Whether notification comes from an open filing with the SEC, a private letter or an inbound call, the mere presence of an activist investor or fund in a company’s stock is enough to put even the most stalwart management team on edge. In recent years, the growth of specialty and hedge funds has led to a dramatic increase in shareholder activism, which has brought both problems and benefits to investors and managements.
One important point to keep in mind when dealing with activists is that despite their loud voices, activist shareholders’ opinions should not outweigh those of other shareholders. That said, as shareholders, activists’ opinions are important and can be very helpful if approached with an open mind, as most activists seek increases in a company’s share price just as management teams do.
However, interests often diverge with the time frames and methods each would like to see. Activists often seek to unlock existing value as rapidly as possible, often through reorganization and austerity, while management teams often take a longer-term view that focuses on investment and franchise expansion. Depending on the specific case, either approach could be the best path for shareholders as a whole.
Understanding Activist Shareholders
Even if there have not been any formal requests by an activist group known to be holding a company’s shares, it is time to organize and begin gathering background information. Here are key steps to take to understand your activist shareholders:
- Form a monitoring team consisting of senior management, legal, and IR representatives
- Research the investor or group, answering these questions:
- Who are the players?
- How much capital do they have?
- What has been their modus operandi in the past?
- What types of demands have they made in the past?
Such information can be obtained through public filings, but valuable insight can also be gained from investment banks, and external legal and investor relations advisors. If no demands ever surface, then the company will simply know quite a bit about one of its shareholders; however, if the situation escalates (as it often does), the company will be better prepared to react.
Once an activist requests a meeting or makes an open declaration, start direct communications as quickly as possible, and add board representation, external legal and potentially IR expertise to the internal team. Early communication is very important to demonstrate engagement in the process and to learn what a group wants and what it actually needs to be satisfied. In addition, most activist groups, like most people, become much more difficult to deal with when they perceive they are not being taken seriously. Avoid this impression at all costs.
Management needs to consider any requests carefully, and determine what it can live with versus what might be detrimental. Common requests include, for example, the removal of a poison pill provision or a classified board. Concessions that management can live with (or that may be – or are becoming – best practices) should be strongly considered as part of the bargaining process, as they are likely to remain “hot-button” issues long into the future. If there are items that management believes will be detrimental to the strategic plan of the company, make the case as clearly and succinctly as possible in face-to-face meetings.
While one or two face-to-face meetings can demonstrate management’s commitment to the process, keep in mind that any information shared during those meetings or incrementally, which is not currently in the public domain, should be properly disclosed and made available to all shareholders, if applicable.
If interactions move into the public eye, management needs to explain the company’s point of view directly with major shareholders. Early communication will demonstrate that management takes shareholder opinions seriously and will help if there is a shareholder vote in the offing. Again, management must provide a concise and compelling argument as to why its vision is better for shareholders and the company.
Sometimes all one’s preparation and negotiations fail to resolve the issues, and public interactions can get heated. Despite the temptation to make things personal (even when the activist gets personal), it’s best to keep to the high road. Win or lose on the issues, a company’s management can make or break its reputations during this often very public process.
Good counsel and preparation can go a long way toward helping your company in the event that an activist shareholder targets your company. Contact us for more strategic information that can help with your IR planning and decision making, and sign up for our newsletter to learn more about best practices in investor relations.