4 Ways Companies Can Brace For An Activist
Law360, New York (October 14, 2015, 3:22 PM ET) -- As the number of
activist campaigns keeps rising, companies need to approach the trend
proactively, looking within to find their own weak points and hash out a
strategy, experts say.
A recent report by
FTI Consulting and Activist Insight
found that the number of activist campaigns is poised to continue its
fast-paced growth, with activism-focused funds now boasting $169 billion
of assets under management.
With activists enjoying returns from their campaigns and drawing even more
capital to their funds, more companies can expect to become a target,
explained Richard Grossman, a
Skadden Arps Slate Meagher & Flom LLP
“There continues to be a lot of money in the activist space. There’s been
a bull market for the last seven or eight years, and activists have had
very good returns. It’s not surprising that they continue to attract
money. There are new funds continuing to be started. They are all looking
for additional targets,” Grossman said.
Here, Law360 outlines four ways companies can prepare for an activist
Create a Response Team
Companies should take the time to establish a team of professionals who
can effectively respond to an activist shareholder in the event one
emerges, explained Alan Klein, a
Simpson Thacher & Bartlett LLP
Aside from company leadership, that team must feature a familiar law firm,
a financial public relations firm, a proxy solicitor and an investment
banker. The group should get together every six months or year to
familiarize the members with one another, but more importantly, the team
should preemptively point out the company’s weaknesses.
“You want that team to talk to you, the company, about what they view as
the company’s vulnerabilities. You want to have the team lined up, but get
input in advance. What is an activist likely to say to you?” Klein said.
That vulnerability self-assessment should include financial and governance
points, including everything from capital allocations and cost structures
and underperforming units, to the CEO and the board of directors and their
perceived relationship with one another, Grossman explained.
By doing this, the company can be proactive in making adjustments to the
business or at the very least, have a response as to why they believe
their strategy is an effective one for driving shareholder value.
“If an activist actually surfaces, you can say, ‘We’ve looked at the idea,
we’ve considered it and here’s an articulate response to why it doesn’t
make sense,’” Grossman said. “Whatever the substance of the response is,
at least you will not be caught flat-footed.”
Get a Strategy in Place
While it may seem somewhat basic, a company needs to have a clearly
articulated strategy for driving value for shareholders that is updated at
least once a year, Klein explained.
This strategy needs to be more than just a general overall concept: It
must outline how the company expects to get from point A to point B, then
the plan must get reviewed by an investment banker. The review should be
done as if the banker were valuing the company to be sold at both its
starting point and its goal point, establishing clear metrics for
measuring the market value of the strategy.
“Part and parcel to having a strategy is having that strategy reviewed by
your bankers at least each year and have them model it in order to show
your board a valuation of your strategy,” Klein said.
This way, if an activist does come knocking, the company can clearly
explain its current path as well as have a baseline for comparing its own
plan with the plan outlined by the activist, Klein noted.
“If an activist shows up and says, ‘You ought to be doing X, Y and Z to
increase your share price to X,’ you want to be able to say to them, or
certainly when the board discusses it, that ‘we know what we’re doing is
going to result in a value of Y,’” Klein said.
Go Beyond Your Normal Song and Dance
With shareholder activism on the rise, engaging long-term shareholders is
becoming increasingly important. Many C-suite executives will make the
rounds, and when they do get feedback from long-term investors, it’s
important that the leadership truly listens and engages with shareholders'
“Listen to and understand what your traditional long-term shareholders are
feeling about the company. If it goes to a contest, they are going to be
the important votes that may determine the outcome,” Grossman said.
But the usual song and dance might leave the company vulnerable, as
long-term shareholders may not feel overly comfortable sharing negative
feedback with the CEO, chief financial officer or other management.
To avoid this, companies should also consider sending out their
independent directors to speak with their largest shareholders, as those
directors will likely be able to get a more accurate picture of the
investors’ feelings and opinions about the company, explained Jamie Leigh,
Cooley LLP partner.
“It’s just a level of independence that lends a different tone to the
conversation. Sometimes it can be a new face or a fresh discussion, rather
than the discussion management is having period after period,” Leigh said.
Doing so will help to take some of the wind out of the activist’s sails.
If long-term shareholders feel they have an open line of communication
with an independent representative of the company, they may be less
interested in pursuing a potentially disruptive campaign.
“They’re not going to launch a campaign unless they have a sense they are
going to get some level of support or encouragement from shareholders,
even if it’s behind the scenes,” Klein said. “Take a page from the
activist book, and have a couple directors go meet the shareholders. Think
of it as a 360-degree review of your management.”
Make Sure You Do Your Homework
Monitoring your shareholder base so you are aware when a hedge fund or
known activist takes up a stake in your company is also important, so you
can make sure you're ready to take action and engage the investor in an
effective way, explained Phillip Torrence, a
Honigman Miller Schwartz and Cohn LLP
On top of monitoring the shareholder base, companies should keep a close
eye on the calendar to help track when they may be more prone to becoming
a target, he noted.
“Typically a lot of the activists tend to raise their heads in and around
the annual meetings of shareholders because it can be something the
activist shareholder will try to get in front of the whole shareholder
base, to be considered and voted on,” Torrence said. “Knowing your
shareholder base and being prepared for certain timelines such as when you
can expect certain information and when those cutoff dates are is
And when an activist investor does take aim at your company, make sure you
take the time to work connections through bankers and advisers to get a
feeling for the type of activist you are up against, Grossman explained.
“You don’t have to necessarily respond to a proposal on the spot. Be
cautious in your comments, and let shareholders know you will get back to
them and follow up,” Grossman said.
Settling might be the most effective option for keeping the focus on
enhancing value at the company, but knowing what type of impact they have
had at companies targeted in past campaigns can help when weighing whether
to settle or fight back.
“Many activists now have a little bit of a track record behind them,”
Grossman said. “Through bankers and advisers, companies can find out how
constructive of a director they might have been versus how disruptive they
--Editing by John Quinn and Edrienne Su
© 2015, Portfolio Media, Inc.