Year after year, the world’s activist-investor community meets at the Active-Passive Investor Summit, the premier shareholder activist conference in New York City, organized by research and advisory service 13D Monitor. Yet at this year’s gathering, on October 22, the mood was perhaps more upbeat than ever. Many activist investors were excited about the prospect of another presidency of Donald Trump.

Numerous activist investors have openly endorsed Trump for president in the 2024 election cycle. While some of them may harbor reservations about Trump’s character, they like his policies. These activists have donated tens of millions of dollars and more to his campaign and related political action committees. This group includes several of Trump’s fellow “corporate raiders” from the 1980s.[1] But while not all activist investors support Trump, numerous principals of the next generation of activist funds are rooting for Trump as well.[2]

Economic Environment

The prevailing perception among activists appears to be that the economic environment will be better for activist funds under another Trump administration. Many activist investors had highly profitable years during the last Trump presidency. They credit Trump for the 2017 tax reform bill, which slashed corporate and capital gains taxes.[3] By contrast, rightfully or not, many activists are concerned about the proposed tax policies of Vice President and Democratic presidential nominee Kamala Harris.[4]

Activist funds also benefited, like many other investors, from the low interest rates of 2016 through 2020. Those rates are set by the Federal Reserve, which is supposed to be independent. However, many activist investors believe that Trump’s policies would be less likely to result in another interest-rate hike (even though not all economists agree).[5]

Then there is deregulation. Trump said he plans to free Wall Street from “burdensome regulations.”[6] He has already announced a plan for a “government efficiency commission.”[7] This is a prospect that excites many shareholder activists. Republican donor and former activist investor John Paulson, floated by Trump as a potential U.S. Treasury Secretary, has publicly said he supports deregulation.[8]

At the same time, another Trump administration could implement policies resulting in economic dislocation. Trump has promised to put through changes, including a universal 20 percent tariff, which many economists fear could damage the global and domestic economy.  These policies tend to make Wall Street nervous.[9] However, it seems that many activist investors are either dismissing – or accepting – the risk of a Trump administration’s triggering widespread disruption. As every shareholder activist knows, companies struggling amidst volatility are prime targets for activism because their share prices are artificially low and present a clear case for change.

Antitrust Enforcement

Another key issue for activists is the current administration’s antitrust policies. Shareholder activist funds require a liquid merger-and-acquisition (M&A) market for their business model. After all, the easiest and fastest way to monetize an activist investment is to push a target company into a sale or breakup. However, over the last three-and-a-half years, the enforcement of federal antitrust law by the Federal Trade Commission (FTC) under its chair, Lina Khan, and the Antitrust Division of the U.S. Department of Justice under Jonathan Kanter has blocked numerous mergers, which has generally chilled M&A activity.[10] For this reason, many activist investors are hoping for Trump to be elected. It is widely considered a near certainty that Khan and Kanter will be replaced if Trump wins the presidency because many Republicans favor more latitude for mergers and see the antitrust agencies as too tough on business.[11] To be clear, shareholder activists are not alone in their desire for more lenient antitrust enforcement; many companies would agree with that stance.[12]

SEC Regulation

From activists’ perspective, one of the most important agencies is the Securities and Exchange Commission (SEC). The reason the SEC’s leadership matters to activist funds should be obvious: Activists push companies to cave to their demands (sell or break up the company, fire the CEO, lever up the balance sheet, etc.) by using the prospect of a director election contest, or proxy contest, as a threat — and the SEC regulates proxy contests. Trump has already pledged to remove current SEC Chair Gary Gensler.[13] However, interestingly, the SEC’s track record under the first Trump administration was not necessarily pro–activist investor.

For years, shareholder activists lobbied for a universal proxy card, which would require companies to include activist nominees on their proxy cards. The Obama administration’s SEC proposed rules providing for such a card in October 2016. After Trump’s surprise victory, some expected the SEC to adopt these rules because in 2017 Trump appointed celebrity activist Carl Icahn as a special adviser on issues relating to regulatory reform. However, Icahn focused  environmental regulations, not the universal proxy, and resigned after a few months.[14] The Trump presidency ended without the SEC’s ever taking up the issue.

In 2021, though, the Biden administration’s SEC under Gensler revisit the idea of a universal proxy. Corporate America, including our practice at Sidley Austin,[15] lobbied either against these rules or to moderate them. Still, in November 2021, the SEC adopted a new activist-friendly regime with the votes of the three Democratic commissioners over the objections of their two Republican colleagues on the five-member commission.[16] It remains to be seen whether the SEC under Trump would revisit the universal proxy; it is clear that Trump’s activist donors would lobby him to keep the rules largely unchanged.[17]

Another reason activists care who runs the SEC is the regulation of proxy advisers like ISS and Glass Lewis. Companies have repeatedly raised concerns about proxy advisers’ significant influence over corporate elections, leading to questions about whether the advisers should be subject to more regulation. In July 2020, Trump’s SEC chair, Jay Clayton, adopted rules for proxy advisers that were welcomed by many companies and business lobbyists like the Chamber of Commerce – but not necessarily by activist funds. However, soon after assuming his position as SEC chair in 2021, Gensler directed the staff to take another look at the rules.[18] In 2022, the SEC adopted amendments to the proxy adviser rules, reversing some of the key provisions that were  favorable to companies.[19] The rules remain tied up in litigation in the federal courts to  this day.[20] While it is unclear what the Trump administration would do about these rules, many activist investors would prefer to see them scrapped for good.

A last topic of interest to activists is the SEC’s stance on shareholder proposals. For decades, SEC rule 14a-8 has allowed shareholders to submit nonbinding proposals for inclusion in a company’s proxy statement. In recent years, special interest groups have been bombarding companies with proposals on environmental, social, and governance (ESG) issues, which companies have long lobbied the SEC and Congress to limit. However, it was under the Trump administration that the SEC imposed stricter minimum stock ownership requirements.[21] And Republican Commissioner Hester Peirce, a possible chair candidate in a Trump administration, appears poised to further restrict shareholder proposals.[22]

Activist funds, which push companies to effect economic changes and are less interested in ESG, were mostly indifferent about the rules for nonbinding shareholder proposals. That said, a more recent development is the backlash to ESG by such activists as Robby Starbuck, who brought the culture wars to corporate America by targeting companies with diversity, equity, and inclusion (DEI) initiatives. [23] These kinds of attacks might become the new normal during another Trump presidency.

Conclusion

While America and the world are nervously awaiting the outcome of the presidential elections in the United States, many activist investors are hoping that Trump prevails. They believe that his policies will benefit the economy and activist funds. Yet, a closer look at his track record suggests that another Trump presidency might be a mixed bag, for activist investors and companies alike.

ENDNOTES

[1] Donald Trump pursued several activist campaigns against numerous companies himself.  See “The Gordon Gekko era: Donald Trump’s lucrative and controversial time as an activist investor,” CNN, August 23, 2016, https://www.cnn.com/2016/08/22/politics/donald-trump-activist-investor.  His supporters include, for  example, Trian Partner’s 82-year-old founder, Nelson Peltz (who might have doomed his Disney proxy contest this year by endorsing Trump). “Nelson Peltz to vote for Donald Trump over fears of Joe Biden’s ‘mental condition’,” Financial Times, March 19, 2024, https://www.ft.com/content/5c460531-f261-4828-a7ae-6180bb275147.

[2] See “Billionaire Bill Ackman endorses Trump in US presidential race,” Reuters, July 14, 2024, https://www.reuters.com/world/us/billionaire-bill-ackman-endorses-trump-us-presidential-race-2024-07-14/.

[3] While less relevant for activists, the 2017 tax reform did not eliminate the carried-interest tax loophole for hedge funds. See “Gary Cohn: We ‘tried 25 times’ to cut hedge fund loophole in tax reform bill, but failed,” CNBC, December 20, 2017, https://www.cnbc.com/2017/12/20/cohn-tried-25-times-to-cut-hedge-fund-loophole-but-failed.html.

[4] “Hedge fund billionaire and Trump donor John Paulson says market would ‘crash’ under Harris tax plans,” CNBC, September 13, 2024, https://www.cnbc.com/2024/09/13/hedge-fund-billionaire-and-trump-donor-john-paulson-says-market-would-crash-under-harris-tax-plans.html.

[5] See also “What Trump Has Said About Rates, and Why It Matters,” New York Times, September 18, 2024, https://www.nytimes.com/2024/09/18/business/economy/trump-interest-rates.html.

[6] “If Trump wins, he plans to free Wall Street from ‘burdensome regulations’,” Reuters, April 12, 2024, https://www.reuters.com/markets/us/if-trump-wins-he-plans-free-wall-street-burdensome-regulations-2024-04-12.

[7] “Trump announces plan for ‘government efficiency commission’,” Guardian, September 5, 2024, https://www.theguardian.com/us-news/article/2024/sep/05/trump-musk-efficiency-commission.

[8] “Trump Treasury Contender Pledges to Work With Musk to Slash Spending,” Wall Street Journal, October 29, 2024, https://www.wsj.com/politics/elections/john-paulson-trump-treasury-secretary-elon-musk-c619ef9f.

[9] “‘The Rest of the Country Just Might Crumble Around Us’: Wall Street on Trump v. Harris,” Politico, October 30, 2024, https://www.politico.com/news/magazine/2024/10/30/wall-street-trump-harris-views-00186042.

[10] “FTC’s Khan Defends Record of Cracking Down on Unlawful Mergers,” Bloomberg, November 3, 2023, https://www.bloomberg.com/news/articles/2023-11-03/ftc-s-khan-defends-record-of-cracking-down-on-unlawful-mergers?sref=SUs0PgvR.

[11] “Fate of Lina Khan’s Bid to Reshape Antitrust Comes Down to Election,” Wall Street Journal, October 13, 2024, https://www.wsj.com/us-news/law/fate-of-lina-khans-bid-to-reshape-antitrust-comes-down-to-election.

[12] “Saying the Quiet Part Out Loud,” New York Times, August 3, 2024, https://www.nytimes.com/2024/08/03/business/dealbook/saying-the-quiet-part-out-loud.html.

[13] “Trump says he would fire SEC Chair Gary Gensler on Day One. It’s not that easy,” Fortune, August 6, 2024, https://finance.yahoo.com/news/trump-says-fire-sec-chair-145122475.html.

[14] “Carl Icahn Quits as a Special Adviser to President Trump,” New York Times, August 18, 2017, https://www.nytimes.com/2017/08/18/business/dealbook/carl-icahn-trump-adviser.html.

[15] “’Proxy Access on Steroids’ — Sidley Sends Formal Comment Letter on the SEC’s Universal Proxy,” Sidley, June 8, 2021, https://www.sidley.com/en/insights/newsupdates/2021/06/proxy-access-on-steroids-sidley-sends-formal-comment-letter.

[16] “SEC Dramatically Changes the Rules for Proxy Contests, Adopts Universal Proxy,” Sidley, November 17, 2021, https://www.sidley.com/en/insights/newsupdates/2021/11/sec-dramatically-changes-the-rules-for-proxy-contests.

[17] They would probably also urge him not to address the increasingly concerning issue of lying in proxy contests.  See “Lying in Corporate Elections,” Sidley, September 12, 2024, https://www.sidley.com/en/insights/newsupdates/2024/09/lying-in-corporate-elections.

[18] “Gensler Blesses the Proxy Duopoly,” Wall Street Journal, June 23, 2021, https://www.wsj.com/articles/gensler-blesses-the-proxy-duopoly-11624486538.

[19] “SEC Adopts Amendments to Rescind 2020 Rules Regulating Proxy Advisers,” Sidley, July 20, 2022, https://www.sidley.com/en/insights/newsupdates/2022/07/sec-adopts-amendments-to-rescind-2020-rules-regulating-proxy-advisers.

[20] In June 2024, the 5th Circuit Court of Appeals found that the SEC’s explanation for its 2022 rollback of the rules violated federal law and remanded the matter to the SEC. However, in September 2024, in clear opposition to the decision of the 5th Circuit, the 6th Circuit ruled in favor of the SEC on the 2022 amendments in a 2–1 decision. See “SEC Proxy Firm Rule Repeal Survives Sixth Circuit Challenge,” Bloomberg News, September 10, 2024, https://news.bloomberglaw.com/esg/sec-proxy-firm-rule-reversal-survives-sixth-circuit-challenge.

[21] “SEC Rule Amendments Impose Heightened Standards for Submitting and Resubmitting Shareholder Proposals,” Sidley, September 24. 2020, https://www.sidley.com/en/insights/newsupdates/2020/09/sec-rule-amendments-impose-heightened-standards.

[22] See “Advocates to SEC: Shareholder Proposals Face ‘Misguided’ Threats,” The Deal, October 31, 2024, https://pipeline.thedeal.com/article/00000192-e324-d86f-ad9a-f7f4b4040000/deal-news/activism/advocates-to-sec-shareholder-proposals-face-misguided-threats.

[23] “A New Business on Wall Street: Defending Against D.E.I. Backlash,” New York Times, October 26, 2024, https://www.nytimes.com/2024/10/26/business/dealbook/dei-backlash-advisers.html.

This post comes to us from Kai Liekefett and Derek Zaba, partners at the law firm of Sidley Austin LLP and co-chairs of its shareholder activism and corporate defense practice.