October 18, 2017
Shareholder activism isn’t going away any time soon. In the first nine months of 2017, we’ve seen a similar number of campaigns and a few less proxy fights compared with 2016. But all signs indicate that the tide of shareholder activism continues to rise. While the majority of targets have been small or mid-cap companies, the recent fight between activist investor Nelson Peltz and Proctor & Gamble demonstrates large cap companies are also vulnerable.
Activism in a company’s shareholder base is more the norm today than the exception. The need to ‘think like an activist’ with a preparedness plan in place has become increasingly more common with boards of directors. We recently hosted a webinar, along with Kai Leikefett and Lawrence Elbaum of Vinson & Elkins, and Bob Marese of MacKenzie Partners to walk participants through a mock proxy fight. Coming out of that session are five interesting highlights on how activism is evolving in 2017.
1. The sophistication and scope of shareholder activism has increased.
In 2016, just over 21% of S&P 500 companies were approached publicly by an activist, and there is currently more than $120 billion in dedicated activist funds, according to FactSet. Activism is expected to continue to grow, and the amount of funds invested by both the activist and the company are also continuing to grow. Consider the fight between Peltz and Proctor & Gamble where it’s been reported that the two sides spent at least $60 million and crisscrossed the county to win shareholder support.
2. CEOs are increasingly becoming targets.
In the first nine months of 2017, roughly two-thirds of proxy contests continue to be for minority board representation, with CEOs increasingly being named as a target. The trend to target the CEO is rising because activists have been successful in either removing the CEO as part of the proxy fight or obtaining a seat on the company’s board and then influencing a CEO transition.
3. More traditional investors are becoming activists.
Activists were once considered a special class of investor. In the past, frustrated investors sold their shares to express their disappointment in a company’s performance. Today, traditional, value and long-term investors are choosing to become more vocal and join forces with other like-minded investors and activists. So, companies of all sizes should assume they have activists in their shareholder base, even if the investor is not obviously characterized as an activist.
4. Proxy fights move faster and require more substantive responses.
A high level of urgency has always been associated with proxy fights. In the past, a company responding publicly within 24 hours to an activist’s public announcement was seen as appropriate and quick. Today, with the news cycles continuing to contract, the acceptable response time has reduced to four hours, and requires more than a ‘we invite dialogue with our investors’ response. This expectation by the markets makes it even more important to have an activism response team at the ready, and to have a subcommittee of the board prepared to quickly review messaging, press releases, etc.
5. Bylaws need to be updated in times of peace.
Roughly 90 % of companies have outdated bylaws that need to be proactively amended to be flexible and support a company during a proxy fight. Bylaws amended during peace time are much easier to pass compared to times of conflict when changes will be viewed with a more skeptical eye.
Activists are well informed investors and can be more familiar with your company and industry than your board. Harvard Law School’s Forum on Corporate Governance and Financial Regulation offers six questions you should address before an activist does. Bottom line: Think like an activist and prepare.
If you are interested in listening to a replay of our recent webinar, ‘Mock Proxy Fight: So you think you’re ready for a fight?’ click here to request a link to the webinar.