5 New Ways to Manage Shareholder Activists
Virtually every day brings another headline trumpeting the latest campaign by a shareholder activist against a public company.
Activists have become fixtures on the corporate landscape, agitating for change at a growing number of U.S. corporations. Over the last 15 years, the number of activist campaigns in the U.S. has more than tripled, reaching 277 in 2017, according to activist data source SharkRepellent. Likewise, 2018 is proving to be an active year for activists with 195 campaigns launched as of May 31.
Activists spent $40 billion targeting 136 companies with market values of more than $500 million in the first half of the year, compared with 94 companies targeted during the same period in 2017, the Wall Street Journal reported, citing a study by Lazard.
Not only are activists as busy as ever, their tactics are evolving. This proxy season has seen an unprecedented wave of “Withhold the Vote” or “Vote No” campaigns, where activists do not run candidates but simply urge shareholders to withhold their votes from one or more of the company’s director nominees. And while activist hedge funds are still leading the charge when it comes to activist campaigns, non-traditional activists such as institutional shareholders, private equity funds, and family offices are joining the fray at an increasing pace.
V&E’s shareholder activism practice, comprised of about 30 lawyers, is among the largest in the country. Led by practice co-heads, Lawrence Elbaum and Jeffery Floyd, as well as Stephen Gill and New York Activism Chair, Patrick Gadson, V&E’s activism team has defended scores of public companies across diverse industries, including energy, technology, manufacturing, retail/wholesale, hospitality, restaurant, pharmaceutical and real estate/REITs. The market capitalization of V&E activism defense clients runs the gamut from $100 million to in excess of $10 billion.
V&E’s shareholder activism practice has topped all the league tables for company defense since 2016, based on number of companies defended.1 The practice maintained its top ranking for activism defense in the first half of 2018 according to SharkRepellent’s rankings.
Here are five tips to keep in mind that were recently shared by the leaders of V&E’s shareholder activism practice.
Pull Together A “Dream Team”
Your best bet to avoid a public campaign, and critical to mounting successful defenses, is to assemble a team of top-notch professionals long before an activist arrives at your doorstep.
Members of the team — lawyers, investment bankers, public relations firms specializing in crisis management, proxy solicitation firms, private investigators and other boutique advisory firms — should have a strong track record of recently dealing with activists so they are fully aware of activists’ current methods and the best counter approaches.
To ensure that you’re adequately prepared, it’s important to regularly conduct fire drills. Your team must be equipped to take you through a variety of potential activist scenarios — private engagements, public engagements, or full-blown proxy fights — and test the speed and effectiveness of your preparedness.
Assess Your Weaknesses
It’s critical for companies to understand their potential vulnerabilities.
Sit down with your lawyers and other members of the defense team, and conduct a financial self-evaluation. Review your business strategy, asset mix, capital allocation strategy, board composition, and corporate governance policies. Then consider how an activist or proxy advisory service, such as ISS and Glass Lewis, might judge you. Compile a list of the five toughest questions an activist might pose, as well as your responses.
Scrutinize your bylaws and charter. Every word, comma, and period that a company has in place during peacetime might mean something quite different when that same company faces a proxy fight.
Your attorneys might be able to identify multiple adjustments that you can make that will be of little concern to investors, but could prove valuable should you find yourself dealing with an activist.
Think Twice Before Suing
Activist shareholders bring lawsuits to pursue any number of goals, such as accessing a company’s financials, dismantling a company’s structural defenses or reversing a board’s decisions.
It’s not typical, however, to see companies suing activists — for good reason. Shareholders, as well as ISS and Glass Lewis, typically frown upon companies that sue their own shareholders.
If a company dealing with an activist has a good reason to pursue litigation, it’s important to have a high level of certainty of achieving a victory and to sue as quickly as possible. If you lose in court, you’ll be burdened with the additional setback of possibly losing in the court of public opinion.
Ignore Activists at Your Own Peril
In today’s world, public companies should regularly engage with and listen attentively to their shareholders, including an activist. It’s generally prudent to meet with an activist and hear out the activist’s complaints and suggestions. In doing so, at the very least you will be building a record of constructive engagement and you might even find some common ground.
Meetings with activists also are important opportunities to gather information. Work with your law firm and other advisors to develop goals for the meeting and be prepared with appropriate responses to activists’ anticipated questions.
Failure to engage can be counter-productive. Among the first things that proxy advisory firms often ask public companies is whether they have engaged with the activist. If your answer effectively is “we ignored the activist for the first three months, and we didn’t speak to them until they issued a public letter,” you lower your potential to receive a positive recommendation from the proxy advisory firms, which can make or break your chances of success at the ballot box in a contested director election.
Don’t Assume This Won’t Happen to You
Regardless of size, or financial performance, no company is immune from an activist campaign.
Unfortunately, companies often ignore the risks of activists. Consider what’s at stake: A lengthy proxy battle that could saddle you with heavy costs and disrupt your business.
In the end, proper preparation and consultation can help you avoid settling with an activist on far less favorable terms than had you prepared in advance.
1FactSet SharkRepellent 2016, 2017 and 1H 2018; Thomson Reuters 2016 and 2017; Activist Insight 2016 and 2017.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.