NEW YORK: An Introduction to Corporate/M&A: Shareholder Activism

Shareholder Activism Overview 

Every economy needs a mechanism to maintain a properly functioning 'checks and balances' system for the governance of publicly traded companies. Shareholder activism has cemented itself as the necessary, external corrective for public corporations. 

The ‘activist toolkit’ has evolved in recent years to become incredibly versatile for prompting other types of improvements at public corporations, in addition to operational and corporate governance enhancements. As such, environmental, social and governance (“ESG”) issues are gaining prominence among investors of all types, with activist investors conducting proxy campaigns at large companies like McDonald’s, Exxon and Kroger to compel corporations to focus more on sustainability and social issues.

Trends in Shareholder Activism 

Shareholder Activism Roars Back after COVID-19 Years
While the number of activist campaigns declined slightly in 2020 and 2021 in the midst of the havoc wrought on the global economic system by the COVID-19 pandemic, the first quarter of 2022 set a new record pace. The 73 new campaigns launched in the first three months of 2022 made Q1 the busiest on record. Q1 2022 combined with Q4 2021 together mark the busiest six month period for activism since 2018. The United States continues to dominate the field, accounting for 60% of new campaigns and 55% of capital deployed in this period.

Regulatory Changes Poised to Impact Shareholder Activism
New SEC regulations will have an impact on shareholder activism in 2022 and years to come. The universal proxy rule will likely encourage mainstream investors to consider running proxy contests, while the SEC’s proposed rule amendments to the 13D reporting regime could change the incentive structure for activist investors to seek changes at underperforming public companies.

Increased Emphasis on Diversity and Climate Issues (ESG Pressure)
A desire to address social justice concerns has risen to the forefront of the many ESG developments reshaping the market in recent years. In particular, we previewed back in 2021 our view that investors would begin requesting that companies conduct racial equity audits. Sure enough, the 2022 proxy season witnessed an increase in shareholder proposals related to these audits with certain companies taking the issue very seriously. For example, Amazon announced that it will conduct a racial equity audit in response to a shareholder proposal (the same shareholder proposal received support from 44% of Amazon shareholders in 2021).

Environmental-focused shareholder activism has also increased in frequency and rate of success. The newly proposed SEC rule mandating disclosures on companies’ climate impact will only accelerate an already robust trend. Following in the footsteps of Engine No1’s successful 2021 proxy contest at Exxon, investors will continue to use ESG concerns in campaigns both as fundamental attacks and as secondary wedge criticisms to sway index funds and other ESG-minded investors. Q1 2022 has already set records on this front; shareholders submitted 89 environmental-related shareholder proposals in Q1 2022 alone, more than all of 2021 combined and over twice the number submitted in either 2019 or 2020.

Activism Continues to Spread across Europe and Asia
Over the past decade, many activist investors have spread their wings into Europe and Asia due to a heavily-crowded market in the US. Europe registered 15 new campaigns in 2021, and French companies in particular were disproportionately targeted, representing roughly 27% of all European targets. While we have seen the rapid return and growth of activist opportunities in US as the challenges created by the pandemic have receded, we believe the larger, well-known activists will continue to search high and low for opportunities abroad.

Shareholder Activism as an Asset Class
Shareholder activism as an investment strategy emerged over the years as a distinct asset class. According to Lazard’s 2021 Annual Review of Shareholder Activism, $42.3 billion in total capital was deployed by shareholder activists. In 2021, more than 170 activist campaigns were launched around the world – 55% in the US, 29% in Europe and 11% in the Asia-Pacific region. Investors continue to wage these campaigns at companies of all sizes and across all sectors, some capturing daily headlines, such as those of prominent activists like Elliott, Starboard, and Legion Partners at companies like Duke Energy, GCP Applied Technologies, and Guess? Inc., while others play out quietly behind the scenes.

Types of Activist Campaigns
Behind-the-scenes engagements with boards, management teams, and public letter-writing campaigns commonly aim to resolve any issues without public escalation, but often serve as preludes to more overt campaigns. If the company and investor fail to reach a resolution, then a director election contest can ensue in which the investor challenges the incumbents for board representation at the company’s 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 the company’s bylaws or other governing documents. Some companies intentionally design bylaws that make it more difficult for activists to nominate and may require the nominees to complete onerous director questionnaires. Highly-qualified director nominees remain a key to success, and investors can draw from an increasingly sophisticated and diverse pool of candidates who are ready, willing and able to serve on activist-nominated board slates.

Types of Shareholder Activists
Every year, we represent a wide range of different types of investors, from your garden-variety balance sheet activists to operational and ESG-minded activists. M&A activists, including those who push companies to conduct a strategic review for an outright sale or block an ill-advised transaction, have featured especially prominently in recent years. Using shareholder activism to advance ESG-related initiatives only continues to accelerate. In April, for example, billionaire activist investor Carl Icahn initiated a proxy fight for two board seats at McDonald’s as a referendum on the fast food chain’s animal welfare practices.

We also continue to hear from a number of traditionally passive investors. These 'reluctavists', as they are often dubbed, predominantly pursue deep value investments and historically maintain passive, long-term stakes in a concentrated portfolio of securities with no intention of any active involvement. Recognizing the value creation in their portfolio companies spurred by established, pure-play activists, these passive investors are now displaying a willingness to engage in an activist strategy to address operational, governance, or other concerns. Each investment category includes numerous subsets of activists, but notwithstanding their diverse personalities, styles, and strategies, all activists share the same fundamental goal – to see that the public companies at which they become involved are left in a better position than they found them.

Olshan Frome Wolosky’s Shareholder Activism Practice
Olshan’s Shareholder Activism Practice Group is widely recognized as a premier practice around the globe for activist investor campaigns. We have unparalleled experience, both domestically and internationally, and routinely counsel clients on a wide variety of activist strategies, from letter-writing campaigns and behind-the-scenes engagements with management and boards 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, over the past decade alone our clients have orchestrated the replacement and appointment of more than 1,200 public company directors across the globe. We advise on over 100 activist campaigns each year, including many of the most closely followed, high-profile board contests.