NEW YORK: An Introduction to Corporate/M&A: Shareholder Activism
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NEW YORK: An Introduction to Corporate/M&A: Shareholder Activism
Shareholder Activism Overview
Every economy needs a mechanism to ensure there exists a properly functioning 'checks and balances' system for the governance of publicly traded companies. Shareholder activism emerged as its own asset class more than a decade ago and by now has cemented itself as this necessary, external corrective for public corporations. History has shown that boards of directors of underperforming companies tend to be inert, status quo-protecting bodies that are reticent to self-help. Shareholder activists have identified and filled this accountability gap worldwide. The activist 'toolkit' has evolved significantly over the past 20 years to the point that activist strategies designed to catalyze change at publicly traded companies are being deployed and accepted worldwide.
But shareholder activism is about more than just holding boards accountable and unlocking value. It is about setting corporations on a better, more sustainable path forward. As such, activist investors are approaching companies holistically and are finding themselves at the forefront of the increasingly important ESG (environmental, social and governance) issues that are factoring prominently in the corporate governance world nowadays.
Olshan Frome Wolosky’s Shareholder Activism Practice
Olshan’s Shareholder Activism Practice Group is widely recognized as the premier practice around the globe in representing investors in their campaigns to enhance value and improve corporate governance. We have unparalleled experience, both domestically and abroad, in counseling clients on a wide variety of activist strategies, from letter-writing campaigns and behind-the-scenes engagements with management and boards of directors to more aggressive proxy contests, consent solicitations and unsolicited takeover bids. We also advise investors on activist-driven M&A and private equity activity, insider trading issues, co-investments and activist and securities-related litigation.
Notably, our clients have been responsible for the replacement and appointment of more than 1,000 public company directors across the globe over the past decade. We advise on around 100 activist campaigns each year, including many of the most closely followed, high-profile board tilts.
Trends in Shareholder Activism
As the leading law firm in shareholder activism, we have significant, firsthand insight into the current trends in shareholder activism. In 2021, these include the following:
Shareholder Activism Not Deterred by COVID-19
While the global COVID-19 pandemic wreaked havoc on corporations and entire economic systems, shareholder activism continued to play a key role in protecting and enhancing shareholder value. In fact, while there was a not unexpected slowdown in the number of campaigns initiated during the second and third quarters of the year due to the pandemic, a surge of activism during the fourth quarter of 2020 contributed to an impressively robust 2021 proxy season. Olshan alone has negotiated over 20 settlement agreements resulting in over 35 new directors being seated during the 2021 proxy season.
Emphasis on Board Diversity
Emphasis on board diversity has grown significantly during the past three years with studies showing a correlation between diverse boards and stronger corporate performance. Proxy advisory firms, large index fund managers and the state of California have all developed their own board diversity standards. Nasdaq has also proposed new listing rules that would require all Nasdaq-listed companies to include a minimum number of individuals on their board of directors who self-identify in one or more of the following 'Diverse' categories: female, underrepresented minority or LGBTQ+. This has resulted in most dissident slates today possessing various diverse characteristics, particularly with respect to gender. 'Next-gen' directors who are typically younger and possess highly-coveted expertise in areas such as high-tech and social media are also beginning to be recruited by activists in order to further enhance the quality of their board slates.
Activism Spreading Across Europe and Asia
During the past three years, many activists expanded their efforts to catalyze change at corporations in Europe and Asia due to an overcrowded market in the US. While we believe more opportunities will now present themselves in the US as the sea of challenges spawned by the pandemic gradually recedes, we believe the largest, well-known activists will continue to search high and low for opportunities abroad. We are already beginning to see an interesting uptick in high-profile activist situations in Japan.
Companies Undermining Corporate Democracy
One disturbing trend we are continuing to see is companies attempting to invalidate nomination letters on highly technical grounds. It is now ordinary course for companies, on advice of their counsel, to seek to invalidate shareholder nominations for immaterial reasons. Meanwhile, director questionnaires that companies typically require dissident nominees to complete continue to grow in length and complexity, which adds undue cost to what should otherwise be a straightforward process. These efforts to subvert corporate democracy and avoid accountability are unacceptable, and boards will be taken to task for following such advice.
Shareholder Activism as an Asset Class
Shareholder activism as an investment strategy has emerged over the years as a distinct asset class. According to Lazard’s 2020 Annual Review of Shareholder Activism, over $39.6 billion in total capital was deployed by shareholder activists, despite the pandemic. In 2020, more than 180 activist campaigns were launched around the world – 45% in the US, 32% in Europe and 17% in the Asia-Pacific region. These campaigns have been waged at companies of all sizes and across all sectors, some capturing daily headlines, such as those of prominent activists like Elliott Management, Third Point and Starboard Value at companies like Public Storage, Intel and Corteva, while others play out quietly behind the scenes.
Types of Activist Campaigns
Behind-the-scenes engagements with boards and management teams and public letter-writing campaigns are common preludes to more overt campaigns, with the hope being to resolve any issues without a public escalation. If the company and investor cannot find resolution, then a director election contest may ensue with the investor challenging the incumbents for board representation at the company’s next annual meeting. This traditional proxy contest approach requires the activist to formally nominate a slate of directors in accordance with certain procedures and by a certain deadline, as typically contained in such company’s bylaws or other governing documents. Some bylaws are intentionally designed to make it more difficult to nominate and may require the nominees to complete onerous director questionnaires. Having highly qualified director nominees is a key to success, and there is an increasingly sophisticated and diverse pool of candidates ready to serve on activist-nominated board slates.
Types of Shareholder Activists
There are various types of activists that we are accustomed to representing, from your garden-variety balance sheet activists to operational activists and corporate governance activists. M&A activists, including those pushing companies to conduct a strategic review for an outright sale or to block an ill-advised transaction, have been especially relevant during the past few years. We are beginning to see a strong trend of shareholders utilizing activism to advance ESG-related initiatives. Renowned activist investor Jeff Ubben recently launched an ESG-focused fund that has already engaged with Exxon regarding its climate change policies.
We also continue to hear from a number of traditionally passive investors. These 'reluctavists', as they are often dubbed, are predominantly deep value investors who had historically made passive, long-term investments in a concentrated portfolio of securities with no intention of being actively involved. Recognizing the success that established, pure-play activists have had creating value at their portfolio companies, these passive investors are now exhibiting a willingness to engage in an activist strategy to address operational, governance or other concerns. There are numerous subsets of activists within these categories, but notwithstanding their diverse personalities, styles and strategies, they all share the same fundamental goal – to unlock shareholder value and improve corporate governance.