The Activist Investor and Negotiated Share Purchases

by Latham & Watkins LLP
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Steven Stokdyk is the global Co-chair of Latham & Watkins’ Public Company Representation Practice. He has extensive corporate, finance and acquisition experience representing companies, principal investors and investment banks in a variety of industries, including technology, financial institutions, healthcare, gaming and REITs.

“2014 has continued to see the rise of the activist investor in a wide variety of manifestations,” said Stokdyk. “These investors continue to shape the corporate landscape through their size, influence and variety of activities. By some counts I’ve seen, activist funds manage more than US$100 billion dollars of assets and no company is too large to be a target for them.”

“Many of these funds work together in groups sometimes referred to as wolf packs, and many of them also work with mainstream funds — either officially or unofficially, which further expands their reach,” he added. “As a result of this, there seems to be an entire industry that’s growing up around these investors, including conferences, publications and websites with specialized advisors on both side of the table.”

In this lw.com interview, Stokdyk discusses the rise of negotiated share purchases.

Are companies purchasing shares back from activist shareholders?

Stokdyk: Negotiated share purchases is one of the more interesting developments we’ve seen during the last year. This is where the company actually negotiates to purchase some or all of the shares back from the activist after they have accumulated a position, made their demands, and engaged in discussions with the company — and this is part of an overall settlement with the activist. In the last 12 months, at least ten companies have repurchased shares from activist investors — this number is more than the previous six years combined.

Some people say this is a redux of the 1980s green mail but in a slightly different form. Most of these negotiated share purchases have been at a discount and they usually involve some other type of provision, for example a standstill or non-disparagement agreement. One important thing to consider is that the rest of the shareholders really will closely scrutinize these types of repurchases unless there are other really good concessions being obtained or it is a smart use of corporate funds and a good corporate finance decision.

As a result of the 1980s, there are still are some laws limiting these types of payment and providing for excise taxes on some of the payments. But I think the more interesting point is the issues that the boards face in determining whether it is an appropriate response to the activist investor under the UnoCal standards and whether it is a good use of corporate funds.

What should companies do to stay ahead of shareholder activism?

Stokdyk: We encourage companies to continue to monitor their shareholder base, communicate with investors and plan for these circumstances. On the monitoring front, there is a wide variety of information out there available to companies concerning their exposure to activists and the use of other constituents, such as media, other shareholders, proxy advisory firms, etc.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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