New Tactics and ESG Themes Change the
Direction of Shareholder Activism
Posted by Richard J. Grossman and Neil P.
Stronski, Skadden, Arps, Slate, Meagher & Flom LLP, on Friday,
February 26, 2021
likely to rebound as the business world recovers from COVID-19 disruptions.
are raising permanent capital, giving them new leverage, and activist
approaches have become more acceptable to many institutional investors.
high-performing companies may face pressure on ESG issues.
defense is a solid relationship with and understanding of your shareholders,
coupled with a plan for dealing with activists if they emerge.
activism levels decreased in 2020 amid the upheaval and uncertainty brought on
by COVID-19. But activists did launch a number of high-profile campaigns and
there was an uptick of activism in the second half of the year; and more than 80
CEOs were replaced during activist campaigns.
well-performing companies may find themselves targets of activist campaigns on
environmental and social issues, as new funds have been formed to specialize in
these areas. Moreover, established activists have established new types of
investment vehicles that could strengthen their hands. Preparing for the
possibility of an activist campaign should therefore be on the board agenda at
most public companies.
Expect an uptick
in activism in 2021. Historically,
many activist campaigns have focused on M&A and returns of capital. The economic
uncertainty and liquidity issues companies faced in 2020 reduced M&A activity
and made it harder for activists to advocate transformative deals, such as the
sale of a company, a breakup or major divestiture, or a large dividend payout.
In addition, there were fewer announced deals for activists to challenge.
As the economy
rebounds and business becomes more predictable, activists are likely to press
companies to undertake transactions and advocate for changes to the deals
may spur some campaigns. Underperformance
is another traditional target of activists. As businesses struggle to cope with
the challenges of the pandemic, or if a company’s stock price does not return to
pre-pandemic levels, some could find themselves vulnerable to activists pressing
for operational or governance changes.
with solid financial performance may face activists. Environmental,
social and governance (ESG) themes featured prominently in 2020 activist
campaigns, and several factors are likely to accelerate that trend.
institutional investors, even managers of passive index funds, have called for
the business world to address environmental and social issues such as diversity.
Many Demands, Few Clear Rules.”) Major American and European oil
companies, for instance, have been pressed to lower their emissions by activist
groups that are backed by major pension funds and asset managers.
activists have recently formed ESG-focused funds alongside their regular pools
to target companies they contend have not met ESG standards, and some veteran
activists, including ValueAct founder Jeff Ubben, have formed new ESG-only
activist firms. Other new ESG funds have been formed by groups with few ties to
established activist firms.
Boards need to
prepare for this new set of players and their agendas, paying close attention to
their companies’ ESG profiles and ratings, and not just the financial
vulnerabilities that traditionally attracted activists’ attention.
The lines between
activists and other investors are blurring. A
number of major activist firms have begun acting more like private equity firms,
pursuing outright acquisitions or negotiating for large stakes in companies for
extended periods (private investments in public entities, or PIPEs). In 2020,
three of the best-known names in activism, Pershing Square, Starboard Value and
Third Point, formed SPACs (special purpose acquisition companies), shell
companies that raised capital to buy businesses. One of the most influential
established activist firms, Elliott Management, formed a buyout fund in 2019.
private equity firms have pursued more activist-like strategies, and in some
cases, activists have teamed up with strategics or private equity firms on
acquisitions. Since activists often zero in on management and operational
shortcomings, a buyout is a logical next step.
These moves may
alter the calculus for companies in some situations, because an activist
investor with sufficient capital and a proven willingness to take a long-term
position in a company or to take it private poses a more serious threat than one
known only for saber-rattling and then trading out of the stock.
investors have become more open to activism. Over
the last few years, as activism has become more accepted, some long-only asset
managers, including money managers, have supported activist campaigns where they
thought it would increase the value of their investments. Usually, this has been
behind the scenes, but some traditional asset managers have now openly adopted
activist tactics. For example, Wellington Management, the largest shareholder of
Bristol-Myers Squibb, came out against the drugmaker’s $74 billion deal to buy
biotech Celgene in 2019.
This reflects a
broader transition to a more shareholder-centric model of corporate governance.
Potentially, any investor with a clear agenda, sufficient resources and the
support of a wide shareholder base can utilize activist tactics.
Framing a Strategy
evolution of activism, it is vital for boards to ensure that their companies
have strategies to address activist pressure.
engagement is the best defense. Ongoing
dialogue with shareholders is the best preventive strategy. Know your most
significant shareholders and understand their investment theses. Engagement with
shareholders more broadly allows management to build relationships, articulate
the company’s strategy and establish the credibility that management and the
board will need in the event an activist surfaces.
usually take the lead in communications with shareholders, but direct engagement
by independent directors is becoming more common, particularly regarding
subjects under the board’s purview, such as executive compensation, capital
allocation and succession planning, and when a company is facing major
challenges. A company needs to weigh the pros and cons of using a director in
this role, and give careful thought to the choice of directors and prepare them
vulnerabilities and prepare responses. Proactively
review your company’s vulnerabilities ahead of any activist approach, looking at
the business from the activist’s perspective. Consider whether alternative
financial and business strategies (say, a divestiture, spinoff or enhanced
return of capital) could boost shareholder value. An open-minded review can go a
long way toward reducing the risk of an activist intervention.
defensive plan. Implement
a stock surveillance warning system to monitor new shareholdings, have a
shareholder rights plan ready to implement if an activist acquires a substantial
stake, assemble a team of advisers and prepare a playbook in case an activist
emerges. Another tool being used more frequently is a “table-top” simulation of
different activist scenarios to test and refine a company’s reactions.
involvement is critical. If
an activist surfaces, it is crucial that management alerts the board immediately
so directors are educated and are actively involved in the response. To avoid
missteps, the board and management must be aligned in their approach and
coordinate both internal and external communications.
* * *
Harvard Law School Forum
on Corporate Governance
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