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Apr 26, 2016

Two board upheavals highlight responsibilities of activist directors

New board seats at Yahoo and Tribune Publishing show the increasing power that activist investors are exerting over boards 

News this week of board churn at two companies – Yahoo and Tribune Publishing -- is raising some interesting questions about how much attention activist shareholders may be paying to their fiduciary duties once they gain seats on a board.

In a deal that Yahoo announced today with investment advisor Starboard Value, the tech company has agreed to add four directors recommended by Starboard to its board, while two current board members, Lee Scott and Sue James, have chosen to not stand for re-election for personal reasons. The four new directors, whose addition will bring the board to 11 members, are Starboard’s CEO and chief investment officer Jeffrey Smith, Tor Braham, Eddy Hartenstein, and Richard Hill.

Scott and James will remain on Yahoo’s board until the annual meeting but immediately gave up their committee responsibilities – as chairs of the Nominating and Corporate Governance Committee and the Audit and Finance Committee, respectively. All the board committees have been reorganized to enable work to proceed smoothly under clear leadership, with Cathy Friedman leading the Nominating and Corporate Governance Committee and Eric Brandt heading the Audit and Finance Committee.    

The deal enables Yahoo to avoid the proxy fight that Starboard announced on March 24, in which it had planned to nominate its own slate of nine directors to replace Yahoo’s entire board. The prospect of Starboard winning such a contest had been expected to boost the likelihood that the company would be sold or dismantled, as reported by the Wall Street Journal.  

Linking the board changes at Yahoo to the upheaval at Tribune Publishing – publisher of the Los Angeles Times and Chicago Tribune -- is Hartenstein, who was a director on the latter’s board since August 2014 and was non-executive chairman until this past January. The controversy at Tribune Publishing centers on the board’s apparent decision to put off a response to a $815 million buyout offer by Gannett until its June 2 annual meeting, when non-executive chair Michael Ferro will effectively gain full control of the board. It took Tribune 10 days to send a letter to Gannett, saying it was still trying to hire outside counsel and essentially asking for more time.

Ferro has been chair of Tribune’s board since February, when his company bought a 16 percent stake in the beleaguered company for $44.4 million. Within weeks of joining the board, he convinced the board to replace Tribune CEO Jack Griffin with Justin Dearborn, a former health care technology executive without a media background, who also took Griffin’s board seat. Shortly afterwards, with the addition of three directors friendly to Ferro – and with no substantial journalism experience – the board expanded to 10 people, five of whom have ties to Ferro. As of June 2, when two of the non-Ferro aligned directors are scheduled to step down, five of the eight remaining board members will have ties to Ferro, allowing him to control the process, as reported this week by the New York Times Dealbook blog.

It’s very rare for a company to wait so long before engaging outside advisors to evaluate an acquisition offer, as the Dealbook blog mentions. Gannett’s bid, valued at $12.25 a share, represents a 63 percent premium to the stock’s closing price on April 22. Ferro has now gone on the offensive, accusing Gannett of ‘trying to steal the company’ by pushing for a response before the board has had time to review Ferro’s strategic plan for Tribune, as reported by the Los Angeles Times on April 26.

That tactic may very well be designed to extract a higher bid from Gannett, but, as the Dealbook blog post remarks, there’s no reason to believe Gannett wouldn’t have increased its offer if the board had responded swiftly. Given the company’s dire need for some stability, playing the waiting game is irresponsible behavior by the board, the Dealbook blogpost says.

Companies targeted by activist investors for board seats have long accused them of putting their own interests above those of other shareholders, a charge that many activists have convincingly refuted through performance improvements that have increased the value of all shares. It will be interesting to see what kind of strategy Tribune’s post-June 2 board opts for. 

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary