Famed corporate lawyer and inventor of the poison pill (or shareholders rights plan, as he called it) Martin Lipton is, as you would expect, not happy about activists’ rise to prominence in the last few years. So he’s offering some free advice for companies on how to prepare for a potential activist campaign, but it’s striking how much of what he suggests is what companies should really be doing anyways.
“To forestall an attack, a company should continuously review its business portfolio and strategy and its governance and executive compensation issues sensibly and in light of its particular needs and circumstances. Companies must regularly adjust strategies and defenses to meet changing market conditions, business dynamics and legal developments,” writes Lipton.
Take away the first four words, and the advice is just as good.
Most issues Lipton addresses are a board’s responsibility anyways
Activists say that they are forcing companies to take their responsibilities to shareholders more seriously, and Lipton’s checklist of defensive measures mostly reflects that assertion despite his distaste for the tactic. Performing in line with (if not outperforming) peers, staying on top of governance issues (having directors who are genuinely independent, appropriate compensation packages), communicating strategy effectively, reasonable capital return policies, and maintaining a good relationship with major shareholders.
One proactive measure that he suggests that wouldn’t be necessary if activists weren’t so successful is to form a small team of key officers, a lawyer, an investment banker, a proxy solicitor firm, and a PR firm to meet regularly and plan for a possible activist campaign. This includes keeping track of hedge funds that have been active in your industry, monitoring 13Fs and other filings as well as parallel trading (a sign of a wolf pack forming) and options activity so that you have some idea a campaign may be forming before the activist is knocking on your door.
Activists: Succeeding on one front isn’t enough
“Today, regardless of industry, no company can consider itself immune from potential activism. Indeed, no company is too large, too popular or too successful, and even companies that are respected industry leaders and have outperformed peers can come under fire,” says Lipton.
It’s pretty clear that Lipton thinks this is unreasonable, but it’s possible for a company to be successful on multiple fronts but still have questionable policies on others. When Carl Icahn started pushing for Apple Inc. (NASDAQ:AAPL) buybacks, he stayed positive the entire time (and he’s certainly not afraid to go negative), but disagreed with Apple’s decision to sit on so much cash. Icahn didn’t get what he wanted, and maybe Apple was right not to return as much cash as he pushed for, but companies can no longer expect outperformance in one area to excuse their decisions in another.