Regardless of a company’s success or confidence in its strategy, management, and board, there are few situations public companies face that are more daunting than an unsolicited approach by an activist investor. And with activist activity continuing to rise—2018 saw a record number of companies targeted by activists, a record number of activist campaigns launched, a record number of board seats won, and a rising bench of first-time activists—all companies need to be prepared.
The increasingly sophisticated and complex manner in which activists target companies requires dedicated focus and a cohesive strategy by a company’s management and its board long before an activist comes knocking. And, while every situation is different, and each response to an unsolicited advance unique, experience shows that preparedness well before an opening salvo can result in a better outcome for all constituents. Advance planning, solid research, and a proactive stance are key both to a successful outcome and to preemptively identifying and addressing shareholder rumblings before a formal fight.
An organization’s management and board of directors should consider the following measures in order to most effectively prepare for the unexpected call from an investor.
Assemble an activist response team. Just as companies have emergency response teams, so should every public company establish an ‘‘activist response team,’’ composed of the most knowledgeable internal resources, including the chief financial officer, general counsel, and additional senior personnel from the finance, investor relations, and corporate communications departments, and the lead board director. External resources, including outside counsel, a proxy solicitation firm, public relations experts, and corporate investigators, should round out the team. This team will also need a communications protocol that enables members to share information and issues, such as shareholder discontent, on a regular and continuous basis.
Once the team is brought together, it should begin to plan for shareholder engagement, even if there is no imminent threat.
Create a shareholder engagement strategy. An effective engagement strategy will include a plan for both the company’s investor relations department and its management, as well as a very limited role for directors. The company should make sure it understands who makes up its investor base, so it is prepared to engage with key stakeholders. The board and management should assess themselves in an “activist light” and seek to identify and address issues that an activist investor may raise.
Develop a response plan in the event of a challenge to the management or board. This plan should include a list of topics with which management is willing to engage, and a policy on whether the company will share nonpublic information if the activist signs a confidentiality agreement. The plan should include a ‘‘no comment’’ mandate, and identify a designated spokesperson who will convey approved messaging from the company, likely the chairman or chief executive, and protocol for updating the board of directors on a periodic basis.
Stay abreast of shareholders. Senior management and the board should know who has invested in the company and communicate with them on a regular basis. Meeting with key shareholders only after an activist advance can be a recipe for failure. A keen understanding of who is invested in the company’s stock, the length of time they have been invested, and notable activities of major investors, as well as what they are discussing in public forums, will help give an early warning of possible malcontent. The response team should pay particular attention to new shareholders, especially if they seem to be taking a relatively large initial stake. Investigate their portfolios and develop information as to how they have interacted with other companies in the past. Identify past practices and whether they were ultimately ‘‘activist’’ in any of their prior holdings.
When assessing investors, it is important for the company to understand the profiles of key investors, particularly if they have a reputation for “going activist.” Understanding an activist’s “playbook” allows the company to prepare a timely and credible response, if necessary, as well as to predict the activist’s next move. This includes identifying relationships between activist shareholders or alignments in previous contests. Actively monitoring ownership changes, through both internal and external resources, helps companies avoid surprises.
Ensure that senior management and the board are prepared and engaged. Knowledge is power—the more a board knows about the issues at hand and the strengths and weaknesses of its members and of potential opponents, the more prepared it will be to respond if a proxy contest does occur. While many activist engagements do not culminate in a proxy fight, those that do often hinge on assessing the experience and aptitude of incumbent board members and management as well as of dissident nominees. Boards should regularly assess their members’ qualifications to ensure these meet the ever-changing needs of the company. In today’s world, where diversity is becoming increasingly important, entrenched, homogeneous boards are particularly ripe for attack.
Both activists and corporations often engage investigative firms to develop information on the efficacy of these individuals. Preemptively identifying strengths and weaknesses in board and management, including undisclosed relationships and conflicts of interest, can be a key component of a successful proxy fight strategy. With a corporate investigations firm in place, activist nominees can be assessed quickly and objectively, and judged against the strengths and weaknesses of a company’s existing team. By understanding the backgrounds of their own directors, boards are in a better position to assess a proposed set of nominees and make appropriate decisions should a settlement be contemplated.
Boards and senior management should be familiar with anticipated questions and answers drafted by the communications team. These will include messaging related to activists’ queries regarding environmental, social, and governance (ESG) issues, with a particular focus on the company’s response to sexual harassment allegations in light of the #MeToo movement.
Additionally, board members should be well versed in the company’s corporate governance documents, such as the board’s voting bylaws, processes for nominating candidates and filling board vacancies, and the rules for calling special board meetings. The middle of a proxy contest is no time to read the bylaws for the first time. Boards also should be prepared to broadcast governance successes, reveal succession plans, defend salary and option grants, and explain the business necessity of related-party transactions in anticipation of activist interest. Activist attacks can be based on apparent or perceived deficiencies in corporate governance practices while attempting to make the connection between those practices and poor share performance, for example.
In conclusion, a proactive defense is the best chance of success. There are few business conflicts with higher stakes than an attack on an organization’s board of directors or its management. Such advances can be expensive, distract from the day-to-day operation of the company and the long-term mission of management and the board, and often get personal. An unfavorable outcome can be devastating to the company and its shareholders. Sitting board members can see opportunities for seats on future boards dwindle if they are perceived as handling an activist situation inappropriately. Experience has shown a key element of effective activist response is creating and using a multifaceted response plan that includes having timely, accurate, and unimpeachable information at the board’s disposal. While there are no guarantees that a company will prevail, the best chances for success reside in careful planning, preparation, and execution.