The level of shareholder activism in the United States is near an all-time high. In the first quarter of 2024 alone, more than 150 new or incremental positions were created by activist investors. In addition to this, we are likely to see more accumulation by broker-dealers. Dissidents continue to use the threat of proxy fights to encourage mergers and acquisitions that oust CEOs, destabilize companies, and force breakups. At the same time, activist tactics have become more aggressive, less predictable, and riskier all year round. Campaigns are increasingly targeting individual directors, and no board or company is immune in this difficult environment.
Start of “Sneak Attack”
In addition to public positions, activists often build “stealth accumulations” on their targets through broker-dealers. These stealth asset accumulations are difficult to spot, and while the banks that accumulate them disclose their holdings, they are not required to reveal the names of the underlying investors.
In recent years, activists have used these sensitive interests to launch surprise attacks on prominent publicly traded companies without prior notice or involvement. In doing so, agitators have sought to use the element of surprise to tip companies off balance, shorten preparation time, and force a public response.
Therefore, new or increased broker-dealer positions on the stock registry should be approached with extreme caution.
Private equity, “fake bids” and “fire sales”
Private equity and activism are becoming increasingly intertwined as activists continue to focus on driving M&A outcomes. Several recent plans to go private have been preceded by activist campaigns. Some acquiring companies are partnering with activists to force deals. Activist firms such as Elliott Management and Starboard Value have also established their own private equity arms.
Other activist firms have launched bids for companies without evidence of financing. Observers believe these “fake bids” are aimed at further attracting buyers' attention and creating the perception that the target is “on the move.”
Similarly, activists often call for the creation of board committees focused on exploring strategic alternatives as part of their campaign platforms. Activists are also demanding inclusion on the board and on this “super” committee, including a leadership role on the committee.
All of these tactics can create pressure to initiate a public sale process, with associated “fire sale” dynamics, sales of shares by long-term investors, and a sharp decline in share prices if a deal does not materialize. may cause.
Payments increase in the UPC era
Increasingly, boards are choosing to settle with activists rather than vote on the Universal Proxy Card (UPC). Activists have won an increasing number of board seats, from just over 110 in 2021 to nearly 150 in 2023.
Companies have long sought to reach settlements to avoid the potential expense and disruption of proxy fights, obtain stalling or other concessions, and avoid defeat at the ballot box. These dynamics have changed as the UPC has become a new approach to voting in proxy contests. Shareholders and proxy voting advisors are focused not only on which directors to vote for, but also which incumbent directors to vote against and remove. The UPC will more critically examine each candidate in a proxy contest. In particular, we focus on board value creation, tenure, and diversity performance. Additionally, ISS and Glass Lewis continue to support activists in most proxy contests.
Given these dynamics, it's no surprise that companies may be more quick to reconcile with activists before news of the campaign breaks. The average time from start to finish for an activist campaign has increased from just under six months (campaign start to close) in 2021 to just under two weeks in the first quarter of 2024. It plummeted by more than 90% in 2019.
How should companies prepare?
Successful defense in today's complex environment requires proactive action to avoid being targeted and better position yourself in the event of a campaign. Now more than ever, preparedness for activism is an important part of risk management, and companies need to take preparedness steps such as:
- Monitor trading patterns for shareholder base and unusual activity, such as broker-dealer accumulations
- Assess your company's vulnerabilities and consider proactive measures to prevent potential attacks.
- Ensure response plans are up-to-date and include the company’s “best facts” to help guide public opinion
- Strengthen relationships with shareholders, including index funds, through customized engagement strategies
- “Board selling” to ensure directors’ expertise and value creation track record is well known and understood.
