Consistent with their roles as fiduciaries, more investment managers are acting as true stewards of the capital they invest on behalf of others by actively engaging with corporate boards of directors and management teams on environmental, social and governance issues that impact long-term returns. A new era of “investor stewardship” is now helping facilitate a number of improvements across Corporate America, ranging from enhanced boardroom diversity to improved human capital management policies to more sustainable supply chain practices.
Unfortunately, this new era is now being threatened by a curious lawsuit brought by the Corpus Christi Firefighters’ Retirement System against Ancora Advisors and Macellum Capital Management. The suit stems from Ancora and Macellum’s active engagement with Ohio-based Big Lots in 2020.
The pension fund, which is represented by the law firm of Robbins Geller Rudman & Dowd, is accusing Ancora and Macellum of violating a thirty-year-old Ohio law designed to discourage so-called green mail. The plaintiff is pointing to a statue intended to force an investor to disgorge all of the profits it earns within 18 months if it is found to have made a hollow takeover bid in order to force a company to buy back shares at a premium. But in this case, the shareholders made no such bid and sought no repurchase of their shares from Big Lots or anyone else.
Not the intent of the anti-green mail statute
Although the plaintiff is trying to conflate activist campaigns and takeover bids, the two approaches are in fact quite distinct. Ancora and Macellum believed—apparently correctly—that Big Lots was underperforming in part because of its excessive real estate holdings. Ancora and Macellum urged Big Lots to enter into sale-leasebacks for a number of its properties. After inconclusive discussions with company leadership, they exercised their rights as shareholders to nominate a slate of candidates for election to the board at the 2020 annual meeting.
Ultimately, Ancora and Macellum did what many pragmatic shareholders look to do: avert a rancorous and distracting election contest and reach a mutually-beneficial settlement. The company agreed to add two new highly-experienced individuals to its board of directors and began a program of sale-leasebacks to monetize its real estate assets.
As a result of Ancora and Macellum’s efforts, shareholders of Big Lots have seen the company’s shares appreciate roughly 300% since March 2020. It seems plain as day that active engagement was good for Big Lots and great for all its shareholders, including pension funds like Corpus Christi.
Who’s harmed? No one
The most perplexing question about this suit is the following: why would a shareholder whose holdings rose 300% bring a case under a statute intended to discourage green mail and compensate the companies that pay it? Shouldn’t other minority shareholders be grateful to the defendants for engaging with the company and ultimately unlocking value? As neither they nor the company suffered any injury, it is hard to see what standing Corpus Christi has for bringing such a suit. Quite the contrary, investor stewardship achieved its desired result here by creating value for all shareholders, to the plaintiff’s direct benefit.
It is notable that Big Lots, which may have had the biggest axe to grind with the activists, did not initiate this litigation. There appears to be no sign of the company being interested in joining in the case.
Dangerous implications
If the plaintiff in this case is somehow able to miscast an activist engagement as a green mail play, it could have a chilling effect on shareholder engagement in Ohio. Many shareholders—including conservative mutual funds—could end up finding the risk of engagement to be too great. Certain investors may decide that they can no longer invest in Ohio-based companies at all if their strategies involve active engagement with management.
The upshot of this type of investor trepidation would likely be an “Ohio discount” that weighs down the valuations of companies in the state and increases their cost of capital. This could be similar to the type of well-known trading discounts suffered by companies that maintain insular corporate governance and entrenchment mechanisms, such as dual share classes or staggered boards. Insulation of boards and management from shareholder engagement and accountability would also have a negative effect on the long-term performance of public companies, which is the ultimate objective of investor stewardship.
The investment community should be equally concerned that companies in other states may lobby their legislatures to broaden anti-green mail statutes to make them into anti-investor stewardship laws. Too many companies, especially underperforming ones, look for ways to entrench their boards and stifle shareholder-driven change. It is a clear and present danger to the entire market when corporate leadership teams are not held to a high standard.
As the court assesses this case, hopefully it takes into account what it means for the capital markets, investor stewardship and shareholder engagement—beyond just the scope of Big Lots. Now is not the time to let a seemingly meritless, opportunistic lawsuit undermine the way in which investors interact with companies in Ohio and across the country.
