Shareholder activism is in the news daily: institutional investors publicly criticizing corporate governance and performance, hedge funds and other investors demanding change through proxy contests, and courts determining activists’ rights when shareholder relations become fractious.
In addition to disputes reported in the press, there are numerous instances of shareholders voicing their concerns behind the scenes to management and boards of directors.
Shareholder activism is driven by demand for better corporate governance and corporate performance — a shareholder may seek changes to the board, the return of capital to shareholders, blocking of a proposed transaction, or management or operational change.
When an issuer finds itself subject to public attack, it needs to respond immediately and effectively, with the board of directors determining how to respond in the best interests of the corporation. However, by the time the activist contacts the company, the activist has already assembled its team, written its “white paper,” and developed its communications and media strategy. If it does not receive the response it wants, it is ready to go public. The company will then be on the defensive and pressured to respond quickly.
There are a number of big-picture actions an issuer and its board should take on a regular basis, and which should be prioritized in the current environment, such as corporate governance and business strategy reviews. But what additional action can you, as in-house counsel, take to better position the company in the face of shareholder activism?
Establish a response team
You should have in place a response team of key members of senior management, legal advisers, financial advisers, a proxy solicitation firm, and a public relations firm. Include the CEO, CFO, CLO, and head of investor relations. Update the board and ensure meetings can be convened on short notice.
Implement an advance notice and/or enhanced quorum bylaw
If the company has not already implemented an advance notice bylaw requiring a dissident to give notice of its intention to nominate directors at the annual meeting, then do so to avoid an ambush from the floor at the next annual meeting. Also, if the company has a low quorum for shareholder meetings, or voter turnout has been poor in the past, you should consider implementing an enhanced quorum bylaw that requires a higher quorum where a shareholder proposes to replace a majority of the board members.
Review and improve your investor relations program
Ensure your investor relations group is actively reaching out to key investors to communicate the company’s strategy and to listen to what they have to say. This will also allow you to assess whether key shareholders are strong supporters of the company’s strategy or potential defectors. Ensure the company’s message is being communicated consistently to all constituents and that callers to the investor relations group, to board and management members, or others speaking out at shareholder meetings, roadshows, and quarterly earnings calls are identified and appropriate follow-up made.
Monitor stock trading activity
Monitoring trading in the company’s stock (as well as public filings where shareholders must report their portfolio holdings) is essential to identifying an activist acquiring shares or increasing its position. Remaining undetected gives an activist a significant advantage. You also need to identify your principal shareholders, and their voting patterns, so you can reach out to them through your investor relations program.
Review indemnification agreements and D&O policies
You should ensure appropriate indemnification agreements with directors and officers and D&O insurance policies are in place. Evaluate any existing D&O policy to understand coverage implications for directors and officers, including a director who is ousted as a result of a contested board election and sued by the activist as shareholder.
Be ready should a shareholder dispute turn into a change of control
Identify provisions in material contracts that could be triggered if a dissident seeks wholesale change to the board of directors or launches a hostile takeover bid. Have a tactical shareholder rights plan on the shelf, ready to be approved by the board, if necessary.
Prepare a detailed checklist of further actions to take
You should consider now further steps to take if an activist emerges, including developing a communications protocol, considering whether to establish a special committee, updating the disclosure policy to address approvals and the avoidance of selective disclosure, profiling the activist, and developing and implementing a communications strategy.
Though it may not be possible to predict when an existing shareholder or new investor will step forward and challenge the company’s governance or performance, taking the time to think through these issues in advance and develop a preliminary action plan will help level the playing field for the company when it is forced to respond.
Kathleen Keller-Hobson is a partner in Gowling Lafleur Henderson LLP’s Toronto office, practising in the areas of mergers and acquisitions, corporate finance, shareholder activism, and securities law generally.
