The Folly of Battling Activist Investors

October 2nd, 2015
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Contributed by: Derek D. Bork, Thompson Hine LLP
There is no question that shareholder activism has steadily grown over the past decade and is now widely seen as the “new normal.” Hedge funds that focus on shareholder activism seem to be emerging all the time, and hedge funds that have been around for many years are now more than ever willing to engage in shareholder activism. As shareholder activism has grown and become more widespread, we have seen a new trend growing in the market—companies are fighting back more aggressively against activists. In most cases, we believe this is exactly the wrong approach to take and can lead to very negative results for companies.

We recently assisted an activist in a control contest that may be the first—if it is not the first, it is one of the few—where majority board control was transitioned to an activist through a settlement agreement short of a full-blown proxy contest. The company’s existing board did not concede full board control in the negotiations easily. The board also engaged in a thorough process to vet the activist’s slate of directors in an effort to satisfy the board’s fiduciary duties. The board was careful to negotiate for protective standstill and governance provisions in the settlement agreement entered into with the activist. The board had carefully assessed the likely shareholder vote in the announced proxy contest and recognized the difficulties that the incumbent board would face in that vote. The board also recognized the disruption that a proxy contest could cause to the company’s business. As a result, the board chose to facilitate an amicable transition to a new board in a way that minimized the impact on the business and created a new and well-functioning board, which included several continuing board members.

This outcome is far from the norm and far from the trend that we have seen in the market. In more and more cases, companies are fighting back more aggressively against activist shareholders who seek board representation or other company changes. Companies are more frequently adopting poison pills, fighting proxy contests that they cannot win, making clever legal maneuvers with no purpose other than to frustrate or antagonize an activist, and engaging in various other aggressive actions and sometimes even dirty tactics. Some companies arrange phony meetings and processes with activists for the sole purpose of being able to tell shareholders and institutional voting advisors that they attempted to engage and negotiate with the activist.

These type of actions are most often counterproductive with shareholders, who ultimately determine who will control a company’s board. Companies can impose obstacles for activists, but they cannot prevent shareholders from having the opportunity to express their views through a shareholder vote. When companies engage in tactics that appear to be unfair, the details of those actions will likely be disclosed to shareholders by the activist, during a proxy contest or in other ways. Shareholders dislike such actions and most often hold it against the incumbent board. Shareholders already are generally inclined to favor the efforts of activists. Boards that fight back aggressively almost always harm their case with shareholders.

Aggressive company actions can also be damaging—and in some cases disastrous—to a company’s business. As a company battles with its own shareholder in a public fight, the company’s customers, vendors and other business partners are usually watching very closely. Uncertainty and concern is often created with valuable business partners and potential partners, and the company’s business and revenues can be negatively impacted. Businesses can be severely damaged or destroyed in the process. Not surprisingly, a proxy contest or prolonged fight with an activist can also be very time consuming and distracting for a board and management team. A company’s operations and financial results can suffer while attention is focused on the perceived threat from the activist. Any negative results announced during a control contest will further damage the company’s case with shareholders.

Aggressive company actions also often motivate activists to press farther than originally planned—sometimes out of concern that the company appears to be in reckless hands, and sometimes simply out of competitiveness or revenge. Many proxy contests have been inspired by a company’s poor treatment of an activist.

In some cases, it may be necessary for a company to resist the influence that an activist is attempting to exert. The activist may not have valuable ideas to bring to the board or, worse, may be pushing for a transaction or other corporate action that is not in the best interests of the company and its shareholders. The activist may desire board representation but has not offered any credible candidates. The activist may not have a stake in the company sufficient to warrant board representation. There are certainly activists in the market who do not have value to bring to the table.

However, many times companies respond to activists in a dismissive or antagonistic manner, losing sight of the fact that the activist is an owner of the company. Companies sometimes engage in legal maneuvers or other aggressive tactics that serve no purpose and may prove to be counterproductive. Companies sometimes utilize newly discovered takeover defenses simply because they exist, without regard to whether this represents the wisest course of action.

When we represent companies being approached by an activist, our advice is simple: you should give them the respect and input that they are entitled to. An activist can be brought to the table—and even into the board room—in a manner and with safeguards that can appropriately limit their role and protect the company. Fighting back recklessly will usually backfire and can even be damaging to the company.
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* Derek D. Bork is a partner with Thompson Hine LLP, a member of its Corporate Transactions and Securities practice group and the Chair of its Takeovers and Shareholder Activism Group. Mr. Bork and Thompson Hine LLP have represented hedge funds, activist shareholders and public companies in activist campaigns and control contests, and the views expressed in this article do not necessarily represent the views of their clients. Mr. Bork can be contacted at derek.bork@thompsonhine.com or 216.566.5527.
Related Article Tags: Shareholder Activists, Corporate Raiders and Proxy Battles; Hedge Fund Resources and Featured Partner News


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