2017 has been a banner year for activist shareholders approaching public companies. Major activists continue to target large companies, but the average market cap of targets is approximately $260,000,000. How should boards approach the discharge of their obligations, when an activist comes knocking?
An expert panel convened by the New England Chapter of the National Association of Corporate Directors on June 13 suggested that the first step is to be prepared. This involves identifying what the 72 hours following an initial approach by an activist shareholder should look like: who speaks for the company, how are legal and public relations and SEC inputs triggered, what is the general nature of the response? Of course, proper preparation also steps back further in time: since activists often are questioning fundamental corporate strategy, a board should oversee making corporate strategy generally known, on a continual basis, through SEC filings and shareholder conferences.
Old school was to “circle the wagons” and not listen to activists, many of whom were viewed as simply attempting to force a company sale in order to achieve short-term gain.
But this instinctive response may not be the wisest. Activists typically have carefully analyzed the company, and indeed may have identified other shareholders friendly to their position. The proper response is to engage, listen and evaluate. Many boards have “learned things” of value from activists.
It is appropriate for the board to make an independent judgement as to whether activist proposals make sense for the long term (not the short term) health of the corporation and its owner-shareholders. Boards, and management, ultimately are responsible to these owners, and sometimes violent resistance to activists serves the purpose of offending other shareholders and strengthening the hand of the activist.
Statistically, in the past year only about 20% of activists’ approaches to companies resulted in a formal shareholder proposal, and of these more than half ultimately were withdrawn based upon discussion with a target. Even if a company is not in agreement with what is being proposed, open discussion with activists seeking agreement on strategic changes (and possibly an addition to the board) is the preferred initial approach.
Who should speak for the board? Activists often want to speak to individual directors. This may be a growing trend but it is dangerous; a given director may not be the best-informed emissary, and may well not be prepared about compliance with Regulation FD, the SEC regulation requiring public disclosure to all parties if material confidential information is released to any party.