What Is an Activist Investor?

An activist investor, typically a specialized hedge fund, buys a significant minority stake in a publicly traded company in order to change how it is run.

The activist investor’s goals may be as modest as advising company management or as ambitious as forcing the sale of the company, divestitures or restructuring, or replacing the board of directors.

Unlike private equity firms that buy and restructure companies in order to profit when they are resold, activist investors seldom acquire full or majority stakes. Instead, they use public communications and private discussions to win over other shareholders and company insiders. When such efforts fail, an activist investor may pursue a proxy contest to elect new directors in order to force the company to meet their demands.

Understanding Activist Investors

Activist investors are sometimes called shareholder activists, a term also used to describe those lobbying companies to improve working conditions for the overseas employees of their contractors, or backers of a dissident board slate elected to fight climate change.

However, many activist investor campaigns seek only to maximize shareholder value, and most of those are the work of hedge funds specializing in the unique mix of public pressure, behind-the-scenes lobbying, and business expertise required.

Unlike the public pension funds and mutual funds that also engage in activism at times, activist hedge funds may hold highly concentrated stakes and supplement them with additional leverage from derivatives like stock options to offset the considerable cost of such campaigns. In contrast with institutional investors that sometimes turn to activism after owning a disappointing investment for years, activist hedge funds typically buy a stake in an underperforming company shortly before calling for change, and hope to profit from the resulting turnaround and price appreciation.

In contrast to institutional investors, activist hedge funds are also more willing to use confrontational tactics, from poison-pen letters to management and unflattering public reports to proxy fights seeking to oust incumbent directors.

How Activist Investors Make Their Case

Investor activists often announce their campaigns by filing a Schedule 13D form with the U.S. Securities and Exchange Commission (SEC), which must be filed within 10 calendar days of acquiring 5% or more of a company’s voting class shares.

Qualified institutional investors and passive investors, meaning those not trying to acquire or influence control of the company, may instead file a simplified Schedule 13G with less stringent disclosure requirements and thresholds. Schedule 13D filers must disclose, among other facts, their reasons for acquiring the stake and any plans they may have for the company in terms of mergers and acquisitions, asset disposals, capitalization or dividends, or other policies.

The initial 13D filing gives the activist investor a golden opportunity to publicize their case for change at the targeted company. At the same time, the filing curtails the activist’s ability to alter their stake in, and plans for, the company out of the public eye. Any changes to the facts disclosed on a Schedule 13D must be reported in an amended filing “promptly,” under current SEC rules.

Activist investors may use amended Schedule 13D filings to comment on a company’s response to their proposals. For example, when Netflix, Inc. (NFLX) adopted a poison pill after funds affiliated with Carl Icahn reported a stake of nearly 10% in the video streaming company, the funds filed an amended disclosure calling the poison pill “an example of poor corporate governance.” Activist investors may also write sharply worded letters to incumbent managers, issue press releases arguing their case to other shareholders, or privately lobby institutional investors to side with them.

The Future of Shareholder Activism

There has been a claim that “activism is dying,” lamented Carl Icahn in May 2022, contrasting the legendary investor’s few-holds-barred approach seen in the past. Some have feared the changes proposed to the Schedule 13D disclosure requirements in 2022 constitute a pressing threat, with Elliott Investment Management stating publicly that the proposed rules “will virtually shut down activism.”

In February 2022 the SEC had proposed shortening the initial Schedule 13 filing deadline from 10 calendar days to 5, with amendments due within a day of a material change rather than “promptly” as currently. The proposal, if passed, would effectively force 13D filers to specify holdings of derivatives (such as options) that confer an economic interest in the company without the shareholder rights associated with an outright stock position. Perhaps more controversially, the proposed rules would no longer require investors to agree to act in concert and be designated a single group by the SEC for Schedule 13D reporting purposes. Rules have also been proposed to make it harder for activist shareholders to squash a company’s environmental or other pro-ESG initiatives.

SEC Chair Gary Gensler argued the stepped up requirements proposed would address “an information asymmetry” between activist investors and other shareholders. Critics countered the proposed rules would make activism unprofitable by making it more difficult and costly for activist investors to accumulate significant stakes, while inhibiting communication among shareholders.

Despite these proposed rule changes, shareholder activism does not seem to be slowing down (at least, not yet). For example, activist investor Nelson Peltz reportedly made a profit of more than $150 million by acquiring shares of Disney (DIS) in November 2022, in a move that prompted a proxy fight against the returning CEO, Bob Iger; however, this brief fight was called off after Iger announced a restructuring plan that is expected to save the media giant $5.5 billion in costs and cut 7,000 employees. Peltz has expressed satisfaction with the company’s direction and decision to make changes, praising Iger and his management team. In early 2023, ValueAct Capital Management, a San Francisco-based activist hedge fund, took a stake in streaming media company Spotify Technology SA (SPOT), with the goal of cutting costs and streamlining management. ValueAct has also disclosed a major position and board seat in SalesForce (CRM), which now has no less than five large activist investor shareholders on board with long positions, resulting in early 2023 cost cutting measures that include layoffs of 10% of the company’s employees. In all three of the these examples, markets have reacted positively to the inclusion of activist shareholders, seeing their share prices afterwards outperform.

What Are Appellate Courts?

Appellate courts, also known as the court of appeals, are the part of the American judicial system that is responsible for hearing and reviewing appeals from legal cases that have already been heard in a trial-level or other lower court.

Persons or entities such as corporations that experience an unsuccessful outcome in a trial-level or other lower courts may file an appeal with an appellate court to have the decision reviewed. If the appeal has merit, the lower ruling may be reversed. Appellate courts are present at both the state and federal levels and do not include a jury. 

How Appellate Courts Work

Appellate courts review the decisions of lower courts to determine if the court applied the law correctly. They exist as part of the judicial system to provide those who have judgments made against them an opportunity to have their case reviewed.

A publicly traded company with an unfavorable judgment against it will likely experience a drop in share price, but an appeal could overturn this previous ruling. If an appeal is successful, the stock price usually jumps.

Courts at the appellate level review the findings and evidence from the lower court and determine if there is sufficient evidence to support the determination made by the lower court. In addition, the appellate court will determine if the trial or lower court correctly applied the law.

The highest form of an appellate court in the U.S. is the U.S. Supreme Court, which hears only appeals of major importance and consequence.

Appellate Courts vs. Supreme Courts

Supreme courts typically have more authority and breadth than appellate courts. The U.S. Supreme Court is the highest legal authority there is in America and many states have their own supreme courts, or court of last resort.

Supreme courts review decisions made by appeals courts. Overall, there are 13 appellate courts on the federal level⁠—12 district appellate courts and an appeals court for the Federal Circuit. 

Many states have intermediate appellate courts, which serve as appeals courts meant to cut down on the workload for the state Supreme Court.

Example of an Appellate Court Ruling

Shares of ride-sharing companies Uber Technologies Inc. and Lyft Inc. rose in the summer of 2020 after an appellate court granted a delay in the implementation of a new California law that requires many so-called “gig workers,” including drivers for ride-share companies, to be reclassified as employees.

In this instance, the appellate court decided that a previous ruling from a lower California court, affirming the constitutionality or legality of the state employment law, would be put on hold until it could evaluate the appeal and rule on its merits.

Not long after, investor hopes that Uber and Lyft could potentially get away with offering drivers no access to benefit plans or workers’ compensation coverage were dashed. In October of 2020, the California First District Court of Appeals ruled that the law was, in fact, legal and enforceable, meaning Uber and Lyft must treat their California drivers as employees, rather than independent contractors, and provide them with the benefits and wages they are entitled to under state labor law.

In February of 2021, the U.S. Supreme Court refused to hear Uber and Lyft’s appeal, affirming the lower court’s decision. The U.K. Supreme Court has also done the same.