Activist hedge fund managers typically seek to implement their ideas at a target company by nominating new directors and advocating for the election of those nominees. Such nominees are more likely to be elected – and, once elected, are more likely to be effective in implementing the activist’s ideas – if they are better qualified, or, to use the activist term of art, if they are “rock stars.” Accordingly, activists have asked how they can find rock star nominees and get the best performance out of those nominees if they are elected as directors. At least two prominent hedge fund managers have answered this question by offering special compensation to nominees that are elected to the target board. These managers and their supporters argue that such compensation arrangements align the incentives of activist nominees and shareholders. Opponents argue that such special compensation arrangements engender short term thinking and result in dysfunctional boards. To clarify the mechanics of such arrangements and to assess the merits of the arguments on either side of this debate – a debate that has real consequences for the rapidly growing volume of assets in activist hedge funds – the Hedge Fund Law Report recently interviewed Marc Weingarten, co-head (with David E. Rosewater) of the global shareholder activism practice at Schulte Roth & Zabel. (On April 22, Schulte announced the expansion of that practice into the U.K.) Our interview covered, among other things: the “market” for director compensation; structuring of special compensation of nominees by activists (including caps, the identity of the obligor and clawbacks); disclosure of such arrangements; the chief arguments for and against such arrangements; case studies involving the two managers referenced above; and the conflicting views of a prominent proxy adviser and law firm on a bylaw recommended by the law firm to prohibit compensation by shareholders of board nominees. See also “How Can a Hedge Fund Manager Dislodge a Poison Pill at a Public Company?
,” Hedge Fund Law Report, Vol. 7, No. 12 (Mar. 28, 2014).