By now, it’s obvious that the crisis stemming from the spread of COVID-19 is going to be with us for some time – likely for the duration of the proxy season, at least. What does that mean for activism?
Like the many people adjusting to their new realities, these are no less confusing times for the corporate and financial worlds.
Stock Market Uncertainty
The first source of uncertainty is the stock market. As of yesterday, the S&P 500 Index is down nearly 25% year-to-date to its lowest level in almost four years. If activists have cash readily available and the market finds some stability, this might be a buying opportunity. Certainly, the level of activism had started to drop last year as the market cruised upward, making value investment opportunities hard to find. That decline was accelerating in 2020 even before this coronavirus became an economic phenomenon.
However, things may not be so simple in as uncertain an environment as this. One activist target in the energy sector has reportedly begun exploring restructuring after the oil price crash caused by Saudi Arabia’s threat to increase production. The same day that Impala Asset Management launched a proxy contest at Harley-Davidson, the motorcycle manufacturer suspended production at its U.S. factories for 11 days.
As if to illustrate the confusion, Bill Ackman this week gave an emotional interview to CNBC in which he warned that certain stocks in his portfolio could go to zero if the health crisis requires a lockdown period of 18 months, then tweeted that he was buying stocks – "bargains of a lifetime if we manage this crisis correctly," he said. Despite hedging his portfolio, his publicly listed fund was down 6.5% as of Tuesday.
The Impact Of De-Risking Strategies
Second is the impact of de-risking strategies on issuers and the wider shareholder base.
Returning cash to shareholders or changing managers is likely to look less appealing in the current climate, while underwater shareholders may rue lowball bids from strategic acquirors or private equity sponsors unless there is a desperate business need. Preserving value, more than creating it, will likely be the priority for this year.
"I think there's going to be far less activism than we've experienced in past years. I can't imagine an activist aggressively prosecuting a proxy contest," MacKenzie Partners’ president, Bob Marese, told me this week. "There are the practical elements of logistics to consider in a time of social distancing, but perhaps more importantly the optics of it. How will the investor base view the activity in light of the broader macro conditions?"
The Logistics Of Annual Meetings
Third are the logistics of annual meetings.
In a client memo this week, Ele Klein and Aneliya Crawford, two partners in Schulte Roth & Zabel’s shareholder activism group, warned of "logistical impediments and shifts in timing and strategy," including delays in moving shares from street name accounts. The lawyers also speculated that a bare-bones Securities and Exchange Commission (SEC) might have less time for fact-checking proxy statements, leading to bareknuckle fight letters.
"The SEC is making it easier for people to hold virtual meetings, which automatically favors a company and disfavors an activist," said Chris Davis, head of Kleinberg Kaplan’s M&A and investor activism groups.
Yet for activists, the urgency might be much greater than that stratagem allows, especially given much of their activity is governed by advance notice bylaws implemented by companies. A nomination letter by Starboard Value at eBay this week read almost apologetically, just as CEO Jeff Smith had said two weeks ago: "I don’t want to seem opportunistic because the first thing we care about is the health and well-being of employees and people around the country, but yes the volatility in the marketplace is a good opportunity for us."
"We are disappointed that Starboard has decided to announce its previously provided nominations amidst the global COVID-19 pandemic while the board and management are trying to focus on the business, employee health and safety, and the important CEO search and portfolio review that are underway," eBay shot back.
"The board by-and-large controls the annual meeting machinery and logistics," with certain procedural protocols discussed between the activist and board in the two or three weeks leading up to the meeting, says Andrew Freedman, a co-head of Olshan Frome Wolosky’s activist practice.
Difficulties In Getting People To Pay Attention
Fourth is getting people to pay attention.
Active (not activist) managers may be too preoccupied to devote significant attention to a proxy contest, Marese told Activist Insight, although institutional stewardship teams should still be engaged.
"With so much confusion out there it’s going to be harder to get people to pay attention than is was in past years, so you could end up with suppressed voting totals," Davis added.
Finally, companies may have more opportunity – and some justification – to delay and defend.
Sarah Wilson, the CEO of U.K.-based proxy voting adviser Manifest, wrote on LinkedIn this week: "Spain has taken the sensible step of allowing meetings to take place up to 10 months later, so long as the annual report is published. This is a great way to handle the disruption. What nobody needs right now is for the whole world to do a "Japan Week" and have all the meetings in the same compressed window."
Morgan Lewis’ Keith Gottfried and Sean Donahue noted this week in a client memo about poison pills: "Extrapolating what we saw in the wake of the 2008 financial crisis, we would expect to see a significant uptick in poison pill adoptions as public companies – including those in sectors that have been disproportionately impacted by the COVID-19 pandemic – continue to grapple with market valuations that they believe do not reflect their intrinsic value and, accordingly, make them unduly vulnerable." Dave & Busters Entertainment, which has KKR’s new activist fund on its register, did exactly that this week after a dramatic fall in value.
Freedman hopes that boards respond to the extraordinary nature of the pandemic in is a spirit of cooperation, not by turning on activists. "My sincere hope is that companies and their counsel approach the logistics of holding their meetings in a collaborative and cooperative spirit where an activist has nominated a slate," he said.