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October 18, 2016

US Election Will Shake Up Activism, Okapi CEO Says

US Election Will Shake Up Activism, Okapi CEO Says

By Chelsea Naso

Law360, New York (October 17, 2016, 10:52 AM EDT) — Donald Trump and Hillary Clinton differ vastly on how to regulate corporate America, but regardless of who is elected on Nov. 8, the changes that follow could have a significant impact on shareholder activism, Okapi Partners co-founder Bruce Goldfarb told Law360.

By now, both candidates have weighed in with their plans to change the tax code, views on the investment community and opinions on regulating competition, all factors that Goldfarb says stand to affect the hedge funds known for launching activist campaigns and the public companies they target.

“Depending on who wins the election and the tax or regulatory changes that result, there could be a significant impact on how activist hedge funds perform, how they are structured and possibly how their campaigns turn out,” said Goldfarb, who also serves as president and CEO of the proxy solicitation and specialty advisory firm.

For activist hedge funds, the biggest challenge brought on by a new administration will likely stem from both candidates’ planned changes to the U.S. tax code, which would deal with the corporate tax rate, taxes on investments and taxes on carried interest in very different ways.

Trump’s proposals borrow largely from the House Republicans’ blueprint for tax reform, which purports to simplify the tax code and encourage investment by eliminating deductions and estate taxes, and cutting individual and business tax rates. The GOP candidate has also called for taxing income that flows to individual owners of pass-through entities at his proposed 15 percent corporate rate, rather than at the individual rate at which it’s currently taxed. His 15 percent corporate rate will “unleash new job creation,” prevent corporate inversions and “cause trillions in new dollars and wealth to come pouring into our country,” he has said.

Clinton, on the other hand, has focused more on high-net-worth individuals and less so on a new tax framework for businesses. She has not advanced proposals for a new corporate tax rate despite bipartisan criticism that the current 35 percent rate on worldwide income earned by U.S. businesses is too high and hinders the ability of companies to compete globally.

And both Trump and Clinton have said that carried interest, or the income that flows to the general partner of a private investment fund, should be taxed like ordinary income instead of at the lower capital gains rate of 20 percent.

The main difference between their approach to carried interest, however, is that the top income tax rate proposed by Trump is 33 percent — down from the current 39.6 percent — while Clinton’s is much higher, at 43.6 percent for those earning more than $5 million. And under Trump’s plan, hedge fund and private equity managers could also end up paying the lower business tax rate of 15 percent.

The changes — if they are in fact made — could bring a challenge to hedge funds, as well as impact the types of activist campaigns they pursue, Goldfarb says.

“It could impact inflows and outflows to the funds, which could determine the companies in which they invest and the size of their investments,” he said. “How carried interest affects it could also depend on whether or not the tax rates change for income. It’s hard to say.”

Aside from changes to the tax code, the candidates’ approach to competition regulation is a factor that could impact companies’ business decisions, such as whether or not to pursue an M&A transaction even when urged to by an activist.

Clinton, for example, earlier this month called for aggressive enforcement of merger review and antitrust laws, saying if she becomes president, she would work to promote competition and take on abuses of market power by acting at every level of government.

In a fact sheet outlining what she called her vision for a prosperous economy, Clinton said she would appoint strong leadership at the government’s antitrust agencies, ensure those agencies conduct post-merger reviews and expand on President Barack Obama’s recent administrative order to increase governmentwide action on competition.

Republicans, however, have not been vocal on the issue. Trump said in March that Amazon.com Inc. has a “huge antitrust problem” and pilloried Amazon CEO Jeff Bezos for allegedly using The Washington Post, which he owns, as a cudgel, but he has not made any major pronouncements on what his competition policy would be.

“Anything that really limits transactional situations is going to obviously affect the M&A market and affect activists who may have seen a natural value creation in combinations or divestitures,” Goldfarb said. “If the obvious buyers are people who might end up with an antitrust probe and can’t get the deal done, you’ve limited the effectiveness of an activist strategy.”

Even the lead-up to the election may alter the types of campaigns activists pursue, Goldfarb says.

“The uncertainty of the elections impact market volatility, which in turn impacts how companies perform. You can see this when companies release earnings results and mention the election as having an impact on their performance. Anything that has the potential to be disruptive to a company and its results or outlook impacts how shareholder activists act in any given situation or if they act at all,” he said.

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