Key to that bitterly fought proxy fight was not only persuading institutional investors to back Starboard's board nominees, but also winning the support the retail investors who represented fully one-third of Darden's investor base.
"I would not dismiss the retail viewpoint and support," said Bruce Goldfarb, CEO of proxy solicitor Okapi Partners, who worked with Starboard on the fund's Darden campaign. "Many of these investors are also customers that care about the brand."
The overwhelming success of Smith and other proxy fighters comes as activist investors and their corporate opponents pay more attention to retail investors whose votes can make the difference between a win, a loss or -- as in the Darden case -- an overwhelming victory.
The extent to which activists and their targeted companies are aiming their campaigns at retail voters counters the perception that a handful of large institutional votes is all that is needed to wrap up a proxy battle one way or another.
The retail vote that can be engaged when an activist mounts a campaign is substantial. Roughly one-third of U.S. shares of publicly traded companies in 2013 proxy fights are held by retail investors, and about half of those shares were voted, according to investor communications advisory company Broadridge Financial Solutions. That's in contrast to the approximately 30% of retail shares that voted the same year at companies that did not have proxy fights. Broadridge estimates that roughly one-third of U.S. shares overall are typically held by retail investors.
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Activists going after small-cap companies -- where the majority of campaigns take place -- must take particular note of retail investors who usually represent the vast majority of the voting shares. In 2014, according to statistics from FactSet, 60% of all activist campaigns occurred at companies with a market cap of under $500 million, while 31% occurred at companies with a market cap of more than $1 billion. Only 6.4% of the large cap campaigns occurred at companies valued at more than $10 billion.
Even at large cap companies, where retail investors represent a minority of the stakeholders, they can be important to an activist campaign. Expect Nelson Peltz's Trian Fund Management and its target DuPont (DD) to direct their advisers to reach out to the chemical giant's 600,000 retail investors, as well as 1,400 institutional investors, in a proxy contest that, if it goes forward, would come to a head this spring.
Grant Hughes, executive vice president at Toronto-based proxy solicitor Kingsdale Shareholder Services, notes that in many proxy fights, the stock is widely held and advisers on both sides of a campaign are taking a lot of time pitching their perspective.
"Regardless of the makeup, it's a numbers game and you want to win the vote," Hughes says. "If there are a lot of retail investors in the stock, you have a bigger campaign to run."
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Publicly held real estate investment trusts, or REITs, are a case in point. Such investment vehicles are set up so that holders can take advantage of steady dividends -- attractive to retail investors looking for better yields -- while the company gets tax breaks. Hughes has advised on proxy fights involving a couple of Canadian REITs, and he says both required reaching out to retail investors.
Hughes represented Partners REIT in 2013 when the trustees were in a dispute with the REIT's management company. The following year, Kingsdale was hired by activist Orange Capital when that firm targeted the company. Hughes also advised on Orange's campaign at InnVest REIT.
But reaching out to retail investors comes at a price. Instead of meetings with a representative of the big mutual funds or pension funds, pitching an activist or corporate position to retail investors takes mass mailings, flair and the money to pay for it.
Goldfarb argues that the "fight letters" mailed by activist investors and their target companies to both retail and institutional clients -- letters with splashy graphics and memorable catch phrases -- are critical to persuading retail investors. That can happen either through the mailings themselves or when the news media picks up key points.
The proxy adviser notes that in the Darden campaign, Starboard's Smith repeated a key argument: Darden decided to sell Red Lobster without shareholder input -- and that the argument went over well among retail investors.
"What struck a chord with all investors, including retail investors, was that Darden did not give shareholders a voice in the sale of Red Lobster," he says.
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Goldfarb adds that Third Point founder Dan Loeb's letter excoriating auction house Sothebys (BID) for an executive meeting held in an expensive restaurant during a 2014 fight may have helped the activist attract retail investors to his cause. The letter portrayed the meal as an "extravagant lunch and dinner" where the auction house's senior management "feasted on organic delicacies and imbibed vintage wines at a cost to shareholders of multiple hundreds of thousands of dollars," and contrasted it with the poor returns Loeb claimed shareholders were realizing. Third Point eventually settled with Sotheby's in a deal that expanded the company's board to 15 seats and added three directors nominated by the activist fund.
In the U.S., the heated rhetoric in such communications must pass muster with the Securities and Exchange Commission, which allows only factual legal disclosure and not opinions, other than specific expert opinions. In Canada, however, Hughes points out that the law generally doesn't require a prior review of such documents by securities regulators. As a result, Hughes contends that as long as there is true and full disclosure in proxy filings distributed to shareholders, activists and targeted companies aren't prevented from expressing their opinions and positions in supplemental shareholder letters.
Rhetoric and packaging are not lost on retail investors. John Bajkowski, president of the American Association of Individual Investors, points out that retail investors are more likely to vote, in proxy fights or otherwise, if they have received a complete package of proxy materials in the mail. (The alternative ways to conduct proxy business are via e-mail or cards directing voters to information posted on the Internet.)
Retail investors may also "vote with their feet" by selling their stake when they disagree with management, rather than stay in the security and vote to back a dissident slate of directors. In response to a recent AAII survey, one respondent suggested he didn't feel that voting his "100 to 500 shares" would have an impact when large shareholders account for "hundreds of thousands of shares." Another noted, "If I don't like what the company is doing, I simply sell the stock."
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Retail investors often don't vote -- in proxy fights or generally -- because they don't believe their votes matter, Bajkowski said.
"If someone can communicate to them that their vote will make a material difference, then they will be more likely to take the time and energy to try to learn about what is likely to be a complicated situation and vote," he said.
Hughes says Kingsdale does everything it can to make voting easy, including assisting holders with technical details such as identifying control numbers associated with their shares and directing them to online voting platforms.
"Your best chance to secure a vote is when you have someone on the phone," Hughes said. "Though some prefer to vote themselves, a lot more will put down the phone and never vote."
Activist investors, Goldfarb adds, conduct several types of outreach programs to attract retail investors, including holding meetings where investors can listen to a presentation or putting out so-called "robo-calls" to send a pre-recorded message from the activist asking for their vote.
One tactic used by both sides is the creation of snazzy websites where investors can receive updated information on developments. "Five years ago, almost nobody used Web sites and now we see some sophisticated campaigns with excellent digital and social media strategies that give participants an option to receive email updates on developments," Goldfarb says.
Paul Singer's Elliott Management Corp. held a 2013 investor meeting at Le Parker Meridien hotel in New York as it pushed for the breakup of Hess Corp. (HES), a move that Goldfarb suggests helped drive retail voter turnout. Other activists and companies have held similar kinds of meetings to bring out retail voters over the years.
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Media outreach is another critical component, particularly to attracting retail investors, Goldfarb said.
"An article that suggests the activist is right could help drive retail voters in that direction," he says. "Drawing attention to the contest itself and the underperformance of a company's shares can also help drive retail votes."
Then, there are situations where activists may rely on no-confidence votes, either for a company's incumbent board members or for executive pay packages, as evidence of investor discontent. In order to keep negative votes below the 30% threshold, since anything higher is considered a substantial message of investor unhappiness, companies must reach out to retail investors to make the case for their business strategy, says Donna Ackerly, a senior managing director at proxy solicitor Georgeson Inc.
Ackerly adds that Georgeson, which works with companies targeted by activists, approaches retail investors by phone, blast e-mails and through special websites set up when proxy contests are launched. In some cases, she adds, Georgeson will conduct calls with a pre-recording of the CEO explaining the company's pitch. In addition, Ackerly says, Georgeson conducts multiple mailings throughout the contest outlining the company's position.
Even the proxy advisory firms Institutional Shareholder Services and Glass Lewis -- so influential with institutional investors -- shouldn't be disregarded in making the pitch to retail investors, proxy advisers say.
While Hughes acknowledges that retail voters often don't know about ISS or Glass Lewis, he still tells them that they are "credible institutional advisors" that carry a lot of weight with professional investors.
"It won't be the main deciding factor, but it may be the straw that tips the balance and gets them to support your client," he says.
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