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Shareholders Support Target in Blow to Ackman
By Zachery Kouwe and Joe Nocera
New York Times
Thursday, May 28, 2009

Shareholders of the retail giant Target delivered a stinging defeat to the activist investor William A. Ackman on Thursday, re-electing all of the company’s nominees to the board in one of the most closely watched proxy contests of the season.

Preliminary results from Target’s annual meeting, which is being held at an unfinished Target store in Waukesha, Wis., showed that 70 percent of the votes cast were in support of the incumbent board members.  Shareholders also voted for the company’s plan to fix the number of directors at 12.  Mr. Ackman had wanted to expand the board to 13.

Mr. Ackman, whose Pershing Square Capital Management is Target’s third-largest shareholder, nominated himself and four others to the board in March, saying the current directors lacked relevant experience in real estate, retail and credit card business.

“No matter whether we win or whether we lose, I think we’ve forever changed governance at Target in a positive way,” Mr. Ackman said on CNBC before the meeting.  During the meeting, Mr. Ackman gave a five-minute speech on the importance of shareholder democracy, invoking the Rev. Dr. Martin Luther King Jr. and President John F. Kennedy.

Target’s chairman, Gregg Steinhafel, thanked shareholders for their support.  “Today’s outcome demonstrates the confidence Target shareholders have in our board’s qualifications, diversity and experience to provide effective and independent oversight and direction to the company, contributing to the creation of one of the most recognized brands in the United States,” he said in a statement.

After the meeting, Mr. Ackman said he expected to hold onto his Target shares for the foreseeable future, but reserved the right to change his mind.

Before starting the proxy fight, Mr. Ackman pushed Target to spin off the land underneath its stores into a separate real estate investment trust and sell its entire portfolio of credit card receivables.

Last year, Target took his advice and sold about half of its credit card exposure to JPMorgan Chase, but rejected the real estate plan, saying it was too risky and would put the company a in tough financial position.  Earlier this year, Mr. Ackman approached the company with three director nominees, but they were rejected by the board’s nominating committee.

The meeting marks the end of one of the most contentious and expensive boardroom contests in modern corporate history and has added fuel to the continuing debate over how much influence big shareholders like Pershing should have over a company’s strategy.

On one side are corporate boards, who believe activist shareholders, especially of the hedge fund variety, distract management from running the business and only offer ideas meant to increase the stock price in the short term.

On the other side are activists like Mr. Ackman and corporate governance experts who argue that many corporate boards are resistant to change and do not always act in the best interests of shareholders.

The debate has been played out throughout the three-month proxy fight as Target painted Mr. Ackman as a short-term speculator with risky ideas.  Mr. Ackman said his investment was for the long term, noting he has held shares for more than two years and pledging not to sell his personal stake for five years if he was elected to the board.

“Mr. Ackman’s preferred method of enhancing shareholder value usually involves higher leverage, lower credit quality and some form of financial engineering,” Carol Levenson, a bond analyst with Gimmie Credit, wrote earlier Thursday.  “This battle couldn’t have come at a worse time, when the company is also trying to deal with a grim retailing environment and a deteriorating credit card portfolio.”

The two sides have spent at least $25 million for high-priced lawyers, bankers, public relations advisers and proxy solicitors, not to mention valuable time trying to convince shareholders of their respective positions.  Critics of Mr. Ackman argue the proxy fight has been a distraction to Target’s management, which should be focused on competing against its main rival, Wal-Mart.

But Mr. Ackman has insisted that Target’s board needs fresh blood in order for the company to realize its full potential.

– Zachery Kouwe and Joe Nocera