This is a subject that I intend to write more about (likely in a white paper), but I wanted to reiterate some points I made earlier on QH’s behavior in the Xstrata/Glencore deal. Particularly, I want to respond to arguments that QH is acting as an “activist investor” and that QH’s behavior is a “game changer.” My point is largely definitional, but definitions are important because regulatory responses often link to definitions.
Much of my research is devoted to corporate governance issues, including the particularly difficult problems that activist investors can pose to existing corporate legal frameworks, so when I hear the term “activist investor” it means to me an investor who takes the initiative to use its voting power to shape corporate policy or effect a corporate transaction. Activists may do this to unlock value for shareholders generally; alternatively, they may simply seek to further a particular social or governance policy. Examples of activist investors are hedge funds Icahn Associates or JANA Partners, the labor union fund sponsored by the American Federation of State, County and Municipal Employees (AFSCME), and professional corporate gadfly John Chevedden. I submit that this is the way most institutional investors, managers, and the bankers and lawyers that advise them use the term “activist”.
What all of these activist investors have in common is that they are catalysts of change. That is what makes them activists. To put it another way, they are exercising positive rights of share ownership–calling for a special meeting, requesting a shareholder proposal to be placed on the ballot, or putting up a slate of directors. QH, by contrast, is not acting as a catalyst for change. Indeed, they have been a roadblock. They are using what I would call negative shareholder rights–the right to vote on a transaction, for example. Negative rights operate like negative covenants in a bond agreement. Under the agreement, the bondholder (or the Trustee) can prohibit the company from taking an action. This contrasts with a positive right (which bondholders typically do not have, but shareholders may try to exercise) to force a company to take an action. I see this as a significant difference because regulatory review of transactions involving foreign-controlled entities will generally be triggered only where positive shareholder rights are exercised. This regulatory posture makes good sense from a policy perspective. Negative rights do not tend to divert management authority away from the directors and officers to the extent the exercise of positive rights might (which is precisely the kind of activity that one might worry about with SWFs, i.e., that management is influenced to do something that inures to the political benefit of the SWF), but negative rights place limits on the ability of directors and officers to impair the rights or interests of the negative right-holder. Exercising positive rights makes you an activist. Exercising negative rights makes you a responsible shareholder.
QH is exercising its negative rights–impeding a transaction that it feels will impair its large investment in Xstrata. The exercise of negative rights is exactly what we need from SWFs because it indicates that they are fulfilling a useful monitoring role as shareholders. Most institutional investors would cringe at the label of “activist” simply because they planned to vote against a transaction they saw as value-decreasing; QH is no different as far as I can tell. I will not worry about SWF as “activist investors” until I see SWFs making plays for board seats or putting up shareholder proposals that resemble what real activist investors are submitting.