Dealing with Activist Investors

Shareholder activism is on the rise.  Through the first three quarters of 2013, activist investors submitted 91 initial Schedule 13D filings, well on pace to eclipse the 109 filings made in all of 2012.1  In addition, proxy fight announcements are at their highest level since 2009.2

So far in 2013, 60 percent of activists’ campaigns have focused on boosting earnings at companies or shaking up their boards.3  And companies with a lot of cash on their balance sheets better beware.  With companies sitting on more than $1.8 trillion in cash, 41 activist campaigns this year have demanded that companies return cash to shareholders through either dividends or stock buybacks.4

Activists are increasingly drawing larger companies into their crosshairs.  In 2013, activists have gone after such large-cap companies as Apple, Dell and Hess Corporation.  According to FactSet SharkWatch, as of October 2013, 50 value maximization and board seat campaigns had been announced against companies with a market value exceeding $1 billion, the most in any comparable period since they started tracking this information in 2005.5  And this trend is likely to continue.  Not only are new activist funds emerging, but their assets under management are rising and an increasing number of mutual funds and institutional investors are siding with activists, thereby allowing activists to go after these larger companies with some success.6  In addition, many larger companies have become more vulnerable to an activist attack after having acceded to shareholder demands to destagger boards, eliminate poison pills and give shareholders the right to vote by written consent and call special meetings.

With activism on the rise, cultivating good shareholder relations is critical.  Directors need to understand who their company’s shareholders are and what they care about.  Boards also need to make sure that their remaining defenses, including advance notice and director qualification bylaws and “on the shelf” poison pills, are state-of-the-art.  Some specific steps companies need to be taking include –

  • Know and engage your shareholders.  First, companies need to understand the breakdown of their shareholder base and monitor trading of the company’s shares.  Companies also need to reach out to significant shareholders.  This is not only a good way to find out what they want, but also helps build credibility and stronger relationships.  According to a recent survey, nearly 30 percent of boards stepped up their communications with institutional investors this past year.7  In addition to cultivating relationships with major investors, companies need to make sure that they are effectively communicating their business strategies to the marketplace, and they should also be taking advantage of the power of the Internet by making sure their Web sites are up-to-date and fully communicating the company’s message.  In addition, companies should be actively monitoring shareholder concerns and opinions that are expressed through blogs and other shareholder forums and proactively responding to any shareholder issues before they escalate.
  • Send a consistent message.  While it is important to be receptive to shareholder concerns, companies also need to make sure that everyone in their organization is on the same page when communicating with shareholders.  Sending a clear and consistent message not only proves to shareholders that the company has thoughtfully discussed and considered the issues, but also brings credibility to both the company and its spokespersons.
  • Watch what you say.  Those charged with communicating with shareholders must understand the legal limits on what they can say.  Regulation FD prohibits the selective disclosure of material nonpublic information to certain market participants and to shareholders who are likely to trade.

The SEC’s recent Regulation FD enforcement action against the head of investor relations at First Solar is a reminder that company spokespersons must be careful about what they say, not only in conversations and meetings with analysts and investors, but also in other settings – including social media such as blogs, Twitter and Facebook.  In addition to Regulation FD limitations, companies need to be mindful that certain types of corporate disclosures must be accompanied by specific cautionary language, and if the communication involves a forward-looking statement, it should provide sufficient reference to factors that could cause actual results to differ materially.

  • Determine director involvement.  Companies need to determine whether, and to what extent, directors should be authorized to communicate directly with shareholders on the company’s behalf.  There are divergent views among directors on whether it is appropriate for directors to communicate about governance issues with shareholders.  According to a recent survey, just over 60 percent of directors communicate with institutional investors; however, one-third of directors surveyed said the board “does not and should not” communicate with institutional investors.8
  • Update advance notice and director qualification bylaws.  Companies should carefully review and, if necessary, update their advance notice bylaws.  As more and more companies dismantle their takeover defenses, having an effective advance notice bylaw is even more important.  Many of the updates that companies made to their advance notice bylaws this year include increasing the minimum amount of time for a shareholder to submit a director nomination or proposal to be considered at a shareholder meeting and increasing disclosure requirements regarding derivative positions held and any compensation arrangements the director nominee may have with third parties.9  To counteract an increasing practice whereby hedge funds pay dissident directors a large bonus payment if they are elected or other goals are met, some companies have also added director nomination and qualification bylaws that would render a director nominee ineligible to be nominated and, if elected, ineligible to serve if the individual is a party to any such compensatory arrangements.10  This type of bylaw provision has spurred some debate in connection with a recent annual meeting, for which ISS recommended that shareholders vote against the directors who adopted the bylaw for their company.  In making its recommendation, ISS took issue with the broad scope of the provision, which ISS believes could ultimately exclude qualified individuals from the board, and the fact that the directors did not allow shareholders to vote on the bylaw.11
  • Consider putting a poison pill “on the shelf.”  The use of poison pills as a takeover defense has been falling out of favor for several years, with less than 15 percent of U.S. companies having a poison pill in force.12  But an increasingly popular alternative is to have a poison pill “on the shelf.” In this situation, a board reviews and approves a form of poison pill that would be ready for adoption on short notice in response to a potential threat.  The board then reviews the poison pill periodically to ensure that its terms are appropriate in light of potential threats and current market practices.  Taking this “on the shelf” approach has several advantages.  First, it gives the board more time for a thoughtful and effective evaluation of the poison pill in the absence of a pending threat.  Also, having the poison pill ready to go enables the board to act quickly in response to an activist attack.  Further, because there are no public disclosure requirements for merely having a poison pill “on the shelf,” the board is not pressured to include the shareholder-friendly provisions recommended by ISS, but instead can ensure the poison pill is sufficiently potent to adequately protect the company.

    This post was excerpted from our Top 10 Topics for Directors in 2014 alert.

1   Activist Insight, “Review: a busy third quarter and a corporate fightback?,” Activist Monthly (October 2013) at p. 1; Activist Insight, Shareholder Activism Review 2012, at p. 2.

2   J. Laide, “Top Takeover Defense Changes – Companies Prepare for Most Likely Threats,” (Oct. 3, 2013).

3  “Activist Investors Go Big,” CFO Journal, The Wall Street Journal (Oct. 1, 2013).

4  Id.

5   J. Laide, supra.  See also “Activist Investors Go Big,” CFO Journal, The Wall Street Journal (Oct. 1, 2013).

6  J. Laide, Activists Continue to Target Larger Companies, (April 24, 2013).

7 PwC’s 2013 Annual Corporate Directors Survey at p. 9.

8 Id. at 9.

9  J. Laide, Top Takeover Defense Changes – Companies Prepare For Most Likely Threats, (October 3, 2013).

10   See, e.g., amendments to bylaws of McGraw Hill Financial Inc. reported on a Form 8-K filed June 26, 2013, Marathon Oil Corp. reported on a Form 8-K filed May 31, 2013 and Wynn Resorts Ltd. reported on a Form 8-K filed September 12, 2013.

11  D. Benoit and J. Lublin, “‘Golden Leash’ Payments Fuel Debate,” The Wall Street Journal (Nov. 25, 2013).

12 Based on data provided by


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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