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Greenmail Under Microscope in Ohio

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Published: August 24th, 2021
A pension fund’s complaint targeting two activist investors who settled with discount retailer Big Lots last year could have far-reaching implications for insurgent fund campaigns at companies in the state and beyond.

Greenmail has generally been defined as buying enough shares in a company to threaten a takeover and then pressuring the targeted corporation to buy them back at a higher price.

The practice, a popular tactic of the corporate raider in the 1980s and considered the pinnacle of greed, was explained effectively in the 1987 classic film “Wall Street” starring Michael Douglas as raider Gordon Gekko.

Flash forward to April 2021 — law firm Robbins Geller Rudman & Dowd LLP  filed a lawsuit in the Court of Common Pleas in Franklin County, Ohio, on behalf of Corpus Christi Firefighters’ Retirement System targeting two activists and their campaign last year at discount retailer Big Lots Inc. (BIG).

The lawsuit appears to be seeking to expand the definition of greenmail so it can affect a now not-so-new generation of activist investors and their insurgency campaigns. Experts contend that, if successful, the suit could wreak havoc on fund managers and their efforts at Ohio-incorporated companies and beyond.

Last year Ancora Advisors LLC and Macellum Capital Management LLC launched a campaign seeking to unseat the entire board of the Ohio-incorporated discount retailer. In April, the funds settled in a deal that added two directors they nominated to an expanded 11-person board.

This February, Ancora reported it had sold shares and cut its stake in Big Lots down to about 198,000 shares in the fourth quarter, from about 589,000 the quarter before. Ancora continued to hold about 199,595 Big Lots shares in 2021’s second quarter, according to an Aug. 13 filing. The report suggests Ancora continues to hold a large stake.

The lawsuit argues that the duo violated the state’s anti-greenmail statute. According to the suit, the statute prohibits a person from disposing of their equity shares in a public Ohio corporation sooner than 18 months after a person — in this case allegedly the activist funds — have made or disclosed an intention to make a proposal to acquire control of the corporation.

The suit asserts the activist duo on March 6, 2020, disclosed “their intention” to acquire control of Big Lots. It continues that within 18 months they “commenced a liquidation of their large stake” and argues the activists must disgorge to Big Lots any profits arising from the “unlawful greenmail” campaign.

Ancora and Macellum sought to replace the entire membership of Big Lots’ board with their own “hand-picked, loyal director candidates,” the suit adds.

But Mike Lubrano, managing director of governance consultancy Valoris: Stewardship Catalysts, disputed the lawsuit’s assertion that the activists sought to acquire control of the company by seeking initially to unseat the entire Big Lots board.

“They put up a slate of directors that other shareholders would have had to vote on,” he said. “Who knows how many of the slate would have gotten elected if they had concluded the contest.”

Lubrano, a former activist investor in emerging markets, noted the majority of the dissident slate — seven of nine candidates — were independent board nominees.

“The activists couldn’t remove or replace them without the vote of the other shareholders,” he said. “Ancora and Macellum would not have controlled Big Lots management.”

Nevertheless, the lawsuit defines greenmail as buying enough stock in a target company to threaten a hostile takeover and then selling the stock at a profit. Lubrano, though, argued that it leaves out a key part of the generally understood definition of greenmail — which is that the company or someone affiliated with the company buys the activist’s shares at a premium to make them go away.

In the Big Lots situation, the activist funds sold their positions in the open market, not to Big Lots.

Critics of the suit also argue that no one was harmed in the Big Lots situation, since the share price spiked around the time of the settlement with Ancora and Macellum — and has remained significantly elevated in the subsequent 16 months. Big Lots has had total returns of 32% and 14% in 2021 and over the past 12 months, respectively. Its shares are up from about $20 a share at the time of the settlement to trade recently at $56.

“Everyone is going to be better off when this is over, except, if they lose the case, the activist investors,” Lubrano said. “And it was the activists who did the work that resulted in a huge improvement in the stock price.”

Activist investors privately expressed concern to The Deal about the case’s implications for Ohio and other states.

“I don’t think the plaintiffs will win its case, but the activists might feel squeezed,” Lubrano said. “If the activists lose or the case is settled in the plaintiffs’ favor, others will use this in the future to threaten activists, in Ohio and perhaps elsewhere.”

He added that if the plaintiffs are successful, corporations may shift to incorporate themselves in Ohio to take advantage of the “stretching of the definition of greenmailing” so they can insulate themselves from activists nominating director candidates.

In addition, a successful case could drive activist defense lawyers to start reviewing anti-takeover laws in other states to see if they can stretch their laws to meet a new Ohio standard. “If this case ends with some sort of victory for the plaintiffs, it will make this a precedent for other corporate lawyers to try,” Lubrano said.

For now, the lawsuit appears to be a long way from resolution. In July, Ancora and Macellum filed a motion to dismiss, arguing a proxy campaign to elect directors at an annual meeting is not a proposal to acquire power over the management of a corporation or a “manipulative practice.”

The activists’ motion pushed back on the lawsuit’s assertion that a proposal they had made to have Big Lots sell and lease back real estate was an attempt to acquire power over corporate affairs.

(Shortly before the settlement in April 2020, Big Lots entered into a sale-leaseback agreement with Oak Street Real Estate Capital LLC for distribution centers to generate about $550 million — the retailer’s shares rose following the announcement and generally have remained elevated ever since.)

In addition, it is unclear how the plaintiff, the Corpus Christi Firefighters’ Retirement System, can profit from the lawsuit since it owns a small Big Lots stake and the benefits of the disgorgement provision would go to the discount retailer, not the shareholder. “They and the other shareholders are not going to get a dime out of this,” Lubrano argued.

Ultimately, Lubrano insisted that if the lawsuit is successful, “we will go back to the old days where it is not the shareholders’ company and it is owned by the managers. That is the opposite of stewardship.”

The court isn’t likely to make a decision on the funds’ motion to dismiss until the fourth quarter or early 2022. Even so, pressure may be building on Ancora and Macellum to settle, since the overhang of the lawsuit doesn’t help their image.

“If you are an asset owner who wants to invest [with] them, you might think twice with this lawsuit situation,” one investor following the situation said. “Now you have these lawyers who say, ‘It can all go away if you settle.’”

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