Covid-19 Will Not Provide Air Cover From Activist Attacks

Just as the virus picks up momentum and more and more people get infected there is an analogy that as coronavirus has damaged the economy, there is a direct relationship as companies stocks become deeply depressed, there will be a direct relationship/ratio of increase in activism.

High quality assets on the S&P 500 that might have been too expensive for an activist before, now become approachable for the larger cap activist funds. Similarly, the mid cap funds will be able to approach larger companies and small cap will reach into mid cap companies. As of March 27th, the S&P is down 35% in certain sectors and some stocks have gone down 80% from the 52-week high.


S&P 500 1 Year Chart

Company’s should actively monitor their stock and prepare for activists building significant positions. For example, if you are in the bottom half of your peer companies you may be vulnerable. In fact, unless you are in the top 1/3rd you may be vulnerable. As ESG continues to gain momentum there are new trends such as Larry Fink’s firm statement that if your company has a poor ESG score but has strong financial performance, directors can still experience a negative “withhold vote”.

You should also consider if your company is going to get unsolicited takeover offers. The stronger competitors in your industry may look to acquire more company’s and do a roll-up and create stronger pure play category leaders using their strong balance sheets to acquire smaller companies (or companies who are in duress due to liquidity and bank covenant issues).

Perhaps you should do an external outside in assessment. See if it makes sense for you to reach out to your peer company’s to merge making a stronger company.

It would be far better to architect your own combination, than to be on your backfoot responding to an unplanned inbound outreach. It would be wise to look at the competitive landscape and see where you may want to do a “roll-up” and be the white knight, becoming the stronger pure play industry leader.

The activists are using this critical time to fund raise and build war chests. They are developing their target lists and their thesis on where they can drive stock price improvement and unlock value. They will not stay on the sidelines for long. Here’s a look backwards on 2019 and a few statistics according to Morgan Lewis i.e. a conservative set of numbers; based on public activism campaigns. Many are privately negotiated in a non-public way.

The number of companies targeted in the US in 2019 was 470. So called “high impact campaigns” equaled 258 with 97 proxy contests. There were additionally 117 activist settlements resulting in 231 directors joining boards. I anticipate a big spike in 2020.

Sullivan & Cromwell Review and Analysis of 2019 U.S. Shareholder Activism

There are a range of estimates on how much the market has come down from its 12-year bull market run. Because of this strong market, many companies who would be vulnerable, may not really looked at themselves as carefully as they should with an “outside in” look. Ask your board if it is time to go through the exercise of doing an external activist assessment. Get a bank to do an evaluation through an unvarnished activist lens to see where you stand.  Have your law firm look at your company’s defenses.

The trends continue; more companies negotiate with the activist to avoid a proxy contest engaging with the activist to reach a solution. As part of that negotiation, company’s often end up buying back stock or issuing dividends and reviewing divisions that can be spun off, divested or going private as ways to drive value for the activist shareholders. Many institutional funds are supporting activists. There is plenty of capital for activist investment strategies.

A new trend that seems to be emerging where activist’s themselves are increasingly going on boards. For the last few years activists have been putting forward experienced public company directors. Boards have found that these directors are indeed independent, professionals with whom they can work with in a collegial manner. It is a very different proposal for the board to consider the activist taking the seat. I predict that boards will dig in and resist to having the activist themselves on the board.

Another emerging trend amongst large activists is that they may propose being a liquidity resource for companies in duress.

Industries that have had huge impact from the ongoing pandemic may want to look at what defenses they have in place and get help from your lawyers for vulnerability assessment. Poison pills (rights plan) have been out of favor for a long time but ISS and other proxy advisors are now informally saying they are being “understanding” in this Covid-19 volatility moment to adopting a pill and putting it on the shelf. This pill/plan would need to have industry standard terms like duration. Review bylaws through the lens of takeover defense: i.e. advance notice timeframes to cancel annual meeting, shareholders ability to act by written consent or call an annual meeting. If you delay your annual meeting be sure you do not inadvertently reopen the window for shareholder proposals or new director nominees.

Boards will be well served to understand the activist business model is to deploy their capital. They are not going to sit quietly waiting for the pandemic to be resolved. Assume they are going to act while this unique “buying” opportunity presents itself.

Boards and their management teams are rightly prioritizing/focusing on creating enough financial runway for their businesses to stay strong. Every board is revisiting their annual operating plans. With those priorities being decided it may be time to think about insulating your company from unanticipated inbounds. Boards may not yet be spending the time to look at shareholder activism, and unsolicited corporate takeovers. It’s time for boards to think about these additional risks. The best way to protect the shareholders is advanced preparedness. As you go through all these discussions the most important constituency to make time for are your shareholders.

Your investors are nervous. They will appreciate hearing from you. It’s an opportunity to build loyalty and conviction on your company’s vision. Engage with your shareholders. Share the narrative of how your company is handling the crisis. What are the plans for the company’s future? This is an invaluable way to build your company’s credibility and reinforce your relationships. In moments like these we must look around the corners!!

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