I. Introduction.

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

After an absence of over a decade, shareholder activism is once again a hot topic, (1) but this time with a difference. Back in the early 1990s, the focus was on institutional investors and whether they could step in and help keep corporate managements in line after hostile takeovers had fizzled a few years earlier. (2) Now "hungry" hedge funds with outsized war chests and egos to match are said to be the "new raiders," or even the "new sheriffs of the boardroom." (3) While hedge funds openly posture and threaten, lawyers and consultants for corporations send their clients memoranda with titles like The New Crisis and (in plainer English) Be Prepared for Attacks by Hedge Funds. (4) Some even believe that managements and these new activist shareholders are battling for corporate America. (5)

This battle is occurring now for three principal reasons. First, in the past few years, hedge funds have attracted an enormous amount of capital at the same time that returns in their traditional, lower-profile strategies have stagnated. (6) Hedge funds now invest well over $1 trillion, (7) and all that money has to go somewhere. Their investors, moreover, generally expect market-beating or even absolute returns in exchange for the hefty fees most hedge funds charge. (8) The pressure to perform is on. And yet hedge fund industry returns were hardly better than flat in 2004 and amounted to not much more than a market index return in 2005 and 2006. (9) According to one knowledgeable observer, some funds are consequently "turning to activism because it is getting tougher to show top-notch returns as more hedge funds pursue similar investment ideas and overall market volatility drops." (10) Second, in our post-Enron, post-Sarbanes-Oxley world, there may be a greater willingness on the part of investors to hold underperforming managements accountable. (11) And third, as this Article will show, recent legal reforms and court decisions have largely deregulated proxy contests and other shareholder insurgency activities so as to make hedge fund attacks easier and cheaper. (12)

Meanwhile, another more complicated battle is taking place, this time among academic commentators and the corporate community. The issue is the role that shareholders (including hedge funds) play in corporate governance. Lined up on one side are those who believe that shareholders actually own corporations and should have a greater say in how they are run. (13) Shareholders, according to...