Activist investors make headlines pretty much every day in one way or another, and every public company is susceptible to being targeted. But is there anything companies can do to protect themselves, other than a standard poison pill or shareholders’ rights plan?
In a post on the Harvard Law School blog, Jay Clayton, Mitchell S. Eitel, Joseph B. Frumkin and Glen T. Schleyer of Sullivan and Cromwell LLP explain recent trends in activist investing. They also suggest some ways companies can prepare themselves for the inevitable.
Shareholders want to be involved
The lawyers note that Vanguard and BlackRock both have recently made comments saying that they’re focused on corporate governance issues and engaging with companies’ boards. Together, the two firms manage a total of over $7 trillion in assets, representing a sizeable chunk of the U.S. asset management market.
Vanguard made its statements in a letter it sent to many of the companies in its portfolio, explaining that it does not have a “passive attitude toward corporate governance.” The firm further outlined how important it is for boards to interact with shareholders directly.
Activist investing goes mainstream
The blog post states that as more and more firms like Vanguard and BlackRock make statements along these lines, it’s clear that activism has gone mainstream, particularly on the topic of corporate governance and how companies deal with shareholder engagement. Activism started as a small movement on Wall Street but now is practically everywhere, and no company—no matter how big or small—is truly safe.
More than $200 billion in fund have been allocated toward activism, with many of those funds coming from institutional investors. Meanwhile the debate about the effects of activism in the long term rages on, although it’s undeniable that short term activism has brought about positive results, even drawing support from shareholders that traditionally tend to be more passive in their investment approach.
Where activist investors find a crack
The authors say many activists push their way in through a crack that has developed between companies and shareholders because often communication between them isn’t good. This is especially true when companies are in crisis situations. Since the financial crisis, activism may be on the rise as activists benefit from greater distrust on the side of investors.
They point out that not all activist campaigns are the same, so companies should prepare themselves for all possibilities. While it’s true that the Bill Ackmans and Carl Icahns of the world tend to follow the same playbook they have developed, there is still a broad range of possibilities when it comes to the type of campaign a company can face.
Among the factors to be taken into account when determining which form of attack may be most likely, they suggest companies look at the size of their equity capitalization, who their shareholders are and the “nature and attractiveness of an activist proposal” and its response to that proposal, among other things.
Where could activists get in?
A company’s governance profile is also important, including the tenure of its directors, which is increasingly becoming a focus of activist investors. The law firm suggests that companies be more proactive in their communications with shareholders in hopes of fending off an attack from an activist before it even happens.
Companies should consider whether they are vulnerable to any area of corporate governance that activists may focus on and if they should do anything to protect themselves. The goal is preparing materials focused on potential weak areas so that they aren’t caught by surprise.
The law firm also suggests preparing the board of directors for the possibility of interventions by activist investors, keeping them updated on any areas in which the company might be vulnerable to activism. Apparently many companies are already doing this, but they think more should be done so that boards are not caught by surprise when their company lands in an activist’s crosshairs.
Examining corporate governance rules
They also emphasize that it’s important to realize the increasing focus on corporate governance at institutional investors. Such investors are typically into a company for the long term, and the authors say companies would be wise to consider making changes to their corporate governance policies or bylaws that would be in favor of these investors. If changes to bylaws are considered, it’s important to realize that shareholders will scrutinize any proposed changes very carefully, particularly if the board tries to make changes without a shareholder vote.
The goal of this would be to get these institutional investors on their side before an activist investor launches a campaign. Once again, this goes back to communication, as the lines between major shareholders and companies should be kept open. The more shareholders feel like they’re in the know with what’s going on, the less likely an activist will be able to gain control. One suggestion is to create a Shareholder Liaison Committee to make communication between the board and shareholders easier.
