In recent years shareholder activism has increased significantly. There have already been more activist campaigns announced against S&P 500 companies in 2014 than in any other year. 2014’s year-to-date total of 29 campaigns is over three times the activity against S&P 500 firms in 2006.
When faced with an activist shareholder, a company must assemble a team as soon as possible, to include lawyers, proxy solicitation firms, auditors, PR advisors, valuators, bankers, etc. Once the team is assembled the company must then formulate a response based on available information: what is the company’s shareholder base, what are the chances of success if the company opposes the activist, what does the activist want, likelihood of settlement with activist, who is the activist, who controls it, primary investors, its activist history, etc. Is negotiating with the activist group the best way to proceed or is it better to deny and defend? It is often sensible to avoid a fight and settle if at all possible as fights can be very time consuming and costly. That being said, the board of the company can oppose actions if they bona fide believe it to be in the best interests of the company.
The company cannot delay in responding to the activist and if the activist was public in its attack of the company then the company will need to respond publicly. Any delay could lend a degree of credibility to the activist and undermine the company’s eventual response.
If the company has determined to oppose the activist shareholder the company should have its legal advisors consider any possible legal arguments and challenges against the activist. In assessing this avenue of action the company will need to determine whether the activist has complied with all relevant governing legislation and disclosure requirements. The company can also consider other defensive strategies including transactional defenses including sale of corporate assets, the placement of securities into friendly hands, use of stock loans, options, derivatives and litigation.
In creating a company that is less susceptible to shareholder activism, the company could also adopt:
(a) advance notice provisions to the extent it has not already done so. These are provisions in the articles of a company that require advance notice to the company of any intention to propose nominees as directors.
(b) adopt a poison pill if permitted under the securities regulatory regime governing the company.
(c) multi-class capital structures if permitted under the securities regulatory regime governing the company. Usually this will need to have been put in place in advance of an IPO as implementing one after the company is already public could be difficult, if not impossible as certain exchanges prohibit the implementation on a post IPO basis. A variation of this is the issuance of a series of blank cheque preferred stock with special voting, conversion or control rights to “management friendly” holders. When issuing such stock, the board must be careful that it has consistently and properly exercised its fiduciary duties.
(d) a staggered board if permitted under the securities regulatory regime governing the company.
(e) enhanced quorum requirements for certain actions such as the removal of directors.
(f) change of control provisions in agreements the company has with its board, key management and debtholders.
If you have questions about how to prepare for, avoid or deal with shareholder activism, contact any member of Clark Wilson’s Corporate Finance & Securities Group.
