Dear Clients,

We are pleased to present the main developments in 2017 relating to shareholder activism in Israeli-related public companies (companies that are traded on the Tel Aviv Stock Exchange and Israeli companies that are also, or only, traded on foreign stock exchanges).

Shareholder activism was expressed during 2017, inter alia

  • by more vocal aggressive activism on the part of some of the players[1];
  • by activism campaigns in large public companies;
  • by more institutional investors initiating activism campaigns;
  • generally – by public companies dedicating significantly more effort to preserving and enhancing investor relations and by investors being more involved in the companies’ activities.

Throughout 2017 we, at Shibolet, continued to successfully navigate many situations that involved crisis management, including shareholder activism. In this context, we designed tailor-made plans for various companies to handle activists and their demands, we identified and reinforced corporate governance aspects and we negotiated, on behalf of companies, with activist shareholders, institutional investors and consulting companies of Israeli and international institutional investors.

Institutional Activism in 2017

  • Institutional shareholders initiated the appointment of 7 external directors[2] on their behalf in public companies traded on the Tel Aviv Stock Exchange. Among the 7 external directors proposed by the institutional investors, 6 were appointed and the appointment of one external director was not approved by the legally required majority. These figures are similar to those of 2016 during which the appointments of 8 external directors were approved and the appointments of 2 external directors were not approved by the legally required majority[3].

 

  • In some of the companies, the candidate was proposed to the company by private shareholders together with an institutional investor (Shikun & Binui). In one company, 2 different candidates were proposed for the position of an external director on behalf of the institutional shareholders (Bezeq). In one company, 2 external directors who were recommended by an institutional investor were appointed (Hadera Paper). In one company, an additional candidate was proposed by an institutional investor after the previous candidate who was proposed by the institutional investor withdrew his candidacy (Azorim). In one company (Prior-Tech), the appointment of 3 directors as external directors or independent directors was requested, but the campaign did not succeed.
  • More than 40 general meetings were postponed as a result of discussions with institutional shareholders or their consulting companies regarding matters on the general meetings’ agendas.
  • Other than the appointment of external directors, the main events upon which institutional activism focused in 2017 were officers’ compensation policy; letters of exemption for officers; terms of office and engagement (primarily of the holder of control of the company).

 

Activism on the Part of Other Shareholders in 2017

  • Appointment of Directors

During 2017, shareholders initiated 14 campaigns to appoint directors on their behalf in public companies traded on the Tel Aviv Stock Exchange, including 14 external directors or independent directors and the remaining 14 as ordinary directors. These campaigns resulted in the appointment of 15 directors (including 3 external directors) while 13 (including 8 external directors) were not appointed by the legally required majority[4].

  • Position statements

Position statements are one of the common tools used by activist shareholders. The upward trend in the submissions of position statements continued in 2017 (in 2017, 18 position statements were published; in 2016, 16 position statements were published; in 2015, 12 position statements were published). In preceding years there was an opposite trend: in 2012, 14 position statements were submitted, in 2013, 10 position statements were submitted; in 2014, 7 position statements were submitted).

The most common matters in terms of the content of the position statements were officers’ compensation policy and terms of compensation of certain officers. Objections to the reappointment of directors (including external directors) also appeared on occasion, and in dual-listed companies, so did the requirement to cancel the staggered mechanism in the company’s articles for appointing directors.

  • Adding a Matter to the General Meeting’s Agenda

Adding a matter to the general meeting’s agenda is an additional tool that activist shareholders possess. In this context, 2017 presented a record year in recent years, in light of the submission of 13 requests to add matters to the agenda as opposed to 5 in 2016 and 3 in 2015. The vast majority of the matters that were requested to be added to the agenda are proposals to appoint new directors (ordinary, independent or external).

  • Noteworthy Activist Campaigns

Mellanox- The American Starboard hedge fund recently became a Mellanox shareholder and currently holds approximately 10% of the company’s capital. The American mega-fund is an experienced investor in companies in the semi-conductor field. It appears that the fund’s objective is to have an impact from within the company by appointing directors, improving results and examining strategic M&A possibilities. The fund recently began a relatively aggressive campaign, in the framework of which, on January 8, 2018, Peter Feld, the managing member of the fund, sent a letter to Eyal Waldman, the founder and CEO of the company, in which he presented his allegations as to the company’s underperformance compared to peer companies in the field and the required improvements. The letter insinuated the need to cut back on the company’s research and development expenditures, which constitute 42% of the revenue, compared to the median of the comparative figures of peer companies, which was 22%. The fund even hired a PR company in Israel to step up the pressure on the company’s management. According to publications in the media, Eyal Waldman has announced that he intends to fight the fund’s campaign. Further to the campaign, on January 18, 2018, the Starboard fund sent the shareholders a letter in which it demanded to replace the company’s entire board of directors while presenting nine new candidates on its behalf. It was stated in the letter that “the replacement of the members of the management is necessary in order for it to be possible to outline and plan the future of the company, to receive a fresh perspective and most importantly – to resume the ability to make difficult decisions without the burden of the past…”.

Perrigo- The American Starboard hedge fund began purchasing company shares in September, 2016 when the share price was demonstrating weakness. Shortly thereafter it began raising demands to make various changes in the company. During 2017, following pressure by the fund, which held only approximately 6% of the company’s capital, Periggo entered into an agreement with the fund, pursuant to which four directors left their positions (including Shlomo Yanai, who previously also served as the CEO of Teva), and three new directors were appointed on the fund’s behalf. Additionally, in the framework of the agreement, the fund was granted the option to recommend two additional directors, such that ultimately, among the 11 directors, three are the fund’s representatives and two more were recommended thereby. The fund agreed to vote in favor of the board of directors’ candidates on behalf of the company, and, subject to a number of conditions, to vote in accordance with the recommendations of the company’s board of directors. The fund also undertook not to propose additional candidates on its behalf at the shareholders’ meeting. The fund committed to a year and a half period of “tranquility”. During 2017 the company’s CEO announced his resignation, a decision which was apparently influenced by pressure from the fund. The company sold Chemagis in the second half of 2017, as part of the process of focusing on its core activities.

Alcobra- Further to the company’s report in January, 2017, regarding the failure of the clinical trial’s third stage and the devaluation of its share, the Brosh fund, which is an activist fund managed by Amir Efrati, announced that it is acquiring shares of the company. After an unsuccessful meeting between the parties, Brosh sent a demand to the company to summon a special general meeting, the agenda of which shall include, inter alia, a change of the company’s articles to allow the appointment of directors at a special meeting and the appointment of six directors on its behalf. Additionally, the fund sent a public letter to the chairperson of the board of directors and thereafter to additional officers in the company. These acts received relatively wide press coverage in the financial media. After the company responded to the fund’s demand, the fund decided to summon a special general meeting on its own. Consequently, the company petitioned to the Economic Department at the District Court and requested to receive an injunction prohibiting the summoning of the meeting on the grounds that it is illegal. Eventually, the parties entered into an agreement, pursuant to which, inter alia, the fund added 2 directors on its behalf to the company’s board of directors; it was agreed that the fund shall be permitted to meet with candidates for a merger with the company and that its representatives shall resign from the board of directors if such a merger proceeds contrary to their position or in the event that the fund’s holdings of the company’s shares shall decline to approximately 8.5%. Amir Efrati undertook that the fund shall vote at the general meetings in accordance with the position that he shall present on its behalf at the meetings of the company’s board of directors. It was further agreed that the company’s management shall cut back on its expenditures.

Kamada- The Brosh fund became an interested party in the company by means of a joint acquisition together with related parties, and thereafter entered into an agreement with the company regarding the addition of 3 new directors, the withdrawal of candidacy for reappointment by one of the company’s directors and regarding a period of “tranquility” of approximately a year (subject to exceptions) with respect to activist campaigns. Amir Efrati said that he interviewed more than 20 directors in order to select directors who would create significant value for Kamada; additionally, the members of the board of directors were offered to purchase Kamada shares in order to maximize the overlap of their interests with those of other Kamada shareholders.

Matomy- The CEO and chairperson of the board of directors resigned during 2017, after the Brosh fund had appointed 2 directors on its behalf in the last quarter of 2016 and after a consultant was appointed to examine strategic alternatives. The company announced a strategic plan pursuant to which it is focusing on activities that are at the core of its business.

An additional investment of the Brosh fund: Perion Network – According to publications in the media, the Brosh fund began holding Perion Network shares during 2017, alongside the purchase of Perion shares by Roy Vermos’ Noked fund. According to the publications, these two funds hold approximately 4% of the company’s shares. As of the date hereof, the funds have not initiated any activist campaigns in Perion. However, it is not unlikely that a significant adverse change in Perion’s condition or in the price of its share, following the departure of its CEO (due to activism by other shareholders in 2016), shall lead the Brosh fund to act similarly to how it has acted in other companies.

Qualitau- During the last quarter of 2016, Guy Equity, a relatively small hedge fund, managed by Danny Saar and Oded Gal – former managers at IBI trust funds, succeeded in appointing a number of directors to the company’s board of directors, despite the fact that it holds only a small percentage of the company’s capital. The fund occasionally initiates activist campaigns with the objective of improving the results of the companies in which it is invested. Some of the directors of the company have recently attempted to promote a campaign to sell the company, based on positive developments in its business and a significant potential value they foresee in its future.

It shall be noted that the activism in Prior-Tech was also led by Saar and Gal.

Bezeq (January 2018)- on January 16, 2018, the Elliot hedge fund purchased 4.8% of Bezeq‘s share capital. The fund sent a letter to Bezeq‘s interim chairperson, demanding, inter alia, to remove one layer of the pyramid and to make changes to the board of directors, including the resignation of all of the directors who are under investigation by the Securities Authority and/or who are affiliated with Eurocom. The fund stated in its letter that it demands to work together with Bezeq‘s managers in order to ensure that it has the board composition and commitment to proper governance that it deserves.

Analysis and Remarks:

  • The Focus of Institutional Activism – The board of directors (composition, size, independence, seniority, number of boards of directors in which the director serves[5], etc.) and executive compensation continued to be at the focus of institutional activism in Israel in 2017.
  • The Focus of Hedge Fund Activism – The conspicuous hedge fund campaigns were made in companies without holders of control, in which the free float is relatively large, and naturally, the prospects of success of an activist campaign in such companies are greater than in companies which have a holder of control. These campaigns primarily focused on making strategic changes in the companies (focusing on core activities) and on M&A’s. A comparison to the United States shows that in the United States, most of the activist campaigns focused on M&A’s (37%), representation in or changes to the composition of the board of directors (32%), strategic changes (32%), operational changes (19%) and distribution of dividends/repurchase of shares (13%)[6].
  • Activism Related to Enhancing Social Responsibility is Rare – Shareholder activism in matters related to social responsibility is almost non-existent. In contrast, this is a developing issue in the United States and it was recently published that Jana Partners, an active shareholder, and the California State Teachers Retirement System (CALSTRS) sent Apple a letter in which they called, inter alia, for it to develop new software tools that will help parents more easily control and limit telephone use. The idea in campaigns such as Jana’s is that turning a company into a good corporate citizen could benefit business.
  • Scope of Activist Hedge Funds in Israel – The number of activist hedge funds in Israel did not change in 2017 and some of them participated in a number of activist campaigns in various companies (the Brosh fund, for example). It appears that there is no significant cooperation between different funds in the activism context (for example in the context of dividing tasks – searching for a CEO, directors, M&A transactions, etc.).
  • Seepage of American Hedge Funds Investing in Securities of Israeli Companies that are Traded on the Tel Aviv Stock Exchange – During 2017 American hedge funds began enhancing their focus on investments in non-American companies and their main efforts were targeted towards European companies (for example, Akzo Nobel, BHP, Clariant , Nestlé). The investment by a hedge fund of Elliot’s magnitude in Bezeq shares may enhance the focus on investments of mega-funds in Israeli companies whose securities are traded in Tel Aviv.
  • Change of Trend Regarding Statements of Position – We are of the opinion that the change of trend and increase in position statements since 2015 can be attributed, inter alia, to the launch of the electronic voting system in June, 2015.
  • Cooperation Among Institutional Investors – In certain cases, cooperation among institutional investors in activist campaigns could raise questions related to the Restrictive Practices Law. It appears that institutional investors do not act in a uniform manner in this matter and it is our experience that in some cases actual cooperation did exist among institutional investors.
  • Activism Towards Specific Transactions (Deal Activists) – The number of activist campaigns that targeted a specific transaction (deal activists) was very limited, while in the United States more than a third of the activist campaigns in 2017 were in matters related to M&A’s, including attempts to improve the terms of a transaction or objections to certain transactions due to their price or due to strategic compatibility.
  • Establishing Nominating Committees – In some companies a nominating committee was established to examine the suitability of proposed candidates, especially those proposed by institutional investors, and a “sterile” examination procedure was conducted in order to examine the most suitable candidates and to convince the shareholders regarding the most suitable choice for the company.
  • Suitability of Candidates to Serve as Directors – It is important to note that materially speaking, we are of the opinion that a considerable proportion of candidates proposed by institutional investors or by other shareholders to serve as external directors or other directors, did not have sufficient experience in the core activity of the company nor did they have proven experience or ability to deal with the challenges and the issues that the board of directors faces. This is of cardinal importance in companies in certain fields of activities and is regretful on the merits of the matter. Accordingly, more than a few companies objected to appointments that were perceived as unsuitable.
  • “Beauty Contests” to Elect Directors – In cases in which a number of candidates were nominated to be elected as external directors and the number of the then presiding directors in the company reached the maximum number of directors under the company’s articles, some of the companies prescribed a “beauty contest”, pursuant to which if more than one candidate is duly approved, only the candidate who received the most votes is appointed. The Israeli Securities Authority staff approved this mechanism, provided that the effective majority for this matter would be counted from among the voters who are not holders of control in the company and do not have a personal interest in the approval of the appointment (except for a personal interest that is not as a result of an affiliation with the holder of control). Some of the companies prescribed a similar mechanism pursuant to which in the event that the general meeting shall approve the appointments of more than one candidate, then a deferred meeting would be convened in which only one would be elected, in accordance with the largest number of votes which voted “in favor” of each candidate. In some of the companies, amending the section in the company’s articles that addresses the maximum number of members of the board of directors was put on the agenda, concurrently with the shareholder’s proposal to vote for the appointment of a number of directors on its behalf.
  • Settlement Arrangements with Activists – Settlement arrangements with activists raise an enforcement question in Israel in light of the fact that they grant significant rights to relatively small shareholders compared to other shareholders.
  • Entropy’s Policy Regarding Candidate Proposals for Directors – Entropy’s voting policy at general meetings for 2017-2018 encourages institutional investors to propose a candidate on their behalf for the position of a director or an external director. In the event that an institutional investor shall propose a candidate on its behalf for the position of a director or an external director at a general meeting, and the company’s board of directors shall propose a different candidate who shall gain the support of the holder of control, Entropy will recommend to vote for the candidate who shall be proposed or shall be supported by the institutional investor, assuming that the candidate is indeed worthy on all accounts. In our opinion, this approach, which primarily operates based on the identity of the proposing entity, rather than on the merits of the ability of the proposed director candidate to create value for the specific company, is problematic.
  • Entropy recently began placing special emphasis on whether a company has procedures regarding the manner of searching for candidates for independent or external directors. If the answer is affirmative, Entropy requests to be furnished with a description of the search process that is conducted by the board of directors, including whether the company has a profile of a desired structure of the board of directors, which takes into consideration the company’s field of activity, needs, risks and strategy.
  • Initial Signs of a Trend of Replacing the Entire Board of Directors by Activists – See the description above regarding Mellanox and Alcobra.
  • ISS’ Policy Regarding Candidates Proposed for Directors – ISS’ current voting policy regarding the appointment of candidates for the board of directors by minority shareholders and other candidates by the company’s board of directors, prescribes that the recommendation shall be specific to the case at issue and shall examine which of the directors is most suitable to create value for the shareholders. The ISS focuses on two main questions: Whether the minority shareholders proved that it is necessary to change the composition of the existing board of directors? If the answer to that question is affirmative- whether the candidate on the shareholder’s behalf could make a positive change in the company and could, in the long term, maximize value for the shareholders.
  • Additional Aspects Relating to the Appointment of Directors on the Minority’s Behalf in Dual-Listed Companies – In the case of dual-listed companies or Israeli companies that are traded on foreign markets, in which an activist demands to terminate the office of existing directors and appoint directors on its behalf to the company’s board of directors, it is necessary to examine the following matters, among others: (a) the appointments’ impact on the company’s compliance with the rules of the local stock exchange in terms of corporate governance rules (for example, complying with the minimal number of independent directors); (b) the appointments’ impact on the company’s status, for example, as a Foreign Private Issuer which is entitled to regulatory reliefs and which, for example, as opposed to a Domestic Issuer, is not subject to the US proxy rules; (c) whether as a result of the appointments, the composition of the company’s board of directors still has a “director of the other gender” as required by law.

In this context, certain dual-listed companies, which do not have a holder of control, benefit from various reliefs, inter alia, with respect to the lack of an obligation to appoint external directors. Attention should be drawn to the fact that adopting this relief, pursuant to which all of the members of the board of directors (other than if the company has a staggered board of directors) are reappointed each year (unless the articles prescribe otherwise), could actually make activist campaigns easier.

What’s in Store in 2018?

  • In January, 2018, Anat Guetta, who until recently served as the CEO of Entropy, replaced Prof. Shmuel Hauser as the Chairperson of the Securities Authority. Entropy’s policy during Anat Guetta’s tenure as CEO of Entropy had a direct impact on the activism of shareholders and therefore it will be interesting to examine how her appointment as Chairperson of the Securities Authority will impact the activism matter.
  • During 2018 we expect to see enhanced investor relations while maintaining more intense communications between companies and their central shareholders. The communications will primarily emphasize listening to the investors’ concerns and thereafter properly and seriously examining their claims in the appropriate company forum.
  • The board of directors’ discussions, both with regard to company strategy and business plans and their implementation and with regard to assessing the CEO’s performance, may be more thorough and professional in an activism environment.
  • We expect that in the coming year more significant emphasis shall be placed on examining the assessment of the effectiveness of the board of directors[7], while applying proper methodology to perform such assessment.
  • There is potential for certain seepage of American hedge funds that are investing in securities of Israeli companies that are traded in the leading indices on the stock exchange – see detailed explanation above regarding the Elliot hedge fund’s investment in Bezeq.
  • And not without mentioning Teva… The huge crisis at Teva and its low share price expose it to activist campaigns by hedge funds, as, for example, happened to Periggo. As of the date hereof, Teva’s huge debt is distancing large purchasers. However, if and to the extent Teva’s condition shall stabilize following steps by the new CEO, the chances of activist campaigns in the company will grow. We send Teva best wishes to quickly overcome the challenges it is facing.

 

[1]     In the Tamar Petroleum company a clarification was added to the invitation to a special meeting for the appointment of external directors clarifying that one of the external directors undertook that commencing from March, 2018, for as long as he serves as an external director in the company, he shall not serve as a director in more than 6 Material Corporations, including the company. A “Material Corporation” – a public corporation or a private corporation that has a material scope or a complex operational structure.

[2]     Lazard’s Shareholders Advisory Group, 2017 Activism Year in Review, January 2018.

[3]     In this context, it was noted at the Israeli Securities Authority’s Annual Corporations Conference in December, 2017, that the disclosure, in the framework of periodic statements, of assessments regarding the board of directors’ performance is of significant importance to investors. The assessment of the board of directors’ performance is measured, inter alia, by the following parameters: the manner and frequency of the assessment, the identity of the assessing entity, the matters assessed and the identity of the subject of assessment. The scope of disclosure shall refer, inter alia, to the frequency of the process, the work and decision making procedures at the board of directors, discussions regarding the assessment’s conclusions and results.

[4]     The companies in which candidates on behalf of the shareholders were appointed are: Tamar Petroleum, Tadbik, Shikun & Binui, Qualitau (3 candidates), Kamada (3 candidates), Perrigo (5 candidates); The companies in which candidates on behalf of the shareholders were not appointed are: Carmit Candy Industries, I.D.O Group, Prior-Tech, Erco Holdings, (Y.Z.) Queenco (candidacy withdrawn), STG International, Allot, Compugen.

[5]     A non-negligible part of “activist” activity is carried out by private investors who in the past were passive investors in the company and after being disappointed by the company’s performance, or for other reasons, changed their approach. As opposed to hedge funds, which are considered highly sophisticated “classic” activist entities that come to the company with prepared plans and potential directors, these private investors do not have the same resources and abilities and there are those who perceive them to be “pseudo-activists” and occasionally, even “extortionists”.

[6]    Institutional investors tend to prefer to appoint external directors since external directors serve in significant committees (compensation, audit, examination of financial statements, independent), they have a long term of office (3 years) and it is relatively complicated to prematurely terminate their office.

[7]    The companies in which external directors were appointed on behalf of institutional shareholders are: Delek Energy Systems, Bezeq – The Israel Telecommunications Corporation, Azorim Investment Development and Construction Company, Hadera Paper and Shikun & Binui. The companies in which not all of the candidates on behalf of institutional shareholders were appointed are: Calcalit Jerusalem and Prior-Tech.

 

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