Client Alert: Shareholder Activists in the Spotlight

Key trends in proxy battles and corporate governance.

Angry, dispirited investors are driving fundamental changes in the realm of the corporate proxy battle. The data tells the story: leading shareholder consultancy RiskMetrics found that there has been a 27 percent increase in proxy battles so far this year. In contested situations, dissident shareholders were successful this year in obtaining at least one board seat in over 70 percent of those contests.

Most recently in this respect, The New York Times’ Gretchen Morgenson focused on the TXI proxy fight with a highly favorable bias towards the dissident shareholders at Shamrock Holdings. Her story highlighted the many allies that joined Shamrock in its proxy fight of the construction materials maker, as more than 80 percent of the shares cast at the meeting were voted against the incumbent directors.

These developments highlight a couple of key trends, which we believe are of interest for our clients and Friends of the Firm:

These developments call for a review to ensure the following procedures are in place:

  1. Response Team: Create a team to respond to shareholder activism. As with other corporate special situations, this team should consist of key members of senior management, internal and outside legal counsel, proxy solicitor and public relations counsel.
  2. Establish Relevant IR and PR Strategies Ahead of Time: Develop and execute a thoughtful, proactive investor relations strategy built around consistent and frequent communication with shareholders. This will help ensure buy-in and build support before an activist situation takes hold.
  3. Monitor Shareholder Base: Closely (and frequently) monitor changes in shareholder base for buyers with a history of activism. Management should – at a minimum – be informed when relevant positions are accumulated, and a discreet contingency plan should be adopted to ensure preparedness if the situation escalates.
  4. Monitor Peer Group: Underperformance relative to peers can be a key trigger for activist investors. The investor relations team should maintain diligent focus in this area and objectively benchmark across performance metrics.

Amid ongoing volatility in the market, corporate boards and management teams should be sensitive to emerging trends among activist investors and, to the extent possible, ensure activist tactics are met with a commensurate and effective response.

Key Figures: