Activist defense attorneys are blasting investors for scooping up shares during the coronavirus crisis, setting off a war of words involving top law firms and Wall Street titans like Carl Icahn

Dealbook Conference

• Over the past month, as the coronavirus spread throughout the globe, some activist investors increased their stakes in public companies on the cheap.
• The activity prompted law firms, including influential activism defense firm Wachtell Lipton, to issue memos, calling out what they perceived to be "aggressive" behavior.
• Now, a longstanding debate surfaces yet again about the role of the activist, a name that at least some in the profession wish to change, given its connotation of pushing for change at a company for profit.
• Business Insider documented the spat between these investors and attorneys who are paid to defend their targets. Reach out to us with any tips or comments about the latest activism activity.
• Click here for more BI Prime stories.

On the last day of March, two partners at the law firm of Wachtell Lipton polished off a memo to their clients, lawyers, and Wall Street at large, and touched a nerve in the tight-knit community of activist investors and their advisors.

The memo, titled "Activists Will Show Their True Colors in COVID-19 Pandemic," struck at the heart of a long-running tension between investors who mount stakes in public companies, sometimes to overhaul management, and the people who defend the boards of directors of the businesses they target.

This time around, the defense side was zeroing in on whether activist investors were taking advantage of the depressed market by aggressively pushing forward campaigns while businesses were at their most vulnerable, during the spread of the novel coronavirus.

The disease, which scaled up in late February, now has killed more than 80,000 people worldwide and wrought chaos at shuttered hotels, airlines, and amusement parks, some of which have had to seek emergency loans to keep themselves afloat as government officials order U.S. citizens to stay indoors.

While that's meant consumers have kept money in their wallets the past month, the same cannot be said for activist investors.

"A number of activist investors continue to over-reach in their private (and public) demands of companies and are seizing the opportunity from reduced valuations to increase their positions in existing targets and build new positions," wrote Wachtell partners David Katz and Sabastian Niles.

Disclosures to the US Securities and Exchange Commission of building more than 5 percent stake in companies - otherwise known as 13D filings - accumulated in March as stock markets plunged, and many activists are fundraising to have additional firepower, they wrote.

Meanwhile, some activists are continuing to make "aggressive buyback demands" and "ill-advised attempts to remove key board members and board leaders with the experience and judgment to help the company navigate the current crisis," the firm wrote.

Comments like those, of course, may make companies want to hire Wachtell as a top activism defense firm, making it far from an unbiased observer.

The firm, founded in 1965, has made its name - and hefty fees - for defending companies against hostile takeovers and has cultivated a warchest of legal and strategic maneuvers that boards of directors can use to protect themselves from being unseated in activist campaigns.

The comments show how the defense side is gearing up and leaning on painting some activists as opportunists amid a crisis. So far, it appears that companies are listening.

A review of 13D filings and sources familiar with them turned up multiple instances of activists mounting stakes in public companies - so much that they have triggered management to enact poison pills, a defense strategy designed to protect against a hostile takeover.

These companies include natural gas pipeline operator Williams Companies, budget airline Spirit, oil and gas exploration and production company Occidental Petroleum, and Chefs' Warehouse, which sells upscale food to restaurants.

Although Wachtell gave some activist investors credit, saying that they gave management "breathing space" during the emergency, that was not the main takeaway for activists and their advisers who read the memo and spoke with Business Insider in the subsequent days.

Some of them grumbled privately about how the law firm was trying to market their services to prospective clients and that the depressed market didn't mean activists should be laying down their weapons - to the contrary, it meant companies needed good management more than ever and activists should be fighting for it.

Others were not so private with their response.

"It's reprehensible, yet unsurprising, that Wachtell is twisting this crisis and unprecedentedly difficult economic environment into an opportunity to bash activist investors," said Andrew Freedman, an attorney who has represented activists in some of their biggest campaigns, including Starboard Value's stake in Papa John's and AECOM, as well as Elliott Management's stake in eBay.

No 'get out of jail free' card

Freedman said activists understand as well as anyone what public companies are facing in this pandemic and are, by and large, acting thoughtfully and considerately in their board engagements.

"Wachtell would like people to believe that this coronavirus crisis should be a 'get out of jail free' card for boards and management teams that were performing terribly well before this pandemic came along," he said.

He also said that there have been a bevy of settlement pacts reached over the past month, showing that activists are willing to work through issues behind the scenes.

"The situations that have not settled are more reflective of boards behaving badly by refusing to embrace the changes that are required and where they are being advised that activists should just walk away," he said. "Why should investors trust a board and management team that failed to perform on a 'clear day' to manage through this crisis where the stakes are even higher?"

Business Insider reached out to Katz and Niles, who did not offer a response to Freedman's comments. We'll update this article if they do.

'Like any investor'

The activists, for their part, are not apologizing for buying what they deem as a valuable security at a low price.

"We're price sensitive like any investor," said Ted White, managing director of Legion Partners, the firm that increased its holdings in Chefs' Warehouse. Legion had previously been invested with the company and still likes the long-term growth potential, White said.

The drop in global markets made the stock "ridiculously cheap," White explained, as Chefs' Warehouse's stock fell from nearly $40 a share at the start of the year, to a low of under $4 on March 18. The stock has since risen to more than $8 a share.

"As bad as all this is, it has reduced valuations in the marketplace."

Others feel the same way - that opportunity is opportunity and investors are simply doing what they do best: creating value for shareholders and making money of their own along the way.

At tea-and-coffee distributor Farmer Brothers, the same day hedge fund Trigran Investments filed its increased stake, March 30, the company announced it had "eliminated" positions across the business and furloughed half of its employees.

"The Company is working to evaluate any relief available through the CARES Act, including through industry associations, as well as any other efforts to support the food industry as a pillar of critical infrastructure," the firm said in a release.

There's no indication that Trigran pressed for the layoffs or furloughs. Trigran bought in after a sharp selloff - the company's stock price began the year trading at more than $14 a share, but has since fallen to roughly $7 a share.

Trigran and Farmer Brothers did not respond to requests for comment.

Lawyer takes aim at Icahn

Wachtell isn't alone in its rhetoric and, while its own memo did not name names, another firm called out billionaire Carl Icahn.

"While there are a few socially responsible activists, there are many activists who don't see a humanitarian disaster of epic proportions, they see an opportunity to generate profits," Kai Liekefett, a Sidley Austin lawyer who defended AT&T in Elliott Management's activism campaign last year.

Liekefett pointed Business Insider to a memo from Sidley Austin that highlighted Icahn's CVR Energy acquiring almost 15 percent of Delek US Holdings in mid-March, which quadrupled his stake.

The Sidley memo said that "most activists" are abandoning their campaigns for the 2020 season, as many funds "are struggling to survive after suffering millions or billions of losses," but that some, like Icahn, were not.

The memo recommended that boards of public companies should, at a minimum, make sure they have an "up-to-date poison pill on the shelf and consider whether to adopt one."

"These activists exploit the low stock prices and high trading volumes in order to covertly and rapidly accumulate large stakes in target companies," he said.

"They count on boards and management teams being distracted by the crisis. And they attempt to force quick settlements knowing that companies strongly prefer not to be distracted by proxy contests in these times."

When reached for comment about the memo, Icahn's general counsel Jesse Lynn noted that Sidley Austin is representing Delek.

"It's interesting that Sidley Austin has decided to become so sanctimonious about the pandemic since they are the ones profiting from the crisis by charging egregious fees, at the expense of Delek shareholders, by scaring the board and management into believing that the company should need protection from accountability to its own shareholders," Lynn told Business Insider.

Lynn also pointed out that Delek has a poison pill agreement that doesn't let Icahn take a stake higher than 15%, and the company's next annual meeting is more than a year away.

"But most importantly, CVR started buying the stock well before the pandemic, at a much higher price, and simply averaged down, thereby helping Delek shareholders by holding up the price of the stock."

No going back to 'normal'

In recent weeks, Icahn settled with Occidental Petroleum, and Elliott Management has made nice with Twitter and French conglomerate Capgemini.

Starboard Value, the activist fund led by Jeffrey Smith, settled with Box recently, but has ramped up pressure on eBay to change its board and oust the current CEO.

Wei Jiang, a professor who teaches activism at Columbia Business School, said that businesses should not expect to go "back to normal" if normal means "the protocols of the past, even after the pandemic is over."

"Certain elements of business operations will fundamentally change as people get more comfortable with business and life online, and (hopefully) change their life habits as they take a probabilistic view about recurring pandemics," she said.

"These are both challenges and opportunities to most businesses. Shareholders have the right to demand that firms adopt such a forward-looking view, beyond dealing with the crisis."

Some activists, though, say they want their businesses to focus, in the short-term, on getting through the pandemic.

According to White, the Legion managing director, his firm isn't looking to change much with Chefs' Warehouse, "where there's a lot of things we like."

"This is a time to hunker down, take care of your employees and your customers," he said.

The investor has yet to speak with management, he said.

Contact us: Please feel free to reach out to Casey Sullivan, at csullivan@businessinsider or on Signal at 1-646-376-6017, and Bradley Saacks, at bsaacks@businessinsider.com or on Signal at 1-919-816-5537, for news on corporate activism.

NOW WATCH: Why the Dow plummeted after the Federal Reserve set interest rates at 0%