Rob Swystun, Pristine Advisers
Ho ho ho and Merry Christmas!
Wait, are we still allowed to say that? Of course we are!
The “war on Christmas” may be a huge myth, but something that is not a myth is the proxy war many publicly traded companies have to face to stave off activist investors. With that in mind, we present Pristine Advisers’ gift to you: Nine lessons learned from a successful proxy battle.
This particular proxy battle comes courtesy of Withers Bergman LLP, whose New York Stock Exchange-listed client had to defend itself against an activist fund that had acquired a 5.5% stake in the company early in 2015.
As posted in the Harvard Law School Forum on Corporate Governance and Financial Regulation by M. Ridgway Barker, a partner at Withers Bergman, the activist fund told the company in September that it would be nominating six directors for election to the client’s seven-person board at the annual shareholder meeting in November. That gave the client two months to get prepared and take action.
The proverbial deck was stacked against Withers Bergman’s client even further by the fact that ISS recommended voting in favor of three of the activist fund’s nominees and Proxy Mosaic recommended voting in favor of all six.
When the shareholder meeting was done and the snow had settled (snow ‘cause it’s a winter battle, obviously), the activist fund managed to get slightly fewer directors elected than it had intended. Zero out of six, in fact.
How did the client get all seven of its incumbent directors elected and convince shareholders to elect none of the activist fund’s nominees? The logical answer is early Christmas miracle, but let’s take a slightly illogical look at it and let Barker, with the help of Withers Bergman partner Clyde Tinnen and associate Michael Rueda explain how their client handled it and the lessons learned from the experience.
Lesson 1: Tell Shareholders How You Plan to Create Value for Them
A well-crafted message to stakeholders that explains in detail how the company will create value for them will help ward off activist investing. The message should:
- be based on sound execution,
- take into account the current dynamics of the industry,
- be competitive in nature, and
- logically articulate the company’s plan for achieving success.
The company has a huge advantage over activists to start with because it has much more knowledge about the competitive landscape of its industry and its future plans. Identify both the challenges and opportunities facing the company, detail how you plan to overcome those challenges, explain how you’re in a unique position to take advantage of those opportunities and describe how you’ll capitalize on those opportunities with current or future actionable plans.
Lesson 2: Focus on Shareholder Rights
A tactic that activist investors often use to bolster their cause is to dig into a company’s publicly available documents for evidence of arrangements meant to entrench the board or enrich management at the expense of shareholder value creation.
Sometimes activists do manage to come up with what appears to be incriminating evidence against the company, but sometimes these provisions have been around for years and have never been a problem for shareholders before, but have merely become outdated and were not changed because nobody gave them any thought. When these provisions are identified by activists, it’s important for the company to take steps to change them and rectify the situation.
For example, Withers Bergman’s client had one of these old, outdated provisions on the books that was perceived to be a way for the board to stay entrenched and the activist fund jumped on it and brought it to wider shareholder attention. The client immediately submitted for shareholder approval an amendment to its charter that eliminate this provision, thus eliminating this weapon from the activist’s arsenal. The client also extended the date for the annual meeting so the activist fund had ample time and opportunity to make its case to shareholders. As is their right, shareholders got to hear both sides and make informed decisions (and the client also got some brownie points for recognizing this right).
“These actions enabled the company to draw stockholders back to the key business strategy choices at hand and avoid being distracted by tangential issues that would appear to undermine the company’s message about its stockholder oriented focus,” Barker says in his posting.
Lesson 3: Know thine Enemy
As previously mentioned, activists are at a disadvantage when it comes to information about the industry (and we’re not talking book knowledge here, we’re talking real operational experience). This means that activists will usually come up with a strategy or assemble a group of nominees that is superficially appealing, but falls apart with scrutiny.
The company should spend the time and resources to engage with the activist fund to find out just how much work they’ve put into understanding the industry and developing its case for change within the company. Plus, it pays to know what is driving the activism in the first place.
Knowing all this will help the company to differentiate its strategy from the activist’s and reinforce the message that it (and not the activists) have the best plan for sustainable shareholder value creation.
Lesson 4: Know Thine Friend
This one should actually be an ongoing thing regardless of activist threats. You should always be soliciting input and criticism from shareholders. It’s another tactic of activists to claim that the current board is out of touch with what shareholders actually want and to ignore their concerns while focusing on board entrenchment.
However, it’s pretty hard to argue that when the company is constantly engaged with shareholders and gives serious consideration to their views. In the case of Withers Bergman’s client, they had engaged with the activist fund on about two dozen occasions (in addition to engaging other shareholders, as well), so when the fund tried to convince shareholders that the current board was ignoring shareholder concerns, the shareholders themselves could smell that these were less than credible claims (and that smell was decidedly bovine in nature).
Lesson 5: Avoid Being Reactionary
While it’s tempting to react to claims by the activist by immediately rebutting them, this is actually counterproductive, as it distracts both the company and shareholders from fundamental issues. Making claims against an opponent (whether factual or not) and distracting people from fundamental issues is often an effective political strategy, but it can also backfire. A company can make this strategy backfire, too, if it does what Barker says Withers Bergman’s client did and focus its efforts on the task of executing its business plan and clearly and succinctly explaining its strategy and objectives for the company.
Lesson 6: Enlist the Help of Others
Sometimes you just need a little backup. If your message is well articulated, your strategy is sound and your business execution is clear, you should theoretically have no problem getting people to listen to your side, even if proxy advisory firms are recommending against your board nominees.
In the case of Withers Bergman’s client, because they had all their proverbial ducks in a row, proxy advisory firms like Egan-Jones and Glass Lewis supported the company’s slate of directors, as did the company’s own franchisees, Wall Street analysts and credit rating agencies. This support acted as an endorsement of the company’s leadership and strategic plan, one that shareholders undoubtedly noticed.
Lesson 7: Stick to Qualifications Over Personalities with Nominees
Proxy contests are often about more than just different ways of running the business. They’re often about the company’s board nominees versus the activist’s nominees and what qualifications they bring to the table and (most importantly) how they may be able to enhance shareholder value.
You need to highlight the difference in nominee qualifications without making it a personality or popularity contest to show how your slate of nominees bring superior skill sets to the table. Obviously, qualifications are subjective, but highlighting them is important, particularly when the activists are running a short slate contest where they’re advocating that any change is good for the company.
Lesson 8: Use the Activists’ Record Against Them if Possible
The record of the activist fund is fair game in a proxy battle. If the activists have consistently sought short-term goals for the companies they’ve targeted in the past and you can clearly demonstrate that, it’s going to make it much more difficult for them to convince shareholders they have the best interest of the company in mind.
Withers Bergman’s client showed its shareholders that the activist fund attacking it had not provided value to the companies it had previously targeted, which soured them on its nominees.
Lesson 9: Conduct Yourself with Integrity and Candor
Go above and beyond the requirements of securities laws and fiduciary duties to conduct yourself with integrity and candor, which shareholders will appreciate. Don’t cherry-pick comparison companies, time periods or financial metrics, as you’ll risk undermining your credibility. Let the activists do that and undermine themselves. Present the facts and let shareholders draw their own conclusions. If you’ve demonstrated that your strategy will create greater value for them, you should be rewarded with their support.
Ultimately, your convictions and understanding of the principles described here should lead you to a successful outcome in a proxy battle. You could also ask the big guy up at the North Pole for a little help, which never hurts.
Happy Holidays, everyone!