Perspectives on the Current Activism
Landscape
Posted by Kai H.E. Liekefett, Derek Zaba,
Leonard Wood, Sidley Austin LLP, on Wednesday, October 26, 2022
The
activism landscape in a post-pandemic world continues to evolve. This year has
been characterized by a sharp increase in campaigns relative to recent years, a
heightened focus on M&A transactions and increased presence of environmental,
social and governance (ESG) themes. Amid all of this evolution, the recent
implementation of the universal proxy card regime represents a step function
change in activism campaigns, the impact of which is only beginning to be felt.
Post-Pandemic Rebound
Activism significantly rebounded in 2022, with total campaigns through Q3 up 39%
over the same period last year, already nearly reaching the total for full-year
2021. In the United States, total campaigns have already surpassed the total for
full-year 2021, with Q3 campaigns up 133% compared to last year. In addition,
the increase appears to be accelerating, with Q3 seeing a 52% increase in global
activism campaigns over the prior year, continuing the trend in both Q1 and Q2.
Technology companies have recently been the most frequent targets, accounting
for 22% of all activism campaigns launched in Q3.
The
increase in activism is due to several factors. Market conditions have been
favorable for activists and characterized by a stock market that severely
punishes any missteps, significantly lower valuations, and increased volatility.
These factors have facilitated the increase in activist engagements,
particularly in sectors that have been hit hardest by the market downturn. In
addition, activist funds have larger amounts of capital to deploy than in recent
years and any remaining constraints on activism from the pandemic have
dissipated, creating a perfect storm for activism.
These factors have also made the acquisition of a meaningful stake in large-cap
companies within reach for many small- and mid-sized activists who are looking
for downside protection and lower volatility in the months ahead. Large-cap
companies are on pace this year for seeing the highest number of demands for
board seats.
In
addition, the 2022 proxy season was an extension of recent years where companies
were more successful at the ballot box than activists. The incumbent boards of
U.S. companies successfully defeated all activist nominees at the ballot box in
65% of proxy fights in 2022 and 63% in 2021. This follows a 2017-2020 average
success
rate of 47%. However,
interpreting these results as activists enjoying fewer “successes” today than
they have historically is misguided. Shareholder activism campaigns that
culminate in a shareholder vote are, by far, the exception and not the rule.
Extrapolating to conclusions based on that small dataset doesn’t reflect the
bigger picture: non-proxy contest resolutions that result in “cooperation
agreements” or remain undisclosed are far more prevelant. In our experience,
companies and their advisors have been more selective about letting campaigns
progress into full-blown proxy fights only when they have confidence that there
will be strong shareholder support.
In
part, this is fueled by companies increasingly prioritizing connectivity with
their shareholders, particular with stewardship teams within large institutional
investors.
“Sell First, Think Later”
Along with the increase in total activism campaigns and demands at large cap
companies, 2022 has seen an increase in M&A-related demands by activists. M&A
demands were included in 32% of campaigns in Q1, 39% of campaigns in Q2 and 48%
of campaigns in Q3, with no signs of slowing down. In fact, public demands for a
sale of the company in 2022 through the date of publication already exceed the
totals for both full-year 2021 and full-year 2020 .
This also does not include situations where the ultimate goal of an activist is
to sell the company but, for tactical reasons, the activist chooses not to make
such a goal widely known:
Despite market weakness relative to the post-pandemic boom in equity markets,
activism focused on the sale of a company continues with good reason, with lower
valuations providing greater potential for securing a significant percentage
premium off of the prevailing share price. Furthermore, the sale of a portfolio
company is a quicker way for an activist to generate returns than attempting to
implement a broader operational thesis.
The ESG-ing of Activism
The
“Me Too” movement, the social unrest of 2020 and the pandemic accelerated
existing trends relating to ESG. This in turn elevated the discussion about the
role of the company with respect to its shareholders and other stakeholders like
its employees and the communities it operates in to an extent not seen before.
With this wave came a substantial increase in activism focused on
“environmental” and “social” prongs. Many traditional activists incorporated
these themes into their campaigns opportunistically while some other investors
ran campaigns purely focused on the key ESG practices and policies of target
companies.
ESG-focused activism continued in 2022, with high-profile public campaigns
targeting large- and mega-cap companies, and many more engagements occurring
behind the scenes. As these issues have gained mindshare from many institutional
investors and proxy advisory firms, companies have increased the attention they
focus on these issues. While we expect ESG trends to continue, ESG activism has
recently faced backlash from an “anti-ESG” contingent that is emerging. This
includes a handful of states that have barred state pensions from investing in
funds that target or incorporate ESG considerations into their investment and
voting policies. Nevertheless, ESG trends are likely to continue with
environmental and social themes increasingly favored by traditional activists.
Looking Forward: All Eyes on the Universal Proxy Rule
The
implementation of the universal proxy regime continues to be the focal point for
many as we enter into the next proxy season. The new rules, which apply to
contested elections at public companies after September 1, 2022, require both
company and a nominating shareholder to include all nominees up for election on
their respective proxy cards. Historically, shareholders voting by proxy had to
choose between selecting from the list of company nominees or the list dissident
nominees. Under the new rules, shareholders can select from the combined pool of
director nominees, allowing them to “mix and match” from the two slates. The
impact on proxy contests will be significant.
Under the new regime, the qualifications and experiences of each director
nominee will be a more critical component of the campaign. Activists will now
being able to pit strong candidates directly against weaker incumbents, which
may encourage voting for activist candidates even if they have not proved their
“case for change” to an extent that shareholders would have previously elected
to vote on the “dissident card”. In line with this, we expect directors with
significant vulnerabilities (e.g., long tenure, age, perceived lack of relevant
skills) to be subject to greater scrutiny and personalized attacks. Both
Institutional Investor Services (ISS) and Glass Lewis have alluded that
directors perceived as weak by shareholders and advisory firms will be
particularly vulnerable. ISS predicted that, under the new system, boards will
be “far less able to shield their weakest contributors.” Glass
Lewis suggested similarly that the new rules “will potentially make all
incumbent directors on a board more vulnerable for replacement, whether they are
specifically identified as a targeted director by the activist or not.”
One
implication is that activists are better positioned to make smaller gains with
higher probabilities of success, regardless of whether they make a strong case
for change at a company. We may already be seeing this take effect. There was a
notable increase in early activist outreach to public companies in Q3 that has
continued into Q4. We anticipate this will continue into the 2023 proxy season.
The
new regime also creates a potential new opportunity for non-traditional
activists such as special interest groups and private individuals with specific
concerns. Because a universal proxy card requires a company to list all director
candidates on its own proxy card, a nominating shareholder will no longer need
to physically mail its own proxy materials multiple times. The cost savings will
enable shareholders with smaller budgets—such as environmental activists, trade
unions, non-governmental organizations and, of course, perennial gadflies—to run
less costly issue-based proxy campaigns to nominate special interest candidates.
For
more information, please visit Sidley’s Universal
Proxy Card Resource Center.
