Conflicts of interest and full disclosure.

• Author: Briggs, Thomas W.
• Position: Corporate Governance and the New Hedge Fund Activism: An Empirical Analysis

The central question running throughout any examination of hedge fund activists is this: Can we trust them? (135) According to critics, they are short-term traders whose interests frequently diverge from those of a company's other shareholders. (136) Worse still, their secretive and complex trading strategies can sometimes mean that they actually may want a company's strategies to fail. (137) There is indeed practically a whole catalogue of possible disclosed and undisclosed sins that a hedge fund (or anyone else) might commit in the course of an activist campaign, and hedge funds seem to have been accused of committing them all. (138) Based on the data gathered in the survey, however, there appears to be very little fire beneath all this smoke, and what there is seems largely contained by present-day regulations.

1. Hedged and Other Adverse Positions

   Perhaps the most serious charge that can be leveled at hedge fund activists is that their trading strategies may encourage them to destroy corporate value rather than create it. What could possibly be worse for the other shareholders, especially if they have no inkling that their activist hero is really short the stock?

   The survey found very little evidence of these kinds of games, just six possibly questionable situations. In three of these, the activist had a trading position in a merger counterparty: ESL at Sears was long and supported the merger; Icahn at Mylan Labs was short and opposed it; and Deephaven at MCI was short and also opposed it. (139) Only Deephaven seemed to provoke skepticism on the part of other investors, and this may have been because the fund further disclosed positions both in MCI's bonds and in a competing acquirer's stock and bonds. Deephaven's campaign consequently seemed profoundly, almost impenetrably, tactical and therefore failed to win the support of either ISS or many other investors. (140) Evidently MCI's investors could read, and they were not easily led astray.

   Two of these six activists were hedged, and leave the disinterested observer wondering whether all politics must indeed be local. The dissident fund in a proxy contest for three board seats at Exar Corporation last year disclosed that it held less than one percent of the stock and that 96% of the shares were "boxed" or fully hedged with offsetting short positions. (141) The dissident was thus almost completely indifferent to how the company performed since a "boxed" position is capable of generating no further profit or loss; nevertheless, ISS recommended a vote for the fund anyway and it won. The seemingly far more complicated situation with Carl Icahn's advisee in his contest at Time Warner, on the other hand, seems to have been interpreted as nothing more than a clever way of acquiring an interest in the most shares for the least risk and cost. (142) The sixth activist, the author of the value enhancement white paper in the Wendy's campaign, disclosed that its interest in the company was mostly in privately negotiated put and call options that appear to have been entered into as a short-term financing device. (143) Here, too, the complexity of the dissident's position seems to have caused little comment or concern...