.93

90 Hewins, ibid., 126.91

Adolf A. Berle and Gardiner C. Means, The Modern Corporation & Private Property(New Brunswick, N.J.,1997, originally published in 1932).92 Edward S. Herman, Corporate Control, Corporate Power(Cambridge, 1981), 67, Appendix B.93 Leslie Hannah, a business historian, has even claimed the U.S. was a haven of persistent personal capitalism

as of 1900. See Leslie Hannah, The Divorce of Ownership from Control from 1900: Re-calibrating Imagined GlobalHistorical Trends, (2007) 49 Business History 404, 421. On reasons why ownership dispersion will generally be moresubstantial in large companies, see Harold Demsetz and Kenneth Lehn, The Structure of Corporate Ownership: Causesand Consequences, (1985) 93 Journal of Political Economy 1155, 1158; Ronald J. Daniels and Edward M. Iacobucci,Some of the Causes and Consequences of Corporate Ownership Concentration in Canada in Randall K. Morck (ed.),Concentrated Corporate Ownership(2000) 81, 90.

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FIGURE9: CONTROLCLASSIFICATIONOFASAMPLEOF40 OFTHELARGESTU.S. NON-FINANCIALCORPORATIONS, 1900-01

Source: Derived from Herman, Corporate Control

Share registers of railway, industrial and utility companies grew substantially between 1900 and1923 and in the 1920s various observers, including sociologist Thorstein Veblen and economist

William Ripley, proclaimed that share ownership in publicly traded companies was becoming highlydiffuse.94 In The Modern Corporation and Private PropertyBerle and Means provided hard data onownership patterns in the 200 largest U.S. non-financial companies and maintained their findingsdemonstrated there are no dominant owners, and control is maintained in large measure from

ownership.95 Taken at face value, the trend in favour of greater ownership dispersion helps to explainthe greater prevalence of offensive shareholder activism in the 1930s and 1940s as compared withprevious decades. The logic would be that the supply side was bolstered not only by the growth in thenumber of publicly traded companies up to 1930 but also by the increased prevalence of firms withshare ownership sufficiently diffuse to mean activism was feasible.

Moreover, while the growth in the number of publicly traded companies apparently levelled off

after 1930, ownership dispersion may well have continued to accelerate, meaning the number ofpotential targets would have increased regardless. Karr, in a 1956 book on proxy battles entitled Fight

for Controlclaimed The last two decades have seen an even wider distribution of ownership in majorcorporations and suggested that the board of directors owned less than 15% of the stock in almostevery company on the New York Stock Exchange and the American Stock Exchange.96 For Karr the

94 H.T. Warshow, The Distribution of Corporate Ownership in the United States, (1924) 39 Quarterly Journal ofEconomics 15, 21-25, particularly Table II (share registers); Brian Cheffins and Steven Bank, Is Berle and Means aMyth?, Business History Review (forthcoming) at xx (quoting Veblen, Ripley and other sources).

95 Berle and Means,Modern, supra note xx, 110-11.96 David Karr, Fight for Control(New York: Ballantine Books, 1956), 2, 3.

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trend did much to explain why contested proxy contests had been growing in prominence, as he saidof potential targets (I)t will be a company in which management owns or controls less than 15 percent of the stock.(A)ny outside group must think twice before attempting to gain control of acompany, no matter how poorly managed, when they need to win an extra 15 per cent of theuncommitted proxies to offset management holdings.97

Karrs assertion that ownership dispersion became more prevalent between the mid-1930s and themid-1950s is in fact mere conjecture. No empirical studies of ownership were carried out between a1940 study by the Temporary National Economic Committee (T.N.E.C.) based on 1938 data andvarious studies in the 1960s.98 Moreover, the empirical evidence from the 1930s failed to demonstrateclearly that ownership dispersion was the norm even among the largest public companies.

A ma

offensive shareholder activist

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