Failed Anti-Activist Legislation: The Curious Case of the Brokaw Act

Abstract

The Brokaw Act was proposed legislation aimed at "financial abuses being carried out by activist hedge funds who promote short-term gains at the expense of long-term growth[.]" Sponsoring Senators named the for a small town in Wisconsin that, according to the Act's sponsors, was decimated by the actions of a hedge fund activist in shutting down the local paper mill with a loss of hundreds of jobs. The Brokaw Act represented the first attempt at federal legislation aimed at restricting hedge fund activism. Since then, new and similar bipartisan proposals have appeared as have threats of state regulation. In this Article, we show that the occurrences in Brokaw, Wisconsin are far different from the representations the sponsoring Senators made. Hedge fund activists played essentially no role in the closure of the Brokaw mill. To the contrary, the paper company's incumbent management closed the mill - just the latest in a series of management's mill closures - amid an industry-wide decline that made the mill uneconomic to keep open. We then consider two claims of hedge fund activism's opponents that appear to motivate the Brokaw Act. The first claim - that hedge fund activists typically use the ten-day disclosure period of Rule 13d-1 to accumulate positions significantly in excess of 5% - has been the subject of empirical study and is incorrect. The second claim - that hedge fund activists often form a "wolf pack" in the pre-disclosure period to act collectively against a target - is also without support from empirical evidence. Neither claim warrants legislative action. Finally, we consider two additional parts of the Brokaw Act. The first would expand the concept of beneficial ownership to include certain derivatives linked to the value of equity securities, while the second would require increased disclosure of short positions in the stock of public companies. Neither activity plays an important role in hedge fund activism, and both require additional study before the passage of any legislation.

Keywords: hedge fund activism, corporate law, shareholder activism, shareholder activist, hedge fund activist

JEL Classification: G18, G28, G32, G38, K22