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:
- The institutionalization and growing legitimacy of the proxy fight is beginning to shift the informal burden of proof that had once prevailed in favor of companies. After brutal losses over the past two years, shareholders might be far more inclined to agree with a dissident from the outset (particularly if the dissident is an “established” fund) that change in the boardroom is warranted. From an investor relations perspective, this tendency mandates consideration of far more involved, deliberate, and sustained campaigns to defeat dissident proposals.
- Along the same lines, corporate governance trends point to a growing recognition that proxy fights can be an effective governance tool. To underscore the point, HealthSouth Corp. recently announced it would reimburse activist shareholders for the “reasonable” expense of nominating a successful dissident board member.
- Third, established institutional investors that may have previously remained muted during an activist battle are getting more comfortable with the notion of aligning themselves with activists. The TXI proxy fight is a prime example of this, as Shamrock was joined in the battle by public pension investors and private mutual funds. Reuters recently cited a couple of factors driving this change: (1) institutional investors have faced criticism for their steep losses and failure to actively manage their positions; and (2) the financial crisis has purged short-term activists from the market, strengthening perceptions of the survivors as more credible.
These developments call for a review to ensure the following procedures are in place:
- 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.
- 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.
- 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.
- 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.
- 9.8 percent of unopposed director nominees had at least 20 percent of shares voted against them or withheld, up from 5.5 percent in 2008.
- Seventy percent of S&P 500 companies now have majority voting for directors, and many expect that number to rise in the next year.