Companies impose new disclosures on activists

By Martha Graybow

NEW YORK (Reuters) - U.S. companies are demanding new disclosures from activist shareholders in an effort to better defend themselves against investors waging high-pressure campaigns for corporate change.

The moves by JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz), Sara Lee Corp (SLE.N: Quote, Profile, Research, Stock Buzz), Juniper Networks Inc (JNPR.O: Quote, Profile, Research, Stock Buzz) and others come as Corporate America faces growing challenges from shareholder agitators seeking to shake up boards of directors and put forward ballot resolutions on how businesses are run.

The new rules are meant to unmask the true size of dissident investors' interests in publicly traded companies.

Companies fear that the size of stakes can be hidden when sophisticated investors quietly amass big positions through complex financial instruments such as derivatives, short positions or hedging transactions that may not need to be revealed under securities laws. They say activists with such positions could want companies' stocks to go down, putting their interests at odds with those of other stakeholders.

"It's an issue which has been getting an increasingly high profile," said Claudia Allen, a partner at law firm Neal Gerber Eisenberg LLP who advises companies on corporate governance matters. "We are now in a situation where hedge funds and others can obtain the right to vote when they don't have the same economic interests as other stockholders."

Companies have revised their bylaws to impose the new rules. Because the changes are so new, they have yet to draw wide attention. But governance experts say there will almost certainly be challenges by activist shareholders in Delaware Chancery Court -- the main venue for U.S. corporate law issues -- as to whether the new rules infringe on their rights.

Also, while companies contend the measures are aimed at guarding against "the proverbial sneak attack" by dissidents, they have not been forthcoming on whether they will share the disclosures with other shareholders as they should, said Patrick McGurn, special counsel at governance services and risk management firm RiskMetrics Group Inc (RMG.N: Quote, Profile, Research, Stock Buzz).

"We've seen very little discussion as to whether it is something intended to level the playing field in the battle between the company and the dissident investor, or whether it will create greater clarity and transparency for the rest of the investing public," he said.

The new rules generally require that investors seeking to nominate board candidates for election or to put forward stockholder resolutions must disclose hedging and other derivative positions that they or their affiliates hold.

The changes were spurred in part by recent court rulings in Delaware involving "advance notice" bylaw provisions that require shareholders to alert companies of their intention to introduce business at an annual meeting.

Also, a court case this year pitting CSX Corp (CSX.N: Quote, Profile, Research, Stock Buzz) against hedge funds that used equity swaps to amass a large stake in the company -- and then sought to shake up the boardroom through a proxy contest -- has played a big role in spurring companies to take a closer look at the issue.

Investors who amass stakes larger than 5 percent in a company must disclose that position under federal securities laws. A U.S. District judge in Manhattan ruled in June that the hedge funds in the CSX case deliberately evaded disclosure obligations as they sought to control the railroad, but said he did not have the power to stop them from voting their shares.

One of the first companies to change its bylaws to address disclosure issues this year was Sara Lee, which revised its rules in March. The change was not spurred by any particular incident involving the foodmaker, but was recommended by its legal counsel, spokesman Mike Cummins said.

"A stockholder may own a certain number of shares but reduce their risk through hedging or derivatives," he said. The new rule "doesn't interfere with their right to do that. It just requires them to disclose any relevant hedging activity."

Keith Gottfried, a partner at law firm Blank Rome LLP who specializes in governance matters, said companies do not want to be blindsided by investors who quietly amassed positions that don't need to be disclosed.  Continued...