Latest version of the 1980s defense playbook
For other professional views and reports
relating to evolving applications of professional defense playbooks, see the
reference page for a 2013-2014 case example observing the practices
advocated at the time by the authors of the article below.
The Harvard Law School Forum on Corporate Governance and Financial
Regulation, January 25, 2019 posting
Dealing with Activist Hedge Funds and
Other Activist Investors
Posted by Martin Lipton, Wachtell, Lipton,
Rosen & Katz, on Friday, January 25, 2019
Martin Lipton is a founding partner of Wachtell, Lipton,
Rosen & Katz, specializing in mergers and acquisitions and matters
affecting corporate policy and strategy. This post is based on a
Wachtell Lipton publication by Mr. Lipton, Steven
A. Rosenblum, Karessa
L. Cain, and Sabastian
V. Niles. Related research from the Program on Corporate
Governance includes The
Long-Term Effects of Hedge Fund Activism by
Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing
with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and
Thomas Keusch (discussed on the Forum here);
Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on
Hedge Fund Activism and Our Strange Corporate Governance System by
Leo E. Strine, Jr. (discussed on the Forum here).
Regardless of industry, size or performance, no
company should consider itself immune from hedge fund activism. No company is
too large, too popular, too new or too successful. Even companies that are
respected industry leaders and have outperformed the market and their peers have
come under fire. Activists set new records in 2018, targeting the largest number
of companies (nearly 300), deploying more capital and winning a greater number
of board seats (161) than ever before.
the most well-known activist hedge funds are surging, and there are
more than 100 hedge funds currently engaged in activism. Activist
hedge funds have significantly more than $100 billion of assets under
management, and remain an “asset class” that attracts investment from
major traditional institutional investors.
Although a number of
institutional investors are beginning to question whether hedge fund activism
should be supported or resisted, and will act independently of activists, the
relationships between activists and more traditional investors in recent years
have encouraged increasingly frequent and aggressive activist attacks. Several
mutual funds and other institutional investors have on occasion also deployed
the same kinds of tactics and campaigns as the dedicated activist funds. A
number of hedge funds have also sought to export American-style activism abroad,
with companies throughout the world now facing classic activist attacks. Many
activist attacks continue to be designed to force a takeover, sale or breakup of
the target, or a change in management, either immediately or over time.
Elliott Management was
the most active and, in many cases, aggressive activist of 2018. The Wall
Street Journal noted that Elliott publicly targeted 24 companies in 2018,
with Carl Icahn and Starboard runners-up with nine public targets each. These
numbers do not include the increasing number of non-disclosed activist
situations against major companies. The New Yorker published a lengthy
profile of Paul Singer and Elliott in August, “Paul Singer, Doomsday Investor,”
noting “Singer has excelled in this field in part because of a canny ability to
discern his opponents’ weaknesses and a seeming imperviousness to public
It has become
increasingly evident that the activism-driven corporate world is relatively
fragile and is proving to be unsustainable, particularly when viewed in the
broader context of rapidly changing political and social norms and initiatives
have been underway to establish a modern corporate governance framework that is
calibrated to the current environment. For our part, at the request of the World
Economic Forum, we prepared a paper titled,
The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership
Between Corporations and Investors to Achieve Sustainable Long-Term Investment
and Growth, which was issued in September 2016. We updated
The New Paradigm and discussed it in our memo,
Some Thoughts for Boards of Directors in 2019.
In essence, The New
Paradigm conceives of corporate governance as a collaboration among
corporations, shareholders and other stakeholders working together to achieve
long-term value and resist short-termism. While we have seen considerable
interest in The New Paradigm and similar initiatives from major
institutional investors and other key stakeholders (for example, the
Investor Stewardship Group), until such a framework is widely adopted and in
the absence of legislation, it is unlikely that there will be any significant
decrease in activism. Accordingly, companies should regularly review and adjust
their plans to avoid an activist attack and to successfully deal with an
activist attack if one should occur. Effective engagement with major
shareholders is the essential element of activist defense, and the support of
major investors, including the largest index funds, cannot be taken for granted.
The Attack Devices Used by
criticizing a company’s governance, management, business and strategy and
presenting the activist’s own recommendations and business plan.
Proposing a precatory
proxy resolution for specific actions prescribed by the activist or the
creation of a special committee of independent directors to undertake a
strategic review for the purpose of “maximizing shareholder value.”
with industry experience (including retired CEOs of major companies or even
former executives of the target) to serve on dissident slates, and conducting
(or threatening to conduct) a proxy fight to get board representation at an
annual or special meeting or through action by written consent (solicitation
for a short slate is very often supported by ISS and, if supported, is often,
though not always, successful, in whole or in part).
“withhold the vote” campaign.
Seeking to force a
sale by leaking or initiating rumors of an unsolicited approach, publicly
calling for a sale, acting as an (unauthorized) intermediary target and the
acquirer, making their own “stalking-horse” bid or partnering with a hostile
acquirer to build substantial stock positions in the target to facilitate a
institutional investors and sell-side research analysts to support the
Using stock loans,
options, derivatives and other devices to accumulate positions secretly or
increase voting power beyond the activist’s economic equity investment.
public relations, social media and traditional media campaigns to advance the
significant diligence and third-party consulting services to analyze the
Seeking to create
divisions within the boardroom or between the board and management.
Reaching a company’s
retail shareholders with weekly mailings, telephonic outreach, local newspaper
advertisements and user-friendly infographics.
investigators to create dossiers on directors, management and key employees
and otherwise conducting aggressive “diligence.”
Current SEC rules do
not prevent an activist from secretly accumulating a more than 5% position
before being required to make public disclosure and do not prevent activists and
institutional investors from privately communicating and cooperating.
Prevention of, or
response to, an activist attack is an art, not a science. There is no substitute
for preparation. The issues, tactics, team and approaches to an activist
challenge will vary depending on the company, the industry, the activist and the
substantive business and governance issues in play. To forestall an attack, a
company should regularly review its business portfolio and strategy and its
governance and executive compensation issues. In addition to a program of
advance engagement with investors, it is essential to be able to mount a defense
quickly and to be agile in responding to changing tactics. A well-managed
corporation executing clearly articulated strategies can still prevail against
an activist, even when the major proxy advisory firms support the activist.
Given the risks and
potential harm of a full-blown battle, in certain situations the best response
to an activist approach may be to seek to negotiate with the activist and reach
a settlement on acceptable terms, if such a settlement is feasible, even if the
company believes it could win a proxy fight. However, when a negotiated
resolution is not achievable on acceptable terms, whether because the activist’s
proposals are inimical to the company’s business goals and strategy or because
the activist is unwilling to be reasonable in its negotiation, the ability to
wage an effective campaign will depend on advance preparation, proactive action,
good judgment and effective relationships and engagement with shareholders. This
outline provides a checklist of matters to be considered in putting a company in
the best possible position to prevent, respond to or resolve a hedge fund
Create Team to Deal with Hedge Fund Activism:
A small group of key
officers plus legal counsel, investment banker, proxy soliciting firm, and
public relations firm.
and periodic meetings of the team are important.
A periodic fire drill
with the team is the best way to maintain a state of preparedness; the team
should be familiar with the hedge funds and other investors that have made
activist approaches generally and be particularly focused on those that have
approached other companies in the same industry and the tactics each fund has
used; the team should also use that familiarity to be alert to any contacts or
interest shown by known activists.
Periodic updates to
the company’s board of directors.
relations officer is critical in assessing exposure to an activist attack and
in a proxy solicitation. The credibility the investor relations officer has
with the institutional shareholders has been determinative in a number of
proxy solicitations. Candid assessment of shareholder sentiment should be
appropriately communicated to senior management, with periodic briefings
provided to the board.
Review capital return
policy (dividends and buybacks), broader capital allocation framework, analyst
and investor presentations and other financial public relations matters
(including disclosed metrics and guidance).
Monitor peer group,
sell-side analysts, proxy advisors, active asset managers, and internet
commentary and media reports for opinions or facts that will attract the
attention of activists.
Be consistent with
the company’s basic strategic message while updating the strategy as
input from shareholders and whether the company is receiving candid feedback.
The company should make sure that major investors feel comfortable expressing
their views to the company and believe that the company honestly wants to hear
any concerns or thoughts they have.
reasons for any shortfall versus peer benchmarks. Anticipate key questions and
challenges from analysts and activists, and be prepared with answers. Monitor
peer activity and the changes peers are making to their businesses, as well as
key industry trends.
with shareholders and analysts before activists surface.
Monitor changes in
hedge fund and institutional shareholder holdings on a regular basis;
understand the shareholder base, including, to the extent practical,
relationships among holders. Pay close attention to activist funds that
commonly act together or with an institutional investor.
contact with major institutional investors, including both portfolio managers
and proxy voting/governance departments; CEO, CFO and independent director
participation is very important. Consider engagement with proxy advisory
investors, including BlackRock, Capital, Fidelity, State Street, TIAA, T. Rowe
Price, Vanguard and Wellington, have established significant proxy departments
that make decisions independent of ISS. It is important for a company to know
the voting policies and guidelines of its major investors, who the key
decision-makers and point-persons are and how best to reach them. It may be
possible to defeat an activist attack supported by ISS by gaining the support
of major institutional shareholders.
enhancements to company disclosures or changes to governance practices are
appropriate in light of evolving shareholder expectations.
governance ratings and reports and seek to correct inaccuracies.
plans for contacts with media, regulatory agencies, political bodies and
industry leaders and refresh relationships.
conference call participants, one-on-one requests and transcript downloads.
Prepare the Board of Directors to Deal with the
Maintaining a unified
board consensus on key strategic issues is essential to success in the face of
an activist attack; in large measure, an attack by an activist hedge fund is
an attempt to drive a wedge between the board and management by raising doubts
about strategy and management performance and to create divisions on the
board, which may include advocating that a special committee be formed.
Keep the board
informed of options and alternatives analyzed by management, and review with
the board basic strategy, capital allocation and the portfolio of businesses
in light of possible arguments for spinoffs, share buybacks, increased
leverage, special dividends, sale of the company or other structural or
presentations by the legal counsel and the investment banker to familiarize
directors with the current activist environment and the company’s preparation.
guard against subversion of the responsibilities of the full board by the
activists or related parties, and should refer all approaches to the CEO.
over business strategy, direction and other matters should be open and
vigorous but stay confidential and be kept within the boardroom.
psychological and perception factors may be more important than legal and
financial factors in avoiding being singled out as a target.
Scrutiny of board
composition is increasing, and boards should self-assess regularly. In a
contested proxy solicitation, institutional investors may particularly
question the “independence” of directors who are older than 75 or who have
lengthy tenures, especially where the board has not recently appointed new
directors, in addition to more broadly assessing director expertise and
attribute Directors may also be criticized for “overboarding” or attendance
issues. Meaningful director evaluation is now a key objective of institutional
investors, and a corporation is well advised to undertake it and talk to
investors about it. Regular board renewal and refreshment, and having
longer-term board development and succession plans, can be important evidence
of meaningful evaluation.
A company should not
wait until it is involved in a contested proxy solicitation to offer its key
institutional shareholders the opportunity to meet with its independent
director. Many major institutional investors have recommended that companies
offer scheduled meetings with some (or in unusual circumstances even all) of a
company’s independent directors. A disciplined, thoughtful program for
periodic meetings and other engagement initiatives is advisable. See
Shareholder Engagement: Succeeding in the New Paradigm for Corporate
Monitor Trading, Volume and Other Indicia of
Employ stock watch
service and monitor Schedule 13F filings.
Monitor Schedule 13D
and Schedule 13G and Hart-Scott-Rodino Act filings.
trading and group activity (the activist “wolf pack”).
Monitor activity in
options, derivatives, corporate debt and other non-equity securities.
Monitor attendance at
analyst conferences, requests for one-on-one sessions and other contacts from
The Activist White Paper:
The activist may
approach a company with an extensive, and in many cases high-quality, analysis
of the company’s business and strategy that supports the activist’s
recommendations (demands) for:
Return of capital to
shareholders through share repurchase or special dividend.
Change in capital
Sale or spin-off of a
Change in business
strategy, including ESG.
Change in cost
management performance or replacement of management (e.g.,
Change in executive
Merger or sale of the
Change in governance:
add new directors designated by the activist, separate the positions of CEO
and Chair, declassify the board, remove poison pill and other takeover
defenses, permit shareholders to call a special meeting (or lower thresholds
for same) and act by written consent.
Responding to an Activist
Response to Non-Public Communication:
Assemble team quickly
and determine initial strategy. Response is an art, not a science.
No duty to respond,
but failure to respond may have negative consequences, and in most cases
response is desirable.
No duty to discuss or
negotiate, but usually advisable to meet with the activist and discuss the
activist’s criticisms and proposals (company participants in any such meeting
should prepare carefully with the company’s activist response team); no
outright rejection absent study, try to learn as much as possible by listening
and keep in mind that it may be desirable to at some point negotiate with the
activist and that developing a framework for private communication may avoid
immediate duty to disclose; determine when disclosure may be required, or
Response to any
particular approach must be specially structured; team should confer to decide
proper response. Consider whether the activist’s claims or demands have merit
and/or are consistent with the company’s own pending or proposed initiatives.
Keep board advised;
in some cases it may be advisable to arrange for the activist to present its
white paper to the board or a committee or subset of the directors.
Be prepared for
public disclosure by activist and have public response contingencies ready in
the event of any disclosure.
Be prepared for the
activist to try to contact directors, shareholders, sell-side analysts,
business partners, employees and key corporate constituencies. Make sure
directors understand that any contacts should be referred to CEO or other
Assess whether there
are sensible business actions that can be taken or accelerated to preempt or
undercut the activist attack and the extent to which the activist may attempt
to publicly claim credit for such actions.
negotiations with the activist and settlement should be pursued and at what
point in time.
Response to Public Communication:
response other than “the board will consider and welcomes input from its
Assemble team; inform
Call special board
meeting to meet with team and consider the communication.
response and whether to meet with activist. Even in public situations,
consider pursuing disciplined engagement with the activist. Failure to meet
may also be viewed negatively by institutional investors. Recognize that the
activist may mischaracterize what occurs in meetings.
If the activist
includes a demand—e.g., replace the Chair or CEO—that the board finds
unacceptable or non-negotiable, it may be advisable to make the board’s
position on that item clear earlier rather than later, even if there is
willingness to consider and negotiate other aspects of the activist’s
Avoid mixed messages
and preserve the credibility of the board and management.
whether the best outcome is to agree upon board change and/or strategic,
business or other action in order to avoid (or resolve) a proxy fight.
Be prepared and
willing to defend vigorously.
Recognize that a
proxy fight will entail a meaningful time commitment from both management and
directors, and work in advance to coordinate availability for key meetings
with shareholders and proxy advisory firms.
Engage with other
shareholders, not only the activist, to take investor temperature, solicit
feedback and assess whether actions may (should) be taken by the company to
secure support (if an activist identifies a legitimate issue, the company may
propose its own plan for resolving any shortcomings that is distinct from the
Appreciate that the
public dialogue is often asymmetrical; activists may make personal attacks and
use aggressive language, but the company should not respond in kind.
Remain focused on the
business; activist approaches can be very distracting, but strong business
performance, though not an absolute defense, is one of the best defenses. When
business challenges inevitably arise, act in a manner that preserves and
builds credibility with shareholders. Maintain the confidence and morale of
employees, partners and constituencies.
A significant number
of major institutional investors are increasingly skeptical of activists and
activist platforms even as they closely scrutinize targeted companies as we
Investors can be persuaded not to blindly follow the recommendations of ISS in
support of a dissident’s proxy solicitation. When presented with a
well-articulated and compelling plan for the long-term success of a company,
investors are able to cut through the cacophony of short-sighted gains
promised by activists touting short-term strategies. As a result, when a
company’s management and directors work together to clearly present a
compelling long-term strategy for value creation, investors will listen.
Harvard Law School Forum
on Corporate Governance and Financial Regulation
All copyright and trademarks in content on this site are owned by
their respective owners. Other content © 2019 The President and
Fellows of Harvard College.