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

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 measure for these companies. History has shown that boards of directors of underperforming companies tend to inertly protect the status quo while shunning accountability to shareholders. Since shareholder activism emerged as its own asset class more than a decade ago, activist investors have identified and filled this accountability gap worldwide.

Olshan Frome Wolosky’s Shareholder Activism Practice

Olshan’s Shareholder Activism Practice Group is widely recognized as the premier practice around the globe for activist investor campaigns to enhance value and improve corporate governance. 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, Schedule 13D and Section 16 filings and activist-related litigation.

Notably, over the past decade alone our clients have orchestrated the replacement and appointment of more than 1,000 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.

Shareholder Activism as an Asset Class 

Shareholder activism as an investment strategy emerged over the years as a distinct asset class. According to Bloomberg, over USD68 billion was invested by shareholder activists in 2022. According to Barclays, in 2022, more than 235 activist campaigns were launched around the world – 58% in the U.S., 21% in Europe and 17% in the Asia-Pacific region. Investors continue to wage these campaigns at companies of all sizes and across all sectors such as those of prominent activists like Elliott Management and Starboard, at companies like Salesforce and Rogers Corp., while others played out more discretely behind the scenes, like Impactive Capital at Envestnet, which resulted in three new directors being added to the board through a settlement.

Types of Activist Campaigns  

Behind-the-scenes engagements with boards commonly aim to resolve investor concerns 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 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 set forth in the company’s bylaws or other governing documents. Some companies intentionally craft 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 ready to serve on activist-nominated board slates.

Types of Shareholder Activists  

Every year, we represent a wide range of different types of activists, from your garden-variety balance sheet activists to operational and corporate governance activists. M&A activists, including those who push companies to conduct a strategic review for an outright sale, block an ill-advised transaction or sweeten a deal, have featured especially prominently in recent years. We also continue to hear from a number of traditionally passive investors. These 'reluctavists' predominantly pursue deep value investments and historically held passive, long-term stakes with no intention of any active involvement. Recognizing the continued successful value creation in their portfolio companies by established, pure-play activists, these passive investors now exhibit 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 unlock shareholder value and advance corporate governance or other social initiatives.

Developments and Trends in Shareholder Activism

As the leading law firm in shareholder activism, we have firsthand insight into the current trends in the space and a deep understanding of how these trends will impact the activism landscape. In 2022-2023, these trends include the following:

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 markets by the COVID-19 pandemic, 2022 proved to be a breakout year for activist-related activity due to “pent up” interest and capital waiting to be deployed by activists who put their campaigns on hold during the pandemic. According to Barclays, during 2022, over 215 companies were targeted by activists, representing the most companies targeted during any given year since the end of 2018, with Q1 2022 being one of the busiest quarters on record with 73 new campaigns.

Shareholder activism got off to a torrid start in 2023, with a record 83 new campaigns in Q1 2023, over 60% of which were initiated outside the U.S. representing a relatively light quarter for domestic campaigns, according to Barclays. Around 45% of these campaigns featured M&A activism, including Carl Icahn’s high-profile discourse at Illumina chastising the board for its Grail acquisition. Q1 2023 also saw a noticeable year-over-year uptick in the number of campaigns against financial services firms, no doubt due to depressed valuations and concerns stemming from the collapse of Silicon Valley Bank and its ripple effects.

Settlements of activist situations gained momentum in Q1 2023, likely due to boards being more willing to settle under the new universal proxy regime discussed below. Olshan alone has so far negotiated over 25 settlement agreements resulting in over 40 new directors being seated during the 2023 proxy season.

The Universal Proxy Era Has Arrived  

The highly anticipated universal proxy card (UPC) requirements for election contests in the U.S. are finally in full effect. Under the new UPC regime, both companies and activists nominating director candidates are now required to list all director nominees on their respective proxy cards, giving shareholders voting by proxy the ability to vote on the election of any candidate regardless of which proxy card they use. Previously, separate proxy cards were used by the company and activist listing their respective competing slates, making it extremely difficult for shareholders to  "mix and match" their votes among all candidates and requiring shareholders who desired to split votes among candidates to attend the meeting and vote by ballot. While the UPC regime has been widely accepted with open arms as a more democratic electoral system, it is still too early to determine how the new system will affect actual voting behavior and electoral outcomes.

Potential Impact of UPC Regime on Shareholder Activism

Under the new UPC regime, expect to see shareholder activists take a more surgical approach to running their proxy campaigns by targeting the most vulnerable members of the board. Look out for leaner yet significantly more experienced, diverse and specialized dissident slates that are specifically handpicked by activists to go head to head with the incumbent directors who lack these qualifications and profiles. We may also see more settlements than in prior years – because the UPC regime may result in shareholder activists conducting fewer control contests and more focused campaigns seeking to replace only the most vulnerable incumbent directors, boards may be more willing to settle on one or two seats rather than taking their chances at an annual meeting.

Troubling Developments in Company Defense Tactics

We have seen a disturbing surge in the number of companies attempting to invalidate nomination letters for purported failures to comply with their nomination procedures. It has become ordinary course for companies, on advice of their counsel, to seek to invalidate shareholder nominations and disqualify dissident nominees for various hyper-technical deficiencies or ‘foot faults’ that have nothing to do with the quality of the nominees. Meanwhile, director questionnaires that companies typically require dissident nominees to complete continue to grow in length and complexity, adding undue costs to what should otherwise be a straightforward nomination process. Shareholder activists have been fighting back by filing lawsuits against companies that have crossed the line with these defense tactics.

Unfortunately, many companies have been making their shareholder nomination provisions in their bylaws even more restrictive under the guise of the UPC rules. These bylaw provisions as well as overly complex and burdensome nominee questionnaires are being rolled out under the pretense that they are intended to ensure nominating shareholders also comply with the new UPC rules. However, these seemingly innocuous overhauls of the nomination process are actually designed to make it more expensive and difficult for shareholders to nominate and often have little to do with UPC compliance.