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Activist hedge fund Starboard pounces on U.S. companies in turmoil

(Reuters) - Most activist shareholders have refrained from challenging the boards of U.S. companies during this season of annual shareholder meetings, as businesses reel from the economic fallout of the coronavirus outbreak.

Not Starboard Value LP.

The New York-based hedge fund, which Jeffrey Smith spun out of investment firm Ramius in 2011 and has built a reputation as a powerful player by winning more board seats than any other activist, is pursuing proxy contests against five U.S. companies, even as rivals remain largely silent, according to a review of regulatory filings.

Starboard is betting companies will be willing to settle during the crisis so they can concentrate on their business and the safety of employees, according to people familiar with the matter. Starboard has been arguing to companies that its presence on their board can help them navigate the challenges of the COVID-19 pandemic, according to regulatory filings and people familiar with the discussions.

"We recognize the COVID-19 crisis has created a difficult environment for many companies and their respective employees, customers, and partners," Starboard managing member Peter Feld wrote in a letter to construction and building materials supplier GCP Applied Technologies GCP.N on April 2, according to a regulatory filing.

“GCP is no different, and needs strong leadership and oversight during these challenging times,” Feld wrote.

Starboard and GCP both declined to comment.

Last week Starboard nominated six candidates at data management software provider Commvault Systems CVLT.O, adding another fight to a lineup that already includes GCP, e-commerce company eBay EBAY.O, healthcare services company Mednax MD.N and medical devices manufacturer Merit Medical MMSI.O. Starboard is looking for roughly two dozen board seats in total, according to the filings.

The shares of all these companies slid at the onset of the pandemic, and the companies are bracing for a hit to business as a result of the economic downturn.

Commvault, eBay, Merit and Mednax declined to comment.

“What Starboard is doing stands in stark contrast with other activist investors who are holding back and have reached settlements,” said Jill Fisch, a University of Pennsylvania Law School professor and corporate governance expert. “We have never seen a shareholder nominate directors at so many companies at the same time. Starboard is blazing a path for more aggression.”

Last year Starboard won 20 board seats at seven companies, and since 2013 it has won 118 seats, according to data from Activist Insight. It secured the vast majority through settlements with companies keen to resolve the board challenges prior to a shareholder vote. It is a track record the roughly $5 billion hedge fund boasts about when it courts investors, according to some who discussed the pitch on condition of anonymity.

Starboard firm made history in 2014 when shareholders voted to throw out all 12 directors at Darden Restaurants Inc DRI.N and install Starboard's slate, a rare feat for a hedge fund at a major U.S. company.

“Their thesis is they don’t mind people being afraid of them,” said Mark Gerstein, a partner at law firm Latham & Watkins LLP who advises companies on their defense against activist hedge funds such as Starboard.

WINNERS AND LOSERS

The performance of Starboard’s targets is mixed. Total shareholder return (TSR) at Darden surged 227% between Starboard’s joining the Olive Garden restaurant owner’s board in 2014 and February 2020, when the coronavirus crisis started weighing on the U.S. stock market. Semiconductor maker Marvell Technology Group’s TSR jumped 166% in the period between Starboard’s joining the board in 2016 and the end of February 2020.

There were losers, too. In two situations where Starboard appointees comprised at least half of a company's board, online data tracking service Comscore SCOR.O and drug maker Depomed, which renamed itself Assertio Therapeutics ASRT.O in 2018, TSR tumbled 87% and 94%, respectively, in the period between Starboard directors' joining the boards and the end of February.

Starboard declined to disclose or comment on the returns of the hedge fund.

It is not yet clear how the crisis will affect the corporate world’s defenses against Starboard. Board members are aware of how high the stakes are this year and are tallying the potential cost of losing experienced directors, bankers, lawyers and investors said.

GCP has called the nomination a “self-serving proxy fight that is out of touch with the realities of the current operating environment and global crisis.”

“Activist shareholders who overreach for the sake of a win and who aggressively and reflexively push to remove key board members and leaders... will be remembered as failing to meet the moment,” said Sabastian Niles, a partner at law firm Wachtell, Lipton, Rosen & Katz LLP who defends companies against Starboard and other hedge funds.

Reporting by Svea Herbst-Bayliss in Boston; Editing by Greg Roumeliotis, Christopher Cushing and Leslie Adler

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