Know Who Drives Return

Okapi's Bruce Goldfarb on Activism, the Rise of Retail, AMC, and SPACs

October 11, 2021 Boardroom Alpha / Bruce Goldfarb (CEO & Founder Okapi Partners) Season 1 Episode 8
Know Who Drives Return
Okapi's Bruce Goldfarb on Activism, the Rise of Retail, AMC, and SPACs
Show Notes Transcript

Bruce Goldfarb, CEO and Founder of Okapi Partners joins David Drapkin on the Know Who Drives Return podcast. Bruce goes deep on what he's seeing in recent proxy seasons, contested M&A, SPACs, AMC, and whether retail investors are good for the markets.

Discussion Details

  • Who is Okapi Partners?
  • Themes of the current proxy season
  • Contested M&A situations
  • Getting SPAC deals passed, and retail investor base
  • Retail, reddit, and the individual investor dynamic
  • AMC, Adam Aron and new retail strategy
  • Are retail investors good for the markets?
  • Director selection in activist situations


Bruce Goldfarb Biography
Bruce Goldfarb is Founder, President and Chief Executive Officer of Okapi Partners. He works closely with a wide range of clients including corporations, mutual funds, activist investors and shareholder groups as well as private equity sponsors and hedge funds, in solicitation and investor response campaigns. He focuses on proxy solicitation strategy, execution for mergers and acquisitions, proxy fights and other extraordinary transactions.

Prior to establishing Okapi Partners, Bruce was the Senior Managing Director and General Counsel of Georgeson Inc. (now a subsidiary of Computershare Limited), where he headed the Global M&A Advisory Group.

Before entering the proxy solicitation business, Bruce was a Senior Vice President of the investment management firm, Scudder, Stevens & Clark, now a part of Deutsche Bank’s Asset Management unit. He joined Scudder as a member of the Legal Department where he concentrated on transactions, including those involving mergers and acquisitions, international matters, alternative investment vehicles, off-shore funds and closed-end funds. Bruce also served as an executive officer of various closed-end funds advised by Scudder. He was the Chairman of Scudder’s Proxy Review Committee and served as the point person for the Scudder Funds proxy solicitation effort relating to the acquisition of Scudder by Zurich Financial Services Group.

Bruce began his career as an attorney at Cravath, Swaine & Moore, where he worked for more than six years, specializing in corporate law, mergers and acquisitions, securities transactions and international matters.

Bruce holds a J.D. from the Columbia University School of Law. He also earned a B.A. in the History of Art from the University of Pennsylvania concurrently with a B.S. Economics with a concentration in Finance, from the Wharton School.

David Drapkin (Boardroom Alpha):

Hi everyone, welcome back to another episode of no who drive for turn the boardroom alpha podcast. Today it's my pleasure to welcome on Bruce Goldfarb Founder President and CEO of Okapi partners, we're going to talk to Bruce about proxy fights activism, little ESG. And of course, we'll get to spax as well, Bruce, it really great to have you on Thank you for taking the time today.

Bruce Goldfarb (CEO, Okapi Partners):

My pleasure, David, always great to talk with you. Great. So just to get started, for those who might not know, can you give us a little bit overview of Okapi Partners? Who are you? What do you guys do? Well, Okapi Partners is a proxy solicitation and investor response firm that I co-founded in 2008. We set up the firm to help our clients as investors, or companies work with investors and communicate about the issues that are important to reach out and get shareholders to vote. Take action. It includes m&a transactions, proxy fights, and the regular sort of issues that come up in an annual meeting electing directors voting on compensation related issues and shareholder proposals, like, say on pay, the environmental and social issues that occur and matters that are important to investors that occur during the year.

David Drapkin (Boardroom Alpha):

Right. And so it seems like it's been a very busy proxy season for you guys. Are there any themes or situations that are kind of stuck out this year this season?

Bruce Goldfarb (CEO, Okapi Partners):

We as a firm represent, as I've mentioned, companies and activists, and we work on a number of campaigns in the m&a space. And in 2021, contested m&a became one of the busiest areas of focus for us as a firm. And I think for the markets in general, there were quite a number of times where a transaction was announced. And there would be an investor who would indicate that the price wasn't right, that it wasn't the right time to do the deal, that potentially the board hadn't looked at the transaction properly. And that all created the kind of tension that you would take to shareholders to let those investors decide what should happen to the company, the target company. And so we found ourselves very busy on behalf of target companies looking to get investor approval, in some instances, in other instances, providing advice to the acquiring party, on how to strategize and work with the friendly target to get those transactions accomplished. And in many instances, we also work with third party investors who really didn't believe that it was the right transaction at the right time. And we worked on a campaign of investor messaging and investor response to get other investors on board and understand the situation. In all instances, no matter who our client was, it really is the same concept that you have a deal. And you have parties looking to get agreement. And and that has been exceptionally momentous in terms of what's going on in 2021. You could contrast that David with 2020, where more companies just had existential crises as to whether or not they would be in existence. It wasn't about the kinds of m&a deals that we were seeing now were companies were trading in some instances at or near highs. And the deals were about how much more valuation there could be either in the public market, or whether the private markets were the place for these companies to best achieve value, and the shareholders would be achieving their highest value through the transaction today.

David Drapkin (Boardroom Alpha):

That's really interesting. And so do you think given you know what's happening in the stock market, you know, high valuations for a lot of these companies is that is that what you think is driven a lot of that maybe disagreement amongst various folks in some of these m&a transactions.

Bruce Goldfarb (CEO, Okapi Partners):

There's always a part of the market that says that current price does not necessarily reflect future value. Even though even though you know, efficient market theory says that the current price does reflect the value of a company, there is a belief that how companies manage going forward is going to impact growth and value and, and so there will be disagreement over value. And, and truly, you know, a static number reflects the picture of a company making use of its assets, the way it's going to having a management team that should be maximizing value. But there are times where you say that value can be maximized through a transaction, or that that value needs to be reworked in a way that's going to be more expensive in the public markets, and there's a value to be had. Now, when those companies go private, there tends to be investors who say that there is value to be had in the company, and it's just seeping out of the public markets and going to the private markets, we find that when private equity firms are buyers, there are more investors who will say that it's not the right price, and that they're frequently haggling over price the the investors, many of these investors are very smart, and do significant valuation work, they tend to be hedge funds, who have deep value research advisor, deep value research analysts on their team. And they say they believe that the shares of the company the target aren't meeting you know, the right requirements for them to sell the multiples are too low, the comparables aren't right, they tend to make very pointed arguments that are value driven. Companies, on the other hand, also want to achieve their highest value. And they frequently believe that that they can make use of the work from the the intelligence that private equity will bring the having a number of executives on staff having experiences from company to company that are complimentary with the work that a management team internally can do, but they feel that they may not be able to do it alone. And they're willing to, in many instances, partner up with the private equity, and make use of the value without the externalities of the public markets and having to report quarterly earnings and having to announce what you're doing to re energize or reinvigorate value. And sometimes that value also occurs because they've gone a bit, they're able to borrow money for the acquisition, and they're now they're still cheap debt. In the markets that allow the private equity firms to buy these companies, there's also a lot of dry powder in the private equity firms to take the opportunities and buy. So you have you have two sides of the equation, you have the management team, with the private equity firms looking at a company and then you have the external investors looking at the company. And both they're saying, we do think there's value to be had in this company. But one side thing, we think the juice is currently squeezed out of the value orange right now, in the current form. And the other side, we still think there's more juice. And part of our role, depending on the side we're on is to get our client in front of other investors and the advisory firms who who make decisions here, ISS and glass Lewis, and have them understand the point of view and get them to vote with us. We really haven't seen this kind of market in many years. I mean, there have been moments since we started in 2008, where there have been active private equity, buying sprees in the public market, but a lot of the work in private equity in the past few years has been a private to private deals. And partly because there has been this issue about valuation within the public market and a recognition that deals can be blocked. And so you definitely have have situations here where both sides have to put out their best argument. And it makes for some very interesting discussions and some very interesting coverage throughout the campaign.

David Drapkin (Boardroom Alpha):

Right. Thanks for that. Given that we're on this topics, it kind of makes sense. To talk a little SPACs then. So, obviously you're working with, you know, a ton of SPACs. You know, helping deals go through. And so curious, a, you know what you're seeing there and be how do you reconcile or think about, you know, most majority of stocks are getting overwhelmingly approved in terms of voting, but we're seeing 90% plus plus redemptions. And so, to talk a little bit about that balance and sort of a, what you're looking at and how you're advising spax and be secondarily that that voting dynamic, because, you know, a lot of the you know, should we be private should we be public? You know, those questions are coming up more and more given the markets, you know, cooled down a little bit, right.

Bruce Goldfarb (CEO, Okapi Partners):

The SPAC market is, is very interesting 2020 and 2021 have been really momentous for, for SPACs in terms of this recognition, by, by investors that you have this opportunity to buy into companies that may not have gone public otherwise, with sometimes very interesting ideas, technology, basically, frequently unicorns that you wouldn't have been able to take public. But for this specs transaction, and with the spec, you have investors who say, I'm buying into a, a basically management team looking to source a great deal. And you're taking almost the chance that they're going to find the right situation when you buy into this back IPO. And there are our buyers. And we have, as you indicated, worked on a number of these transactions on behalf usually on behalf of the spec, once they announced the deal to make sure that the D spec transaction is approved. And so there have been a number of situations where some of the sponsors for the SPACs are well known, have great reputations. And on that reputation, people have been buying the spec and sometimes the SPAC has traded up beyond its initial, let's say $10 per share price. In theory, you're paying for the what could be the next great thing at $10. But obviously, the interesting part of a SPAC is that there is the potential to redeem your interest before the transaction, the deSPAC transaction closes. And so that will allow you to get back your $10 plus some interest out of the trust where the money's been sitting until the deal closes. You've also accurately identified that we are witnessing a significant percentage of investors requesting redemption in the past few months. At the beginning of end, let's say end of 2020, beginning of 2021, we had a very different situation where we saw a significant amount of shares being acquired in the back IPO aftermarket at prices that far exceeded $10, sometimes, sometimes, you know, up to six times that value, more or less. And in those instances, the people who were the original spec investors and by the way, specs are not something brand new, it's they've been around for years and years. But this new phenomenon, the amount of specs recently has been been what's you know, sort of flooded the market and taking the attention of the retail shareholders much like mean stock. And so this new retail buyer comes in buys back, the prices are high. The original buyers then say, wait a minute, this, this is you know, unbelievable for us. And they would sell out of their positions. And you would have somebody who who bought shares at $10 was able to sell them at $20, $30, $40. And then you find when you go to get the shareholder approval, you're the transaction that those buyers don't own the shares. And so you had retail shareholders and there was a different kind of solicitation campaign. We found at the beginning of 2020. Some of the SPACs were harder than you would have anticipated to get shareholder approval because you're chasing down retail shareholders who are largely apathetic and in some instances may have sold out already. They're not natural voters. On the other hand, when the specs don't trade so much, and they remain in the hands of what people used to refer to as the spec mafia, and other investors, who would frequently buy from spec to spec, those investors know that if the shares trade below, they're $10 or so they have a redemption, right. But the deal has to close to be able to get redemption rights, so never correct, they vote for the deal. And then they redeem their shares, which means that the trust that holds the the money that should be going to the new company, have less money for the new company to use going forward. That's what we've been experiencing. What we've been experiencing, especially in this last quarter, has been that a number of specs who have hit the stage where they have their sec approval, to go to shareholders. And if I go backwards a little little, because the SEC cost specs to re evaluate how they how they do their accounting for the warrants, there was a almost a block, a blocked funnel for for investors, I mean, for SPACs to come to market. And so all of a sudden, all of the specs that had been trading high and had all this retail excitement, had to recalibrate their disclosure, it slowed the market down, the market moved in a different way, there became a little bit of a taint on the specs in general, the buying into the retail market really slowed down. And so we have had more specs with less trading, meaning that they would trade at around the $10, sometimes below. And once the specs are trading below the $10 line, you have a pretty good indication that large the reach I'm sorry, the institutional investors are by and large going to sell out. Unless they really believe that the underlying company has something phenomenal and they want to own it. So we've had some companies who have maintained ownership, not everyone's redeemed, we've also had companies come to market now, where there have been very significant redemptions, it hasn't been hard to get shareholders to approve the transactions. The only ones that were a little challenging were these situations with a lot of retail, you need to be able to get those votes. But for the institutionally held specs, people vote and we know who's going to redeem we we've also found that with some recent trading activity, some of the specs are going to have a moment between the redemption cut off. And when they go public. And the shares are going to spike a little they're going to go up part of that is it is it a trade. There's a trade where people are long the Warren says short the shares and there's a little bit of short squeeze going on. And people want to cover and the volume in some of these specs is relatively low. So the prices become very volatile. We've had investors who have asked to redeem they've asked the companies whether they could rescind their rigid, sorry, rescind their redemption request, and then trade those shares out in the open market. And that has allowed for the for the company to have more shares in the trust. But with some volatility in terms of trading near the end, and some almost lack of understanding as to who the ultimate owners of the company are as they IPO. You know, it's it's a volatile market. But, but I will say that if you look at this market in a long term for the stock market, it's really the blip of 2020, 2021 as opposed to what we're seeing today. More SPACs saw huge redemptions generally that visa v. The market for SPACs overall, it's just been an unusual occurrence because of this retail attraction to these companies. That the redemptions were actually lower.

David Drapkin (Boardroom Alpha):

Right. Yeah. And, you know, thanks, you bring up a lot of good points and, and from conversations we've had and what we're seeing we kind of agree that, you know, last year was almost an aberration. It's going to take a little time for that to clear out the glut, and things might be more rational. But you mentioned retail investors, which is something I want to talk about. Obviously another huge theme and story over the last two years has been, you know, the massive uptick in, in trading and investing from from from the retail community and then the Reddit of the world. And Robinhood, how is that you mentioned it a little bit on voting on SPAC transactions, has that affected any other activist or contested situations or you talk a little bit to batters, other things you're seeing from from the retail community?

Bruce Goldfarb (CEO, Okapi Partners):

Sure, right. retail investors have significant impact on the outcome of election campaigns, sometimes far more than any individual investor appreciates. And, and we as a proxy solicitation for know this from work that we do on behalf of companies, but also from work that we do on behalf of investment management companies, mutual funds, who need their shareholders to vote, we know that the biggest challenge with retail shareholders is just overcoming their apathy and getting them to vote. And so in the old days, and old days, you can define however you want here, sometimes I could go back and say, whatever happened 20 years ago, but the fact is, this is post COVID are almost old days, pre COVID, or old days, because a lot of retail shareholder still gets their proxy material in the mail. And people stop getting their mail it once once the pandemic started. And so there were investors who didn't vote, or they used to vote, they voted by mail, there was experiential data that said that if you sent people proxies by mail, your response rate was higher than if you ask them to vote by internet. The only other way that you could get someone to vote was to pick up the phone and get the new vote by phone. Well, we have problems with phone voting, too, because people don't answer their landline anymore. And people don't want to talk to you on their cell phone if they don't know who's calling. And so the the two best ways to get retail shareholders to vote, mail and telephone have been moved out of popularity in the modern world, which means that it is harder to get individual investors to vote using traditional methodology and getting them to overcome their apathy at a time where they're having an existential crisis about their lives, in many instances, has made retail shareholders a challenging segment of anybody's shareholder population. Now, to the extent that a company has a very large institutional investor base, and they haven't had to worry about the retail shareholders that has made their solicitation campaigns usual, pandemic change that the Robin Hood effect, change that, so that companies especially in same March 2020, when their prices started falling, you had individual investors who would buy brands that they know, they would buy into companies that they use regularly as consumers. And suddenly, there would be a flood of new investors owning shares of companies at their almost lowest levels. And then if the price moves too little, they buy out and so they'd sell out, I should say, but what you really found is that a company that's let's say, had 10,000 shareholders suddenly had 200,000 shareholders, but those, those 900, 990,000 shareholders, math not being perfect on that one, I acknowledge. You know, the, the new shareholders above the old 10,000 shareholders largely held a very small number of chairs. And so you can suddenly find that your shareholder base went from 10,000 shareholders and that the retail population held 1% of the shares, suddenly had 200,000 shareholders, but the retail population only own 4% of the shares. But what it did to these companies was, oh, we're not going to need those investors to vote. But we have to mail to them. And so now your cost component of a proxy outreach went through the roof. And that just seemed to be problematic for companies even for those investors who didn't want paper mailing and they would receive their mail electronically, and a lot of Robinhood investors and new investors do set up their entire portfolio over the internet. So while you might be saving, printing and mailing costs in a solicitation, you're still not saving cost because broadridge and mediant as agents of these brokers charge you to distribute them the materials electronically. Even for shareholders that don't even own a round lot. So you're paying, let's say $5, $10 dollars a shareholder to, to mail something to an investor who owns $3 worth of shares. And so the return on that investment is awful for a company, right. But now let's say the investors do buy a lot of shares. And let's say you're, you're a company like AMC, you're a mean stock. And actually, I was talking to Adam Aaron yesterday. And he's had to confront these issues, and more than any, any company with new retail shareholders, he's learned to embrace these investors. And he's really has a lot of interesting things to say about individual investors in a positive way. And he recognizes, by the way that a lot of these investors are also potential customers, and which is why consumer oriented companies love to have retail shareholders, because it's a brand loyalty issue. So what he pointed out, he now has 4 million shareholders, the average holder owns about 100 shares, but he needs them to vote, or he can't have a shareholder meeting, he can't have a board, he can't issue new shares. They've run out of shares at their company, because they've issued shares opportunistically when the markets moved. And this is a case where the retail shareholders help save a company that potentially would have gone bankrupt. But by and large, the retail shareholders are costly to companies, they're hard to reach. The campaigns that we use, have had to advance with technology. And so actually, AMC is a good example, because Adam tweets every day, he puts out a some feed through Twitter. And that is a smart use by a company of technology reaching their audience. For a lot of companies, they don't like using Twitter, they don't like using Reddit. And there are reasons why I mean, it's not an equal medium, there are people who have an outsized voice there, we as a solicitor, have made started to have to make use of social media, to reach shareholders to get them to vote in ways that are, you know, relatively message neutral, not too provocative. We have to help clients stay on their own brand and within sec compliance to get voting. But there's no doubt that the process has changed, the retail shareholders are much more important to getting certain activity done. And the companies who are not totally benefiting the way say AMC had has to have to reach out to investors who may not be as enthralled or enchanted with their current stake in the company, but you still need them to take action once they have a critical mass of ownership.

David Drapkin (Boardroom Alpha):

Right. That's super interesting. And he says, Say what you will but AMC, but I think there's no denying that Adam has been able to opportunistically you know, use social media to interact and like take advantage of a very unique situation, you know, with what's going on his stock. And so logistics aside, do you think that, you know, the boom in retail investing is overall good, you know, for for public markets.

Bruce Goldfarb (CEO, Okapi Partners):

I think it is good for the markets, I think it's important for companies to have a mix of share owners, one of the challenges that companies have is the high concentration of ownership that really is owned by individuals anyway, except it's through, you know, ETFs. It's through the largest institutional investors who purport to be passive owners who purport to have policies and guidelines on which they use to vote. Those voting decisions can be very impactful to help companies run their business. Certainly, we see the ESG issues being reflected in the policies and guidelines of the largest institutional investors. Now the challenge that I believe this concentration of ownership creates is that there is a lot of pressure on those investors to have policies and guidelines that sometimes may reflect a current political view. It may reflect a current view of how the markets work and be and it may not have enough flexibility to hear the case by case differences that a particular company may have in terms of distinguishing why that company's policy is different than the state of guideline for a particular institution, or the stated guidelines for ISS or Glass Lewis, the individual investor is much more willing to hear that nuance, but of course not as easy to reach it's quite easy to set up your meeting with BlackRock, right, yeah, it's hard to set up your meeting with 4 million individuals. And so the communication channel is changed. I mean, that does go back to logistics. But I think that you want to have this diversity of, of your ownership base, so that your your retail shareholders make up their own mind, your large institutions make up their mind. And your active owners that make up their mind to I mean, Vanguard T. Rowe, and Neuberger Berman, they all have policies and guidelines. They, they're going to make their own decision. I think companies appreciate the mix. But it's super, super interesting dynamic.

David Drapkin (Boardroom Alpha):

Switching gears just just slightly focused on the boardroom. Right. So we're talking about, you know, obviously, you work with companies to engage, engage more with boards, obviously facilitating that. So specifically in an activist situation, you know, how significant Do you think the process of directors selection is in winning that campaign and sort of a that and be, you know, there's certain aspects of strong directors that that you think are more impactful in sort of activist situations.

Bruce Goldfarb (CEO, Okapi Partners):

The most successful activist campaigns are those where the activist has a thesis, that change is needed at the targeted company, and that they have nominees to be directors of the company who can impact that change. And so frequently, that means identifying a group of nominees with diverse backgrounds, diverse interests, so that the skill set of the new board members will solve the issues that a company is facing. And with that in mind, that means that the best activists are, in effect, almost the best executive recruiters for AI for finding new members of the boardroom. We work with some very, very active activists, and part of what they are doing is always looking for boardroom talent, whether that means that they are finding people in the boardrooms of companies where they are owners, or they are reaching out or creating a network, and what are they looking for, they're looking for people with solid industry experience in the target company, which is sometimes frequently lacking in current companies, companies will find that they have a board that are comprised of very well respected good people. Frequently, large cap companies have CEOs, x CEOs, so they have good expertise, but they may not have the right industry expertise. So the activists are going to find people with industry expertise, the activists are also going to find people who will help address the specific issues that the company faces, whether it's capital allocation, or if it's somewhere in sales and marketing or or, you know, m&a, or if it's, it could be governance, it could be environmental or social issues, or other risks to value. And that's how I think of environmental and social issues as risk to value. So they may identify somebody with human resources experience, they may identify somebody with sustainability or expertise in that area, they may identify somebody there with cyber experience, and because that can be a significant risk to a company. And so bringing together that board, and also creating an overall diverse slate of candidates is important. Plus we have compliance issues for companies to consider. You need to have a board that's going to be gender diverse, and racially and ethnically diverse. And the the good activists are keenly aware of those challenges. And my experience recently is that the best activists are also willing to expand the horizons of boardroom selection. Find talented individuals who may come from diverse backgrounds that are not necessarily CEOs, but have great company experience. Relevant industry experience to broaden out the boardroom, putting those kinds of slates together are going to be the best way for activists to continue winning campaigns going forward, that that also being said, boards have become more savvy about selecting nominees and about mixing up the the, the people who sit around the table and long tenured participants may find that their tenure is coming to an end as they look to diversify.

David Drapkin (Boardroom Alpha):

Right mandates or otherwise, it does feel that you're there, there's a real push to really capitalize and follow through on the diversity of, you know, not only like gender and tenure age, but experience and backgrounds, you're not having to have been a CEO, etc. And so it's super, super interesting. Really, really appreciate your thoughts. There are a lot going on. Bruce, thank Thanks again so much for talking to us today. super busy time for you guys and generally in the market. So really appreciate it. A lot of interesting topics and I hope to hope to talk again soon.

Bruce Goldfarb (CEO, Okapi Partners):

Sounds great, David. Happy to talk anytime.