The Conference Board
Governance Center Blog
Jun
10
2013
By Marty Lipton,
Partner, Wachtell, Lipton, Rosen & Katz, Karessa Cain, Partner, Wachtell,
Lipton, Rosen & Katz, & Sabastian V. Niles, Counsel, Wachtell, Lipton,
Rosen & Katz
1) Shareholder
activism is growing at an increasing rate. No company is too big to become
the target of an activist, and even companies with sterling corporate
governance practices and positive share price performance, including
outperformance of peers, may be targeted.
2) “Activist
Hedge Fund” has become an asset class in which institutional investors are
making substantial investments. In addition, even where institutional
investors are not themselves limited partners in the activist hedge fund,
several now maintain open and regular lines of communication with
activists, including sharing potential “hit lists” of possible targets.
3) Major
investment banks, law firms, proxy solicitors, and public relations
advisors are representing activists.
4) ISS and Glass
Lewis continue to play a major role in proxy solicitations and favor
activists over management. They see no problem in supporting a short slate
of an activist’s director candidates for the purpose of “shaking things
up,” regardless of the merits of the activist’s proposals, and they ignore
legitimate concerns over creating dysfunction and paralysis in the
boardroom. It is a mistake to assume that they understand the basic
business and long-term business strategy of a company attacked by an
activist. It is necessary to make a sophisticated presentation of the
company’s finances and business to have any prospect that they will reject
the activist’s argument and support the company’s.
5) Major
institutional investors, including BlackRock, Fidelity, State Street and
Vanguard have established significant proxy departments that make
decisions independent of ISS and GL and warrant careful attention. 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 is possible to mount a strong defense against an
activist attack that is supported by ISS and GL and gain the support of
the major institutional shareholders.
6) Active
participation, including visits to ISS and major shareholders, by the lead
director and the other independent directors is critical in a proxy
contest.
7) The failure of
a company to maintain regular contact with its institutional shareholders
will result in a very significant disadvantage in a contested proxy
solicitation. Early outreach can prevent institutional shareholders from
mistakenly concluding that supporting activism is the only path for
successful engagement with a company.
8) The investor
relations officer is critical in a proxy solicitation. The regard in which
the IR officer is held by the institutional shareholders has been
determinative in a number of proxy solicitations. Candid IR assessment of
shareholder sentiment should be appropriately communicated to senior
management, with periodic briefings provided to the Board.
9) Relationships
with sell-side analysts are important and should be proactively developed.
A company should be on the lookout for new suggestions or ideas floated by
the sell-side community. If analysts are making errors, the company should
correct them and educate them about the business; ideas suggested by
analysts, even ill-advised ones, can generate momentum and inspire
activist approaches.
10) Media outlets
tend to favor the “shareholder rights” mantra of activists. A proactive
public relations campaign is important in seeking a level playing field.
11) A company
should not wait until it is involved in a proxy solicitation to have its
institutional shareholders meet its independent directors. A disciplined,
thoughtful program for periodic meetings is advisable.
12) Scrutiny of
board composition is increasing, and boards should self-assess regularly.
Institutional investors frequently question the “independence” of
directors who are older than 75 or who have served for more than 10 years.
In addition, they may discount the independence of directors solely
because they have been nominated by the company as compared to an
activist’s nominees. In some situations consultation with major
shareholders about potential nominees may be important.
13) Periodically,
and at least shortly after each annual meeting, a company should review
its portfolio, governance and preparation for defense against an activist
attack in the light of potential activist perspectives and consider
appropriate adjustments. Experienced advice is critical ISS and GL and
institutional investors discount strategic and governance changes that are
initiated after an activist has surfaced, even if there is evidence that
the changes were previously “in-the-works.”
About the Guest Bloggers:
Wachtell, Lipton, Rosen & Katz
Martin Lipton and
Karessa L. Cain are partners and
Sabastian V. Niles is counsel with the law firm Wachtell, Lipton,
Rosen & Katz.
This post originally appeared as a Wachtell
Lipton memo on June 10, 2013.
© 2013 The Conference Board Inc. |
