What's left for DuPont, Trian to fight over?

The nasty rhetoric between DuPont and Trian Fund Management has been ramped up in the days leading up to next week's proxy vote.

But whether or not Nelson Peltz's effort to get four members onto the DuPont board are successful, a couple interesting developments have taken place.

One, the two sides are not nearly as far apart as they were when this proxy war began.

And two, no matter who gains a seat on DuPont's board, it appears the company will emerge more efficient.

Peltz and Trian had originally argued for splitting DuPont into two companies (in addition to the already-announced spinoff of the Chemours chemical unit) and divesting non-core assets such as the DuPont Theater, DuPont Country Club and Hotel du Pont.

At every turn, DuPont has strongly opposed Peltz's proposals for the company.

However, Peltz has started to back away from his plan to separate DuPont, saying those decisions need to be weighed carefully.

And since the proxy war began the company has sold the theater and is taking bids for the country club and hotel, according to sources familiar with the process.

Lawrence A. Hamermesh, a professor of corporate governance at Widener University School of Law, said DuPont has already enacted several of Trian's ideas, but noted that many of these propositions were already in motion.

"In a sense, Trian has already won," Hamermesh said. "The things Trian has proposed are already happening at DuPont. But you can't say these moves happened because of Peltz."

As both sides prepare for DuPont's annual shareholder meeting on May 13, the goals of the chemical giant and hedge fund seem more aligned than apart.

"The difference between what DuPont is willing to accept and Trian is asking for seems to be nuanced," said Matt Arnold, an analyst with Edward Jones Investments in St. Louis. "Trian is pushing for change, but change has been consistent for a lot of years at DuPont."

What's left to fight about

Despite the increasingly similar platforms, both sides continue to spend millions of dollars to sway DuPont shareholders.

Arnold said DuPont is largely battling to prevent Peltz from joining its board. Peltz said in an April interview with the News Journal that if DuPont doesn't want him on the board, he would be willing to step aside and offer his seat to Trian Chief Investment Officer Ed Garden. But Arnold claimed the two men are too much alike for DuPont's liking.

"It's a minimal difference between Peltz and Garden," he said. "They are both Trian principals and there is no meaningful difference on how they see a path forward for DuPont."

Former GE Asset Management CEO John Myers, another Trian nominee, is more acceptable to DuPont as a compromise candidate because he is not a Trian principal, Arnold said. DuPont said earlier this year it was open to Myers joining its board.

Lynn Stout, a corporate law professor at Cornell Law School, said she understood why DuPont would battle to keep Peltz or Garden off its board.

"Once you let the activist name a person to your board, they will be relentless in pushing for coughing up cash and selling the company," she said. "The activist playbook is very clear."

For Trian, the fight must continue because it doesn't want to create a precedent for its next activist campaign, said Damien J. Park, managing partner of Hedge Fund Solutions, a consulting firm focused on activist shareholders. He said Trian must show a commitment to prevent future targets from thinking they can simply put up a healthy fight to get them to concede.

"Trian is committed and will follow this to the end," Park said. "They are activist investors and have the courage of their convictions."

Beyond those two issues, analysts have struggled to find major differences between the parties' platforms at this point.

"Some may ask why DuPont is spending this money to resist if they are already doing what Trian wants them to do," Hamermesh said. "But others may wonder why Trian is spending so much to get someone on the board for the same reason."

Both sides getting closer

Trian, a New York hedge fund, acquired roughly a $1 billion stake in DuPont in 2013. The hedge continued to amass DuPont shares and now owns $1.8 billion, or 2.7 percent of the company.

In September 2014, Peltz authored a white paper calling for splitting DuPont's seven business units into two autonomous companies. Agriculture, nutrition and health, and industrial biosciences would be divided into one company. The remaining units, comprised of DuPont's cyclical, high-cash generating businesses, performance materials, safety and protection, and electronics and communications would become another single company.

Under the Peltz plan, what was once DuPont would become three independent units. The 213-year-old company decided to spin off its performance chemicals unit, Chemours. DuPont said the Chemours spinoff is expected to be completed later this summer.

DuPont has consistently opposed Peltz's idea to separate DuPont, calling the plan value destructive.

But Peltz has backed off from such rhetoric in recent months, saying he is open to keeping the company together if it is in shareholder's best interests.

"Trian is not dogmatic as to the best path forward regarding corporate structure," Peltz wrote last week in a letter to DuPont shareholders.

Peltz has also urged DuPont to shed between $2 billion and $4 billion of what he characterized as excess corporate costs. He claimed the country club, hotel and theater account for a portion of those expenses.

But DuPont has already cut more than $2 billion and expects to slash an additional $1.3 billion by the end of 2017, DuPont CEO Ellen Kullman said in a recent shareholder letter. The company's cost-cutting plan was announced before Peltz released his white paper.

As for DuPont's hospitality assets, it sold the 130-year-old DuPont Theatre to the Grand Opera House in January. It is also listening to offers for the hotel and country club according to sources familiar with the process.

DuPont has also blunted Peltz's criticism of its board by appointing former Tyco CEO Edward Breen and former LyondellBasell Industries CEO James Gallogly as interim directors in February. Both Breen and Gallogly are among DuPont's 12 board nominees.

Peltz said at an April investor presentation that he tried to recruit Gallogly to be a Trian nominee, but Gallogly balked when Peltz refused to consider him as a replacement for Kullman. Gallogly has denied the claim.

In a Securities & Exchange Commission filing, Peltz conceded the two directors will bring "fresh, independent [and] highly relevant perspectives."

Peltz, one of Trian's four nominees, has also stopped demanding a seat for himself on DuPont's board. In addition to Peltz and Myers, Trian has nominated Arthur Winkleblack, a former executive vice president and chief financial officer of H.J. Heinz Co. and Robert Zatta, a former CEO of Rockwood Holding.

In February, Peltz met with Kullman and Lead Independent Director Alexander "Sandy" Cutler to discuss a potential compromise. Under the agreement, DuPont would support Myers for its board if Trian agreed to back the company's investor slate. DuPont officials said Peltz walked away from the agreement because the company would not select him as the potential board member.

However, Peltz has again moved away from this demand saying he would give up his seat to Garden.

"The great question is 'What is left to fight about?' " Hamermesh said. "Ideally, in an activist campaign you are able to identify where those visions diverge. It's just not clear anymore what the divisions are anymore between Trian and DuPont."

Settlement possibility

Although Trian and DuPont are closer than ever, it remains unclear if a settlement can be reached by Wednesday's shareholder meeting.

Settlements in activist investor campaigns are fairly common. On average, only 12 percent of proxy battles between 2009 and 2013 have gone to a shareholder vote, according to a 2015 JPMorgan report. When an activist campaign does end in a vote, the activists won board representation more than 45 percent of the time, the report said.

Edward Jones' Arnold said if a settlement does occur, it would be fueled by one side realizing it does not have the votes to win the proxy battle.

"The catalyst for a settlement will be where DuPont and Trian's best guess on where the votes sit," he said. "If one or both side feels a need for damage control, then they will settle."

The three major proxy advisory services have endorsed at least one Trian nominee for DuPont's board with Egan-Jones Co. endorsing all four candidates. Park said the advisory service recommendations are not devastating to DuPont, but will have some impact on shareholder votes. Academic studies have found an adviser's recommendation could sway vote totals as much as 30 percent.

"The advisers wield a lot of power," he said. "But a company's strategist often anticipates which shareholders will vote in line with the advisers and recommends on how to unwind those votes."

DuPont has scored some victories of its own. Two large pension funds, the California Public Employees Retirement System and the Canadian Pension Plan Investment Board, which own a combined 7 million shares of the company, both said they voted for all 12 DuPont nominees. In addition, Proxy Mosiac, a proxy advisor focused on corporate governance issues, endorsed all of DuPont's nominees.

Settlements in activist campaigns have occurred on the day and sometimes, the hour before a shareholder meeting. Stout said she's seen annual meetings delayed while the two sides hammer out an agreement.

Widener's Hamermesh countered that settlements are more unlikely as a shareholder vote looms because the sides have a clearer picture of the election's outcome.

"The closer you get to a meeting the less incentive there is to settle because both sides know what the vote is going to be," he said. "With more clarity it is harder to settle. Every day that passes reduces the likelihood of a settlement, but that does not mean it is impossible."

Contact Jeff Mordock at (302) 324-2786, on Twitter @JeffMordockTNJ or jmordock@delawareonline.com.