Shareholder activism is an unavoidable cost of doing business as a publicly traded company in America today.
In the not too distant past, shareholders were people and institutions that a public company interacted with once a year, if at all. No longer.
Increasingly, institutional shareholders and activist groups are intent on making their voices heard—through means ranging from private, direct contacts all the way through to knock-down, drag-out proxy contests to replace some or, in some cases, all of a target company’s directors.
As in most areas of life, in dealing with shareholder activism an ounce of prevention is worth a pound of cure. Here are four things that every public company should make sure it knows before an activist arrives and initiates a proxy contest or other public campaign to best position itself for a successful outcome of any activist situation.
Know Your Shareholders (and let them get to know you)
A proxy contest or other activist campaign bears some strong resemblances to a political campaign, and no politician is successful without getting to know the constituency. Having an active investor relations team that engages in active outreach to the company’s shareholder base is critical.
First, having a feel for what institutional shareholders like and dislike about the company’s story will guide which parts of the message need to be emphasized and which ones are not likely to resonate in the event of a contest.
Second, establishing and maintaining a regular dialogue with key shareholders will build goodwill and provide established points of contact that will be extremely important to the company’s ability to make its case in defending against an activist campaign. It is much easier to speak effectively to institutional shareholders in a contest if the company is not reaching out to them for the first time only after the campaign has begun, which tends to make the company look weak and defensive.
Third, having regular contact with key shareholders allows companies to co-opt their ideas where appropriate, and in doing so to eliminate potential points of friction that could be exploited by an activist in a campaign. Companies that perform shareholder outreach well also tend to keep their boards well informed about the results of these efforts; it’s a good idea to make reporting on investor relations efforts a regular board reporting item.
Know Your Board (and how it is perceived).
To have good credibility with shareholders today, it is essential that a public company board have a diverse and continually evolving skill set among its members. For example, insufficient industry experience on a target company’s board is a common complaint from activists that frequently yields traction with other institutional shareholders. In addition, excessively long tenure among directors is frequently viewed by both activists and institutional investors as a sign of staleness that can lead to a shortage of creative thinking in the boardroom.
In 2014, Institutional Shareholder Services (ISS) established this view as policy by noting that director tenure of longer than nine years would be regarded as “excessive” and could negatively affect a company’s Quickscore 2.0 governance rating if the proportion of such directors on the company’s board is too high. To avoid these problems, public company boards must have a robust, active board succession planning policy to ensure both adequate talent and adequate turnover to satisfy shareholder expectations.
Know Your Team (and have it ready to go).
If it comes to a public contest, the company will need to enlist a number of outside advisors—a proxy solicitor and outside counsel, for certain, and most likely a financial advisor and media relations advisor. Having this team in place in advance will allow them to become familiar with the company, its performance and its message to the Street – and thus will significantly increase both the quality and speed of the company’s response to any activist overtures or public statements.
Know Your Defenses (and keep them current).
The influence of governance activists and institutional investor advisory services has significantly changed the typical defensive profile of most public companies in recent years. Institutional shareholders are simply unwilling to accept the ironclad defenses of years past, such as 10-year poison pills and classified boards. However, it is still possible to shape an appropriately strong but shareholder-friendly defensive profile.
Companies and their boards should regularly review their defensive profiles with outside counsel to ensure that they are keeping up with current best practices while maintaining defenses that are adequate to help the board ensure the best possible return for shareholders in a takeover situation. Again, this is an item on which the board should be briefed periodically, both to establish a good record for fiduciary duty purposes and to enable the board to act quickly if an activist situation arises and requires it.
A full-blown activist campaign can be extremely distracting for a public company’s board, management team and employees. But taking the preventive steps above will help ease the initial crisis and prepare a company to mount a more effective defense, do it more quickly, and do it without nearly as much disruption to what really matters — carrying on with running the business.
Scott Bell is a member in Bass, Berry & Sims’ Nashville office. His practice encompasses a wide array of corporate and transactional matters, including mergers and acquisitions, private equity and venture capital financings, securities offerings and securities law compliance, shareholder activism defense and general corporate governance and strategic issues.
