Shareholder activism levels in the U.S. are near record highs. More than 150 new or increased positions held by activist investors emerged in the first quarter of 2024 alone— in addition to broker-dealer accumulations potentially representing even more activist activity. Dissidents continue to leverage the threat of a proxy fight to oust CEOs, destabilize companies and catalyze M&A—including forcing corporate breakups. At the same time, activist tactics have become more aggressive, less predictable and represent a year-round risk. Campaigns increasingly target individual directors, and no board or company is immune in this challenging environment.
Launching ‘Sneak Attacks’
In addition to their disclosed positions, activists often build “stealth accumulations” at their targets through broker-dealers. These stealth accumulations are tough to discern—the accumulating banks will disclose the holdings but are not required to name the underlying investors.
In recent years, activists have leveraged these confidential stakes to launch surprise attacks at prominent public companies without prior notice or engagement. In doing so, agitators have sought to use the element of surprise to keep companies off balance, reduce time for preparation and force public responses.
The emergence of new or increased broker-dealer positions in a share register should therefore warrant close attention.
Private Equity, ‘Faux Bids’ and ‘Fire Sales’
As activists remain focused on driving M&A outcomes, private equity and activism are increasingly entangled. Several recent take-privates have been preceded by activist campaigns. Some acquirers have even partnered with activists to force transactions. Activist firms have also formed private equity arms of their own, including at Elliott Management and Starboard Value.
Other activist firms have launched bids for companies without evidence of financing. Observers believe these “faux bids” are designed to attract additional buyer interest, creating the perception that the target is “in play.”
In a similar vein, activists often demand as part of their campaign platforms the creation of board committees focused on exploring strategic alternatives. Activists also demand to be added to the board and this “super” committee—including leadership roles on the committee.
All these tactics can create pressure to launch public sales processes which, in this context, can create “fire sale” dynamics, the sale of stock by long-term investors and a plummeting stock price if a transaction does not materialize.
Settlements on the Rise in the UPC Era
Boards are increasingly opting to settle with activists rather than face a vote on the universal proxy card (UPC). The number of board seats won by activists continues to increase, with activists winning nearly 150 seats in 2023, compared with just over 110 in 2021.
Companies have long sought to reach settlements to avoid the potential expense and distraction of proxy contests, to gain standstills and other concessions and to avoid losing at the ballot box. These dynamics have changed now that the UPC is the new approach for voting in proxy fights. Shareholders and proxy advisors no longer focus only on which directors to vote for, but also which incumbent director(s) to oppose and oust. The UPC leads to a more critical review of each nominee in a proxy fight—with a particular focus on director track records of value creation, tenure and diversity. Moreover, ISS and Glass Lewis continue to support activists in most proxy fights.
Given these dynamics, it is no surprise that companies are settling with activists more quickly sometimes before news of a campaign has even broken. The average time between activist campaign launch and settlement has plummeted over 90 percent in the last few years, from just under six months (between campaign launch and settlement) in 2021, to just under two weeks in the first quarter of 2024.
How Should Companies Prepare?
A successful defense in today’s complex environment requires proactivity to avoid being targeted and to be better positioned in the event of a campaign. More than ever, activism readiness is a critical part of risk management, and companies should take action to prepare, including by:
- Monitoring the shareholder base and trading patterns for unusual activity, including broker-dealer accumulations
- Assessing the company’s vulnerabilities and considering proactive measures to preempt potential attacks
- Ensuring a response plan is up-to-date and includes the company’s “best facts” to help steer public narrative
- Strengthening relationships with shareholders, including index funds, through a tailored engagement strategy
- “Selling the board” to ensure director expertise and value creation track records are well known and understood
