Understanding the Basics of Shareholder Activism and Corporate Defense

With activism becoming increasingly common, corporate boards must think differently about how they approach shareholder relations. They must make offense their best defense, say investment bankers.

Activists target companies for various reasons, including underperforming stock performance, poor earnings compared with peers or governance practices that hurt long-term value. This online program will help participants assess their company’s vulnerabilities and develop a plan for defending against an activist campaign.

Activate the Defense Team

No public company is immune from the different types of shareholder activism in a globalized business environment. As such, it’s important for board members and those aspiring to serve on boards to understand the tactics and strategies of activist investors to navigate their demands effectively. This program provides participants the tools to defend against shareholder activists, whether in proxy fights or hostile takeover attempts.

Understand the Activist’s Playbook

Activists target companies they see as undervalued and aim to increase the stock price through various tactics, including share buybacks, spinning off divisions or shifting company strategy. They also push for governance changes, such as demanding board seats or replacing CEOs, and advocate for specific business strategies. Several studies show that shareholder activism does boost company stock prices, at least temporarily.

Defending against activist attacks requires assessing the same vulnerabilities activists identify and then determining an effective response. A company can anticipate an attack by regularly monitoring changes in hedge fund and institutional shareholder holdings and keeping up with investor relationships, including those among holders. It can also closely monitor attendance at analyst conferences and requests for one-on-one sessions with directors.

Shareholder activists may use various offensive tactics to force a sale, including leaking or initiating rumors about a takeover, acting as an (unauthorized) intermediary between the target and potential acquirers, or partnering with hostile takeover-minded hedge funds in their own “stalking horse” bid. They often build substantial stock positions in the company, rally institutional investors and sell-side research analysts, and attempt to raise public awareness through news releases and media interviews. Corporate defense is strengthened by having a strong internal communications function that addresses shareholder demands for information and transparency. In addition, a high level of engagement and two-way communication with shareholders can bolster the perception that management has the interests of the investment community at heart.

Develop a Tactical Plan

The goal of shareholder activism is to force change in a company. This change can take various forms, from obstructing management or threatening litigation to submitting formal proposals that are voted on at a company’s annual meeting. Regardless of the specifics of each situation, shareholders pay more attention to the financial, governance and reputational health of the companies they invest in. This increased scrutiny creates a greater opportunity for dissatisfied shareholders to push companies to make significant strategic and management changes.

Activists typically develop specific plans for unlocking value in the targeted company. This can involve several elements, from changing financial policies and restructuring to selling the business. As a result, company executives and directors need to be able to evaluate these ideas objectively. Developing a plan to engage with key shareholders around these issues can help companies prepare for–or, in some cases, avoid–an activist campaign. It also provides a valuable framework for explaining why the company believes that remaining the course is in the best interests of its owners, even if that means avoiding or defeating the activist’s proposals. This deliberative process will enable company leaders to demonstrate that they have seriously considered the activist’s suggestions and that their decision to remain on the course is based on solid facts and a thorough analysis of the company’s financial performance and prospects.

Engage with the Shareholders

A company can prepare for—or avoid—shareholder activism by proactively engaging with shareholders. Taking a disciplined approach to early conversations with activist investors, providing them a private platform for discussion and making it clear that the company’s management supports the changes they seek can help mitigate a hostile campaign. It also demonstrates engagement, which proxy advisers and institutional investors like to see. Shareholder activists are often investment firms or high-net-worth individuals with a substantial stakes in publicly traded companies. They use their equity ownership to pressure a company’s management to achieve financial goals, such as cost-cutting, change in corporate policy and financial structure, or non-financial goals, including (dis)investment in politically sensitive markets or adopting environmentally friendly procedures.

Activists may use various strategies, from obtaining a board seat to filing a shareholder proposal for a vote at the company’s annual meeting. Regardless of the strategy, activists carefully review a company’s charter and bylaws to understand their shareholder rights and any advance notice requirements. The more an activist knows about a company’s boardroom dynamics and management team, the more targeted their campaign will likely be. Developing an engagement plan and working closely with your advocacy defense advisors can help you anticipate and prepare for activist campaigns. Whether or not you’re the target of a campaign, an active engagement process can help build trust with your investors, which is crucial to long-term success.

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