4 Ways Companies Can Brace For An Activist Campaign

By Chelsea Naso

Law360, New York (October 14, 2015, 3:22 PM ET) -- As the number of activist campaigns keeps rising, companies need to approach the trend proactively, looking within to find their own weak points and hash out a strategy, experts say.

A recent report by FTI Consulting and Activist Insight found that the number of activist campaigns is poised to continue its fast-paced growth, with activism-focused funds now boasting $169 billion of assets under management.

With activists enjoying returns from their campaigns and drawing even more capital to their funds, more companies can expect to become a target, explained Richard Grossman, a Skadden Arps Slate Meagher & Flom LLP partner.

“There continues to be a lot of money in the activist space. There’s been a bull market for the last seven or eight years, and activists have had very good returns. It’s not surprising that they continue to attract money. There are new funds continuing to be started. They are all looking for additional targets,” Grossman said.

Here, Law360 outlines four ways companies can prepare for an activist shareholder.

Create a Response Team

Companies should take the time to establish a team of professionals who can effectively respond to an activist shareholder in the event one emerges, explained Alan Klein, a Simpson Thacher & Bartlett LLP partner.

Aside from company leadership, that team must feature a familiar law firm, a financial public relations firm, a proxy solicitor and an investment banker. The group should get together every six months or year to familiarize the members with one another, but more importantly, the team should preemptively point out the company’s weaknesses.

“You want that team to talk to you, the company, about what they view as the company’s vulnerabilities. You want to have the team lined up, but get input in advance. What is an activist likely to say to you?” Klein said.

That vulnerability self-assessment should include financial and governance points, including everything from capital allocations and cost structures and underperforming units, to the CEO and the board of directors and their perceived relationship with one another, Grossman explained.

By doing this, the company can be proactive in making adjustments to the business or at the very least, have a response as to why they believe their strategy is an effective one for driving shareholder value.

“If an activist actually surfaces, you can say, ‘We’ve looked at the idea, we’ve considered it and here’s an articulate response to why it doesn’t make sense,’” Grossman said. “Whatever the substance of the response is, at least you will not be caught flat-footed.”

Get a Strategy in Place

While it may seem somewhat basic, a company needs to have a clearly articulated strategy for driving value for shareholders that is updated at least once a year, Klein explained.

This strategy needs to be more than just a general overall concept: It must outline how the company expects to get from point A to point B, then the plan must get reviewed by an investment banker. The review should be done as if the banker were valuing the company to be sold at both its starting point and its goal point, establishing clear metrics for measuring the market value of the strategy.

“Part and parcel to having a strategy is having that strategy reviewed by your bankers at least each year and have them model it in order to show your board a valuation of your strategy,” Klein said.

This way, if an activist does come knocking, the company can clearly explain its current path as well as have a baseline for comparing its own plan with the plan outlined by the activist, Klein noted.

“If an activist shows up and says, ‘You ought to be doing X, Y and Z to increase your share price to X,’ you want to be able to say to them, or certainly when the board discusses it, that ‘we know what we’re doing is going to result in a value of Y,’” Klein said.

Go Beyond Your Normal Song and Dance

With shareholder activism on the rise, engaging long-term shareholders is becoming increasingly important. Many C-suite executives will make the rounds, and when they do get feedback from long-term investors, it’s important that the leadership truly listens and engages with shareholders' opinions.

“Listen to and understand what your traditional long-term shareholders are feeling about the company. If it goes to a contest, they are going to be the important votes that may determine the outcome,” Grossman said.

But the usual song and dance might leave the company vulnerable, as long-term shareholders may not feel overly comfortable sharing negative feedback with the CEO, chief financial officer or other management.

To avoid this, companies should also consider sending out their independent directors to speak with their largest shareholders, as those directors will likely be able to get a more accurate picture of the investors’ feelings and opinions about the company, explained Jamie Leigh, a Cooley LLP partner.

“It’s just a level of independence that lends a different tone to the conversation. Sometimes it can be a new face or a fresh discussion, rather than the discussion management is having period after period,” Leigh said.

Doing so will help to take some of the wind out of the activist’s sails. If long-term shareholders feel they have an open line of communication with an independent representative of the company, they may be less interested in pursuing a potentially disruptive campaign.

“They’re not going to launch a campaign unless they have a sense they are going to get some level of support or encouragement from shareholders, even if it’s behind the scenes,” Klein said. “Take a page from the activist book, and have a couple directors go meet the shareholders. Think of it as a 360-degree review of your management.”

Make Sure You Do Your Homework

Monitoring your shareholder base so you are aware when a hedge fund or known activist takes up a stake in your company is also important, so you can make sure you're ready to take action and engage the investor in an effective way, explained Phillip Torrence, a Honigman Miller Schwartz and Cohn LLP partner.

On top of monitoring the shareholder base, companies should keep a close eye on the calendar to help track when they may be more prone to becoming a target, he noted.

“Typically a lot of the activists tend to raise their heads in and around the annual meetings of shareholders because it can be something the activist shareholder will try to get in front of the whole shareholder base, to be considered and voted on,” Torrence said. “Knowing your shareholder base and being prepared for certain timelines such as when you can expect certain information and when those cutoff dates are is important.”

And when an activist investor does take aim at your company, make sure you take the time to work connections through bankers and advisers to get a feeling for the type of activist you are up against, Grossman explained.

“You don’t have to necessarily respond to a proposal on the spot. Be cautious in your comments, and let shareholders know you will get back to them and follow up,” Grossman said.

Settling might be the most effective option for keeping the focus on enhancing value at the company, but knowing what type of impact they have had at companies targeted in past campaigns can help when weighing whether to settle or fight back.

“Many activists now have a little bit of a track record behind them,” Grossman said. “Through bankers and advisers, companies can find out how constructive of a director they might have been versus how disruptive they have been.”

--Editing by John Quinn and Edrienne Su

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