By Rob Swystun, Pristine Advisers
This blog has featured a lot of stuff about shareholder activism (“a lot” here meaning four). But this post features tips on how corporations can counteract that activism with their very own SWAT team. (SWAT here standing for Shareholder … Waitforit … Activist Termination.)
These tips come courtesy of Kathleen L. Keller-Hobson in Canadian Lawyer Magazine.
Shareholder activism happens when shareholders are unhappy with corporate governance or performance and can take the form of:
- seeking changes to the board (with shareholders often trying to shoehorn in their own chosen board member)
- demanding the return of capital to shareholders
- blocking a proposed transaction
- blocking a management or operational change via proxy battles.
If things get bad enough, the courts can get involved.
Shareholder activism isn’t something that just pops up suddenly and gets rolling along quickly. It takes time to plan, get a team together, create a communications and media strategy and prepare the necessary documents. That means that by the time a corporation finds out there is shareholder activism afoot, the activists have already been planning for months and have a huge head start and will be prepared to go public if their demands are not responded to in a way they like. This threat of going public can put a lot of pressure on a company to respond quickly.
And that’s where having a SWAT team comes into play. A company should, of course, be doing all its regular due diligence like corporate governance and business strategy reviews, along with consistent investor relations and investor perception audits, but it can take some valuable additional steps when the shareholder activism flag is raised.
Establish an actual response team
This response team should consist of:
- primary members of senior management, including the CEO, CFO, CLO and head of investor relations
- legal advisers
- financial advisers
- a proxy solicitation firm
- a public relations firm.
The job of the response team is to update the board and ensure meetings can be convened on short notice.
Invoke an advance notice and/or enhanced quorum bylaw
This is a preventative measure. By enacting an advanced notice bylaw, you can require any dissidents to give you notice of their intentions to nominate directors at the annual meeting. If the company has a low quorum for shareholder meetings or voter turnout has been low, an enhanced quorum bylaw might help. These bylaws require a higher quorum for when a shareholder proposes to replace the lion’s share of the board members.
Be vigilant about improving your investor relations program
There’s always room for improvement. Every year or so you should be reviewing your IR program and getting feedback about it from the people who it is targeted at.
Among the most important things an IR strategy should do is allow you to assess whether your major shareholders are supporters of the direction the company is going or whether they are leaning toward activism. And the IR strategy should also have a system in place to make sure any shareholders who are dropping clues as to potential activism should be followed up with to gauge the situation.
Monitor stock trading activity
To make major moves, most activists will have to acquire a significant number of shares. Keeping an eye on your company’s stock and public filings where shareholders must report their portfolio holdings will save you from being ambushed. And get to know your primary shareholders’ voting patterns so you can reach out to them via your IR program.
Review indemnification agreements and D&O policies
Have appropriate indemnification agreements with directors and officers and D&O insurance policies in place. Evaluate existing D&O policies to ensure everyone covered by the policies fully understands coverage implications for directors and officers, especially a director who is given the boot as a result of a contested board election and sued by an activist shareholder.
Be ready should a shareholder dispute turn into a change of control
Identify any clauses in material contracts that you could activate should a dissident call for wholesale change to the board of directors or launch a hostile takeover bid. Have a tactical shareholder rights plan at the ready to be approved by the board, if necessary.
Prepare a detailed checklist of further necessary actions
Other things you should consider:
- developing a communications protocol
- considering whether to establish a special committee
- updating the disclosure policy to address approvals and the avoidance of selective disclosure
- profiling the activist
- developing and enacting a communications strategy
Short of having a working crystal ball or having a psychic on the payroll, having a SWAT team and plan in place is the best way to counteract shareholder activism. (And it’s a bonus if your SWAT team has a psychic on it.)