Investors have learned that it pays to be aggressive when it comes to boardroom fights. As a result, companies are preparing for activist campaigns well in advance.
THIS IS PART FOUR OF A SERIES: read Part Three.
QUESTION > How can you take into account the views of an activist investor while maintaining corporate strategy and not alienating other shareholders?
Chris Ruggieri > In the case of activism, I think the best defense is a good offense. This means not just running your company well and making good decisions, but also routinely revisiting them. There is a big debate about whether shareholder activism is good or bad, and that debate will likely rage on forever. But if there is one good thing to come out of the current wave of activism, it’s that we are seeing companies more routinely evaluate strategic alternatives, transaction possibilities, and business performance. We’re also seeing an increased focus on capital allocation at the board level, meaning that board directors are asking more questions about the approach and process that management goes through to evaluate its strategic choices. I think that is really healthy and positive for companies and their shareholders.
There is also no one single profile of activists – they have different personalities, different strategies. Some activists are very discreet in the way they engage and interact with companies, while others have become quite adept at leveraging the media and using social media, for example, to get their point of view across. There are certain activists that regularly use social media as a platform for broadcasting their point of view and their message.
Jason M. Halper > Ideally, the key is to have ongoing dialogue and engagement. So before an activist is on the scene, the company should be looking at vulnerabilities. Is there a big cash pile on hand? Is the company underperforming? Is the share price down? Has there been a material negative event? Things such as that might attract an activist, and you should be preparing for how to respond if someone comes on the scene, or if institutional investors have concerns. Hopefully, in the course of dialogue with an activist or an institutional shareholder, the company can be persuasive as to what it is doing to address the issue.
Lex Suvanto > From the vantage point of a company, an activist investor is usually an unwelcome challenge. Companies and management teams build their own strategies and have their own plans for the future – they’re instituting initiatives to maximize shareholder value based on the information they have. Often it’s not easy to have to deal with an activist investor who is suggesting significant changes to the way things are being run or to the teams running the company. As a result, many of the strategies that companies are pursuing now – including governance engagement and the cultivation of long-term investors – are built around trying to create a stronger base of shareholder relationships.
However, activists are not always seen as a negative. I’ve spoken to a lot of long-term investors who have told me that they agree with the activist 90% of the time. If you’re asking the question from the vantage point of the investment community, the presence of an activist is often thought of as a potentially good thing.
John Viglotti > The issue does come up when companies are considering how to approach their communications materials. When you have an activist investor, it can end up in a proxy fight, which can play out almost like a political campaign. Both sides hire proxy advisors and generate press releases about why shareholders should vote a certain way. Both sides may put up specialized websites around the issues. The intensity of them varies, but proxy fights really do ratchet up the level of shareholder communications, and companies and activists spend a lot of money to win support, including on things such as full-page ads in the Wall Street Journal. After all, a big activist has a lot of money at stake.
Kai Haakon E. Liekefett > The issue of how to deal with activists is the billion- dollar question. The legal standard is straightforward. In most US states, the board has a fiduciary duty to act in the best interests of the company and all the shareholders. You would be violating your fiduciary duty if you took a corporate action just to silence an activist investor if you didn’t believe the action was in the best interests of all shareholders.
Now, many activists call for the sale of a company – and not because they think it’s in the interests of all shareholders. They do it because it is the most efficient way for them to realize a significant return on investment. So when you face these activists, you basically have a decision to make. If you agree with them that now is the time to sell, you sell – that’s fine. But if you don’t agree and you cave just because you are concerned about a potentially nasty proxy contest and about what that could do to your reputation, then you have not been doing your job and you have violated your fiduciary duties.
This is not just theory. There was a case last August in the Delaware Chancery Court that has received astonishingly little coverage in the media, titled In re PLX Technology Inc. Stockholders Litigation. In that case, an activist launched a proxy contest against a company, arguing that it was time to sell. The board vehemently disagreed, but it lost a proxy vote for minority representation on the board. Following the proxy vote, the majority of board directors remained the same who had vehemently argued against selling the company – and yet the board decided, “Okay, we will sell the company anyway.” Shareholders sued, and the Delaware Court ruled that the board’s decision constituted a breach of fiduciary duty.