Hedge fund activism requires attention and warrants similar preparation as to that we recommend for responding to a hostile takeover bid. This memo is a revision of the one I did in 2007 as a supplement to my Takeover Response Checklist. In fact, some activist attacks are designed to change management or the board of the target in order to facilitate a takeover or to force a sale of the target. Careful planning and a proactive response are critical. Failure to prepare reduces a company’s ability to control its own destiny.
Among the attack devices being used by activists are: (a) proposing a proxy resolution for creation of a special committee of independent directors to undertake a strategic review for the purpose of “maximizing shareholder value”; (b) conducting a proxy fight to get board representation (note solicitation for a short slate is very often supported by ISS and when it is, is usually successful); (c) orchestrating a withhold the vote campaign; (d) convincing institutional investors to support the activist’s program; (e) stock loans, options, derivatives and other devices to increase voting power beyond the activist’s economic equity investment; and (f) using sophisticated public relations campaigns to advance the activist’s arguments. SEC rules do not prevent an activist from secretly accumulating a more than 5% position before being required to make public disclosure.
Prevention of, or response to, an activist attack is an art, not a science. It is essential to be able to mount a defense quickly and to be flexible in responding to changing tactics. To forestall an attack, a company should continuously review its business portfolio and strategy and its governance and executive compensation issues sensibly and in light of its particular needs and circumstances. Companies must regularly adjust strategies and defenses to meet changing market conditions and legal developments.
This outline provides a checklist of matters to be considered in putting a company in the best possible position to prevent or respond to hedge fund activism.
He proceeds to outline his recommendations. useful stuff.