Tech’s love-hate relationship with activist investors is headed toward an awkward end

An SEC rule proposal would help tech companies pursue more speculative investments — potentially to their own detriment.

SEC headquarters in Washington

The SEC proposal would require activist investors to disclose a position of over 5% equity within five days, half the current 10-day disclosure period.

Photo: Saul Loeb/AFP via Getty Images

The SEC is proposing a rule change that would make it easier for tech companies to ward off activist investors. While tech executives may welcome the proposal, some investors worry that it will allow corporate mismanagement to fester. On the flip side, the change could give tech executives greater leeway to pursue so-called “moonshot” projects that have more speculative upside and often draw criticism from hard-nosed investors.

The SEC proposal would require activist investors to disclose a position of over 5% equity within five days, half the current 10-day disclosure period. The change is intended to reduce information asymmetries that can give some investors an unfair advantage. The SEC introduced the rule in February and is now observing a 60-day comment period. Democratic SEC commissioners, who currently hold a 3-1 majority, favor the proposal.

Five fewer days might not seem like such a big deal, but for activist investors, it can be the difference between profit and loss. Activist investors typically try to establish a sizable equity position before announcing to the world — and the company itself — that they intend to steer the targeted firm in a new direction.

Once an activist investor makes a public disclosure, the targeted firm’s stock price typically jumps (assuming markets agree with the activist’s thesis). For example, Twitter’s stock jumped nearly 8% after Elliott Management revealed that it had accumulated a stake with the intent of removing then-CEO Jack Dorsey.

The timing of a price jump is important because it increases the cost of purchasing more equity. Higher costs mean lower profit, and that can make activist investing less attractive in the first place.

“This is a sad day for many American businesses, which need to replace incompetent chief executives rather than entrench them,” Carl Icahn said of the rule proposal. According to Icahn, the rule change would particularly hurt investors that rely on outside funds to fuel their campaigns.

Republican SEC commissioner Hester Peirce likewise felt the new rules could harm rather than help markets. “Information asymmetries in this sense — where investors have equal access to disclosure from the issuer and insiders, but come to different conclusions about the long term prospects of a company based on their respective due diligence — are a feature, not a bug, of our capital markets,” Peirce wrote in a dissenting statement.

Some research backs up these assertions. For instance, a prominent 2014 research paper concluded that firms targeted by activist investors become better innovators in the five years following an intervention. This improvement came despite a drop in R&D expenditures at most targeted firms during that time. The researchers considered several plausible explanations, including that the firms became more focused on their core expertise, that they had better aligned incentives and that they more efficiently allocated innovative resources (e.g., patents and innovators).

Regardless of this theoretical upside, it’s safe to say no tech CEO wants to hear that an activist investor is targeting their firm. The industry is littered with instances of contentious battles between activists and executives. In 2013, for example, Icahn took an activist stake in Apple, pressuring the company to use its cash troves to pay dividends. Icahn also pressured eBay to spin PayPal off into an independent company. And before Elliot Management attempted to show Jack Dorsey the door at Twitter, ValueAct Capital helped oust Steve Ballmer from Microsoft.

These cases raise the larger question of whether activist investing needs to be so hostile in the first place. Could investors benefit from communicating with the target company earlier in the process? Would the companies even be receptive to outside guidance that isn’t backed up by the threat of a boardroom proxy battle?

“I think the [targeted] company would also say that their ability to talk to investors and to provide more context or disclosure and not have the information be one-sided or incomplete is also — from their perspective — a benefit to their shareholders,” Elizabeth Bieber, counsel and head of shareholder engagement and activism defense at Freshfields, told Protocol.

Bieber added that the existing 10-day period “does not sound like a long period of time, but is in this world.” As Bieber sees it, the 10-day period allows the activist investor to be “working in the market and the company to be in the dark until a point significantly in the future, when it is really hard to kind of catch up and to speak to their stakeholders and to sometimes correct misinformation.”

One realm in which tech companies often struggle to communicate with investors is “moonshot” investments. Any given moonshot is unlikely to pan out on its own, but the upside of even one success can theoretically be worth the effort.

Google popularized the idea of the moonshot, and Facebook has followed in its footsteps with recent metaverse activity. Moonshots often work to imbue these gigantic tech firms with an aura of innovation, but in truth, most of their revenue growth has come from either their core businesses or from more predictable growth areas, such as cloud computing. The Big Tech moonshots that have generated a lot of buzz — internet balloons and virtual reality, for instance — have struggled to move the revenue needle.

Peter Cohan, a senior lecturer of strategy at Babson College, said if major companies were more focused on financial discipline, they wouldn’t invest resources in these moonshot projects. “A lot of these companies basically entrenched the founders after the company went public and they could basically do whatever they wanted,” said Cohan. He pointed to Google as an example, claiming the company hasn’t really diversified from its core advertising business, “which is so lucrative and growing so fast that it almost doesn’t matter.” Still, Cohan said, there’s a case to be made Google would be even more profitable without the moonshot activity.

Should the SEC ruling go into effect, it would likely matter more for the next generation of tech companies rather than the current giants. Given the trillion-dollar market caps of Big Tech, investors would have a hard time accruing a position of greater than 5% equity. Will the new rules make it easier for younger tech firms to repeat the mistakes of their predecessors? Maybe. But it’s not going to be easy convincing firms of that when their predecessors are so dominant and successful. Activist investors may still have a point, but it’s so subtle — and relies on so many what-ifs — that they will have a hard time ever saying, “Told you so.”


It's OK to cry at work

Our comfort with crying at work has changed drastically over the past couple years. But experts said the hard part is helping workers get through the underlying mental health challenges.

Tech workers and workplace mental health experts said discussing emotions at work has become less taboo over the past couple years, but we’re still a ways away from completely normalizing the conversation — and adjusting policies accordingly.

Photo: Teerasak Ainkeaw / EyeEm via Getty Images

Everyone seems to be ugly crying on the internet these days. A new Snapchat filter makes people look like they’re breaking down on television, crying at celebratory occasions or crying when it sounds like they’re laughing. But one of the ways it's been used is weirdly cathartic: the workplace.

In one video, a creator posted a video of their co-worker merely sitting at a desk, presumably giggling or smiling, but the Snapchat tool gave them a pained look on their face. The video was captioned: “When you still have two hours left of your working day.” Another video showed someone asking their co-workers if they enjoy their job. Everyone said yes, but the filter indicated otherwise.

Keep Reading Show less
Sarah Roach

Sarah Roach is a news writer at Protocol (@sarahroach_) and contributes to Source Code. She is a recent graduate of George Washington University, where she studied journalism and mass communication and criminal justice. She previously worked for two years as editor in chief of her school's independent newspaper, The GW Hatchet.

Sponsored Content

Foursquare data story: leveraging location data for site selection

We take a closer look at points of interest and foot traffic patterns to demonstrate how location data can be leveraged to inform better site selecti­on strategies.

Imagine: You’re the leader of a real estate team at a restaurant brand looking to open a new location in Manhattan. You have two options you’re evaluating: one site in SoHo, and another site in the Flatiron neighborhood. Which do you choose?

Keep Reading Show less

Arm’s new CEO is planning the IPO it sought to avoid last year

Arm CEO Rene Haas told Protocol that Arm will be fine as a standalone company, as it focuses on efficient computing and giving customers a more finished product than a basic chip core design.

Rene Haas is taking Arm on a fresh trajectory.

Photo: Arm

The new path for Arm is beginning to come into focus.

Weeks after Nvidia’s $40 bid to acquire Arm from SoftBank collapsed, the appointment of Rene Haas to replace longtime chief executive Simon Segars has set the business on a fresh trajectory. Haas appears determined to shake up the company, with plans to lay off as much as 15% of the staff ahead of plans to take the company public once again by the end of March next year.

Keep Reading Show less
Max A. Cherney

Max A. Cherney is a senior reporter at Protocol covering the semiconductor industry. He has worked for Barron's magazine as a Technology Reporter, and its sister site MarketWatch. He is based in San Francisco.


The great onshoring: Inside the transcontinental chip race

The second annual Trade and Technology Council emphasized the centrality of semiconductor onshoring to U.S.-EU military objectives.

For chip manufacturers, free-flowing subsidies for now might come at the cost of a potential overcapacity problem in the longer term.

Illustration: Christopher T. Fong/Protocol

The prospect of global conflict permeated the room at this year’s Trade and Technology Council, which concluded in France earlier this week. The second annual gathering of U.S. and EU officials yielded a joint statement that mentioned some form of “Russia” or “Ukraine” more frequently than “technology,” “regulation,” “investment,” “security” or “competition.”

The conflict in Ukraine, having already escalated into a U.S. proxy war, seemingly convinced the EU to fall in line with the American tech policy agenda.

Keep Reading Show less
Hirsh Chitkara

Hirsh Chitkara ( @HirshChitkara) is a reporter at Protocol focused on the intersection of politics, technology and society. Before joining Protocol, he helped write a daily newsletter at Insider that covered all things Big Tech. He's based in New York and can be reached at hchitkara@protocol.com.


2- and 3-wheelers dominate oil displacement by EVs

Increasingly widespread EV adoption is starting to displace the use of oil, but there's still a lot of work to do.

More electric mopeds on the road could be an oil demand game-changer.

Photo: Humphrey Muleba/Unsplash

Electric vehicles are starting to make a serious dent in oil use.

Last year, EVs displaced roughly 1.5 million barrels per day, according to a new analysis from BloombergNEF. That is more than double the share EVs displaced in 2015. The majority of the displacement is coming from an unlikely source.

Keep Reading Show less
Lisa Martine Jenkins

Lisa Martine Jenkins is a senior reporter at Protocol covering climate. Lisa previously wrote for Morning Consult, Chemical Watch and the Associated Press. Lisa is currently based in Brooklyn, and is originally from the Bay Area. Find her on Twitter ( @l_m_j_) or reach out via email (ljenkins@protocol.com).

Latest Stories