Disrupting the Disrupters: Shareholder Activism @ Tech Companies – Part II
In Part I, we described the current shareholder activism environment and the significant and consistent focus of shareholder activists on tech companies of all sizes. We also described how your company’s structural defenses, including your organizational documents and shelf “poison pill,” can be optimized to address an activist situation. In Part II, we now describe three advance preparation steps that we believe are essential for tech companies in the current activist environment:
#3: Stock Surveillance
Even if a company has a fully operational poison pill on the shelf, its effectiveness as a defense measure is severely impaired without proper stock surveillance.
Most activists quietly amass a significant stake under the radar, called a “beachhead.” Most regulatory reporting regimes contain enough loopholes to enable a dawn raid of an activist. Most notably, in the U.S., an activist has ten days after crossing the 5% threshold before filing of a Schedule 13D with the SEC. Shrewd activists use this ten-day window to buy as many shares as possible. For example, recently a company woke up to an initial Schedule 13D filing with a new 25% activist shareholder—and the company had never even heard of the activist before the filing was made.
In an era of shareholder activism, it is therefore important to watch the trading in a company’s stock. Most do not use a stock watch firm or they use a service that is not paying close enough attention. In fact, most stock watch firms only monitor basic trading metrics which will do very little to help a company identify an activist lying in wait. Stock watch is more art than science. Only a handful of stock surveillance firms have their ear to the ground, read the tea leaves when reviewing a company’s DTC transfer sheets and can give a company a heads-up in a case of rapid and furtive stock accumulation by an activist.
#4: Prepare for Meetings with Activists
“I don’t need anyone to babysit me. If I can’t handle a one-one-one with a shareholder, I have no business being the CEO of this company,” the CEO of a billion dollar market cap company told us when explaining why he did not need to hire activism advisors. Six months later, he was “retired.”
Many executives are eager to meet activists face to face—and they underestimate their adversary. The first meeting with an activist often comes as a shock: many activists are testing executives by intentionally pushing their buttons. And most activists are quite adept at this since they do this all the time (some are even trained by former CIA or FBI interrogators). Most executives are successful entrepreneurs or businessmen who are used to people admiring and courting them. They are not used to open criticism, let alone an aggressive confrontation. The result is often disastrous. Some executives become first defensive, then aggressive and then say things they later regret—which is exactly what the activist was looking for. The activist will use these sound bites against the company in the “court of public opinion” during a live campaign.
So how do you prevent this from happening? Preparation, preparation, preparation. We firmly believe that the proper groundwork for a meeting with an activist is like deposition prep in litigation. It is critical to take clients through a simulated meeting with an aggressive activist and equip them with responses to the most likely tough questions and statements.
The problem is that in at least half of the situations we become involved in, the company has already been talking to the activist for weeks or even months—without prior preparation. Investor relations officers often times do not even recognize investors as activists. Of course everyone knows Carl Icahn, Pershing Square and Starboard, but there are over 200 other activists operating in the U.S. alone and many investor relations officer do not know them. We have seen companies set up meetings even with the likes of ValueAct, Elliott and Raging Capital without knowing they are well-known activists. Uninformed investor relations officers also allow activist investors to ask questions on earnings calls, facilitating a public take-down of management in front of all the company’s major investors and analysts. The same happens at industry conferences: often the conference organizers are arranging for one-on-one meetings between activists and unwary companies—often with unfortunate consequences.
The take-away is that your company’s investor relations officer should run every inbound inquiry from new investors by activism specialists in order to identify activists in a timely manner and schedule a prep session before speaking with an activist by phone or in person.
#5: Develop “Break the Glass” Response Plan
Activist attacks rarely come out of the blue, but either way it is important to have a “break the glass in an emergency” response plan.
Every company should retain a response team that includes an investment banker, special proxy fight counsel, regular outside counsel, PR firm and proxy solicitor—and designated personnel at the company. This response team should prepare a detailed response plan and standby press release for the most likely contingencies (e.g., plain or aggressive Schedule 13D filing, nasty public letter, or an unsolicited takeover bid).
The team should get together on a call once a quarter to update the company on any threats or trends and to review the company’s shelf poison pill, bylaws and corporate governance practices to make sure they are state-of-the-art from proxy fight perspective. Moreover, companies should take their board of directors through a “shareholder activism boot camp,” including a mock proxy contest.
In our experience, companies with a response plan in place are, in fact, less likely to ever have to “break the glass”—these companies are one step ahead of the activists, making an attack much less likely.
We hear from many tech companies that they are reluctant to invest time and effort into shareholder activism preparation. This never ceases to amaze us. In an era of shareholder activism, chances of an activist attack on your company are high, and increasing. If your company was not the target of an activism campaign in 2016 or the first half of 2017, chances are higher you will confront one in the next year or so. It borders on malpractice not to prepare for this contingency. After all, everyone is buying homeowner’s insurance even though likelihood of a fire is low. So why would you not insure your company against shareholder activism when the odds of being confronted by an aggressive activist are so much higher?
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.