Activism Spotlight: Ackman Could Challenge ADP as Battle Heats Up
Automatic Data Processing Inc. (ADP) - Get Report last month took the unusual step of seeking to preempt activist investor Bill Ackman.
The payroll company put out a press release Aug. 4 suggesting that the insurgent investor wanted to take effective control of the company by seeking to install five dissident directors on its ten-person board. ADP also said Ackman wanted a CEO change.
The news likely was met with some surprise by Ackman, who was on vacation at the time and had been hoping that ADP would postpone its deadline for director nominations so discussions could continue. Nevertheless, Ackman came out with his own statement later in the day launching a director-election contest to install three dissident directors to the company's board.
However, a review of the ADP press release and its recently produced preliminary proxy statement suggests that the payroll and human resource company was aware prior to Aug. 4 that Ackman was willing to work with ADP's CEO, Carlos Rodriguez, and that he was also willing to accept fewer than five seats on the company's board. As a result, Ackman may want to challenge the company's statements, identifying some inconsistencies between the aggressive ADP release on Aug. 4 and Ackman's comments as described by ADP. It's not unusual for either side of a heated director battle to challenge statements, as both sides seek to get formal approval from the Securities and Exchange Commission for their documents.
One attorney who represents activists said that he would not be at all surprised if Ackman's fund, Pershing Square Capital Management, has already sent a so-called "bed bug" or "poison pen" letter to the SEC seeking to flag the disclosure issue. This is a common tactic used by both sides in proxy campaigns to keep the other honest in its communications, he said, adding that it was highly unlikely that ADP will have to issue any sort of retraction of its Aug. 4 press release.
"Even if the SEC were to continue to press ADP on its depiction of the discussions in the Aug. 4 press release, there are other filings the company can use to address any SEC concerns, for example, by including updated disclosure in its proxy statement or a future press release," he said. "It's very rare for either side to re-issue a corrective press release, which can destroy their credibility in the campaign, and is a last resort option if all else fails in working through things with the commission. Bottom line, you won't be seeing a reissuance of the Aug. 4 press release to correct the record. It just doesn't typically happen like that."
ADP's proxy statement notes that on Aug. 1 Ackman spoke to Rodriguez by phone and suggested that he intended to launch a proxy contest to elect five dissident directors to ADP's board if it didn't postpone the deadline for nominating directors first According to ADP, Ackman said that he didn't think Rodriguez was the right person to lead the company going forward. On Aug. 2, ADP reported that Ackman had spoken to ADP Chairman John Jones to add his belief that a CEO "recruited from outside the company would be necessary" to accomplish the change Ackman was seeking.
However, ADP noted that on Aug. 3 that Ackman met with Rodriguez and said could consider accepting fewer than five directors to the company's board, potentially as additions to the company's ten existing directors rather than replacements. In a phone conversation later that day with Rodriguez, Ackman said he was concerned that he had "come on too strong" in earlier conversations, adding that the two could be able to work together if the ADP CEO would embrace the activist's vision for the company.
Pershing Square's own proxy statement backed up that assertion, noting that Ackman spoke with Rodriguez by phone on Aug. 3 and said he was willing to work with Rodriguez "if he was in agreement with respect to the future direction and strategy of the company."
Nevertheless, ADP's Aug. 4 press release suggested that Ackman wanted to seek effective control of the ten-person board by installing five directors and he wanted a "CEO change."
The attorney, who is familiar with activist campaigns and the SEC, argued that unless a company issues a blatantly false statement it typically can respond their way out of the situation. In this case, he said ADP could say that "Ackman initially said he was looking for 5 directors and even though he expressed willingness to discuss less than five, that until he nominated a slate or a settlement was reached the company had good reason to continue to believe he may go for 5."
And according to a person familiar with the situation, ADP is close to filing its definitive proxy statement with the SEC, which suggests that it is unlikely that the commission is giving it any grief over the press release.
Nevertheless, a potential dispute over the ADP's press release and proxy statement would not be unusual. Lawyers specializing in the sector insist that activists and corporations often complain to the SEC about statements each side produces.
"If there is an egregious situation and one side can document it, the SEC may ask the other side to make a correction" said Richard Grossman, partner and chief of Skadden, Arps, Slate, Meagher & Flom LLP activist defense team. "More often than not, the SEC opts to let the parties fight it out in the court of public opinion."
Later developments, nevertheless, suggest that Ackman and Rodriguez won't be willing to work together anytime soon. On Aug. 10, Rodriguez told CNBC's "Squawk Box" that the billionaire insurgent investor has acted like a "spoiled brat" who did not "do his homework." Ackman later responded that having seen the reaction he got from Rodriguez that "it is very likely in my view that this will require a change in the CEO of the company."
On Tuesday, Pershing Square, an 8.3% ADP holder, took a major step in its director battle by filing a definitively proxy statement officially nominating its slate of three dissident director candidates including Ackman. Expect SEC challenges and a hotly contested battle to follow.
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