Tag: activism

Wachtell Lipton Discusses Delaware Chancery’s Caution Against Reading Between the By-Lines

Post author By renholding
Post date September 8, 2026
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In a significant decision for public companies facing activism, the Delaware Court of Chancery last week held that a board may not reject a director nomination notice based on disclosure requirements that are not explicitly spelled out in the corporation’s advance notice bylaws. In ATG Capital Opportunities Fund LP v. Lane et al., Vice Chancellor Lori Will found that Empery Digital, Inc. had improperly rejected the nomination notice of an activist investor, ATG Capital Opportunities Fund LP, notwithstanding the Empery board’s well-founded concerns that ATG Capital did not disclose it was acting in concert with another investor and had taken a large short position in Bitcoin ETFs to hedge its position in Empery. The Court concluded that the rejection was not based upon the plain language of Empery’s advance notice bylaws and therefore represented inappropriate interference with the stockholder franchise.

This litigation came after ATG Capital took a significant stake in Empery and nominated a slate of nine director candidates to the board. The Empery board considered the notice and determined that it was deficient both because ATG Capital did not disclose (i) that another investor was acting as a “participant” in ATG Capital’s solicitation and (ii) its short position in Bitcoin ETFs, and because the nominee questionnaires contained certain omissions and inaccuracies. Following receipt of a rejection notice, ATG Capital sued Empery to compel the company to allow the dissident nominees to stand for election.

Vice Chancellor Will held that the Court “cannot . . . enforce a requirement that a bylaw does not contain,” noting that the company’s advance notice bylaws did not require disclosure of any agreements, arrangements, or understandings among investors in connection with the proposal (as is common in many advance notice bylaws), nor did they require disclosure of a Schedule 13(d) group. The bylaws only required disclosure of any other “participant” in the solicitation, but “participant” was defined narrowly. Similarly, the Court found that neither the advance notice bylaws nor the questionnaires for director nominees required disclosure of any commodity hedges, cryptocurrency hedges, or positions in unrelated ETFs. Notably, Vice Chancellor Will also stated that she would not rule on whether omitting disclosure of coordination with another investor or the short position in Bitcoin ETFs was necessarily misleading pursuant to Rule 14a-9 of the proxy rules (which was incorporated by reference in Empery’s advance notice bylaws) because Empery did not preserve that argument by including it in the rejection notice.

This decision is the latest in a line of Delaware cases that attempt to strike a delicate balance between protecting the shareholder franchise and permitting boards to enforce advance notice bylaws, with important implications for public companies. First, the decision underscores the continuing importance of thoughtful, deliberate bylaw drafting. Courts will closely scrutinize the plain language of the advance notice bylaws and will not infer disclosure obligations if a board later concludes that certain information would have been material. Bylaws should be appropriately drafted to require disclosure that boards will need to evaluate nominations and comply with proxy requirements in connection with a proxy contest. On the other hand, companies must also ensure that their advance notice bylaws are not so burdensome, indeterminate, or unreasonable as to inequitably obstruct a shareholder’s right to nominate.

Second, the decision highlights the importance of a thorough, disciplined process when a board is presented with a nomination notice. Boards should engage experienced counsel and conduct a careful evaluation, in the context of the existing bylaw and nominee questionnaire language, before deciding whether to invalidate the nomination notice. The legal, reputational, and strategic consequences of rejecting the nomination notice can be significant. If the company is sued and loses the ensuing litigation, that may ultimately strengthen the dissident’s position in a proxy fight. In addition, while many institutional investors recognize the propriety of advance notice bylaws and reasonable restrictions designed to ensure stockholders can vote on full information, actions by boards that they perceive as obstructing the shareholder franchise may raise broader governance concerns, and also may be viewed as a sign that the company is not confident it will prevail at the ballot box.

Delaware remains amenable to advance notice bylaws that are clear, reasonable, and appropriately enforced, but companies should not assume that judges will rubber stamp rejections of nomination notices. Boards would be well-served to review their advance notice provisions on a clear day and ensure that the required disclosures align with best practices and evolving activist strategies.

This post is based on a Wachtell, Lipton, Rosen & Katz memorandum, “Delaware Chancery Court Cautions Against Reading Between the By-Lines,” dated September 1, 2026.

Tags activism, advance notice bylaws, delaware, Delaware Chancery, director nominations

Corporate Governance

Opening History’s Shareholder Activism Black Box

Post author By renholding
Post date May 14, 2026
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Though shareholder activism is a pivotally important corporate governance topic, historical analysis of shareholder engagement with publicly traded companies has generally been cursory. In a recent paper I do much to correct matters for the United States in the first half of the 20^th century by drawing upon a hand-collected dataset of proxy contests in public companies compiled through searches of major daily newspapers from 1900 to 1949. In such firms, most shares are voted by proxy, so proxy battles provide highly salient evidence of shareholder engagement.

With respect to the paper focusing on the first half of the 20^th century, 1900 is a logical place to begin because at that point industrial company shares were starting to transform U.S. equity markets, which railway securities had monopolized. 1949 is an apt end point. Beginning in the 1950s, source material on shareholder engagement in public companies is quite well developed.

There was a realistic possibility that newspaper archive searches for proxy contests between 1900 to 1949 would have revealed little activity. Adolf Berle and Gardiner Means famously claimed in The Modern Corporation and Private Property, their classic 1932 study of large American corporations, that shareholder indifference made a separation of ownership and control a hallmark of big business. The newspaper-derived dataset that provides the departure point for my paper indicates that in fact shareholder engagement did occur with some regularity in public companies during the first half of the 20^th century, and often with corporate control in play.

The strategy for compiling the proxy contest dataset was to carry out searches of the New York Times and the Wall Street Journal for each year from 1900 to 1949 to identify and investigate all stories potentially involving proxy battles in public companies. The resulting dataset, which is comprised of 279 proxy contests, is, for reasons the paper elaborates upon, underinclusive to some degree. Nevertheless, the dataset is the only one available to gauge the nature and extent of shareholder activism in U.S. public companies during the first half of the 20^th century.

With the companies involved in the 279 proxy contests in the dataset, they operated in a wide range of sectors, with railways featuring prominently. The firms affected included a substantial number of what were very large companies for the time. There was an appreciable number of activism incidents in each of the decades the dataset covers, but the proxy contests clustered in the 1930s and 1940s.

As for what shareholder dissidents were seeking to achieve, nearly three-fifths of the activism incidents in the proxy contest dataset put board control in play, meaning the stakes could not have been higher. With modern-style hostile tender offers to shareholders being essentially unknown during the first half of the 20^th century, these de facto takeover attempts dominated the market for corporate control. In approximately one-quarter of the proxy contests in the dataset, the insurgents were seeking board representation, but there was no evidence board control was in play. With just under one-fifth of the proxy battles, the shareholder activists were focusing on a topic other than directorships.

If shareholder insurgents rarely succeeded with their proxy contest forays in U.S. companies during the first half of the 20^th century, this would have muted considerably the impact shareholder activism had in practice. The proxy contest dataset indicates success was by no means guaranteed, but it was more than occasional. Shareholder insurgents achieved their objectives fully in more than one out of three instances and were partially successful just over one-eighth of the time. Proceeding via a stockholder committee did not affect success levels. On the other hand, the success rate was higher in the minority of occasions when the activist was “offensive,” in the sense that the protagonist lacked any detectable, enduring prior connection to the company affected by the proxy contest the protagonist launched.

A plausible explanation why activism incidents were more common in the 1930s and 1940s than they were in previous decades is that there were considerably more companies traded on the stock market in those decades than there were in earlier decades. To the extent that laws protecting shareholders afford a congenial environment for shareholder activism, the introduction of federal securities law in the mid-1930s also may have fostered shareholder interventions. The proxy contest dataset chronology casts doubt, however, on this conjecture. This is because, with 1930s proxy contests in the dataset, the number occurring before and after federal securities law was in place was similar.

There is another way in which federal securities law failed to have the impact on shareholder activism that might be expected. The direct forerunner of Securities and Exchange Act Rule 14a-8, which currently provides the platform for voting on hundreds of shareholder proposals every year, was introduced in 1942. It might have been anticipated that a by-product would have been a substantial increase in the number of proxy contests, but this did not occur.

It is important to remember in this context that the shareholder proposal regime introduced in 1942 was, as with Rule 14a-8, subject to a crucial qualification, namely that those advancing proposals could not put boardroom seats in play. Given this, if the SEC shareholder proposal regime in fact served as the catalyst for proxy contests, the proportion in the dataset where there was no attempt to secure a board seat should have been higher after 1942 than before. There was no such time trend, which implies the introduction of Rule 14a-8’s forerunner did not affect proxy contest activity materially up to 1950.

Berle and Means and various other commentators attributed an alleged docility on the part of shareholders in U.S. public companies during the first half of the 20^th century to diffuse share ownership. When share ownership is thoroughly dispersed in a publicly traded company there indeed is a compelling logic underpinning a hands-off approach. Why, then, did proxy contests occur with some regularity between 1900 and 1949?

If there are shareholder insurgents who are willing to step forward despite deterrents to intervening, this can do much to break the shareholder activism logjam. This is because, for otherwise neutral stockholders who have misgivings about a company, backing a shareholder insurgency involves little more than supplying proxy documentation to authorize the voting of their shares. When, though, might stockholder insurgents step forward?

Berle and Means themselves identified a practically significant scenario where shareholders might be prepared to intervene, namely where the shareholders in question own a sufficiently large equity stake to exercise “minority control” and fall out with the management team or other shareholders with a substantial equity stake in the company. One might have assumed, with Berle and Means famously claiming that there was a separation of ownership and control in corporate America, that shareholders owning enough shares to exercise minority control in publicly traded companies were a rarity during the first half of the 20^th century. In fact, there is empirical evidence indicating that sizeable share-ownership stakes were quite common in such firms during Berle and Means’ era. The pattern of ownership and control in corporate America thus provides at least a partial explanation for the shareholder activism that occurred between 1900 and 1949.

In sum, while proxy contests were by no means an everyday occurrence during the first half of the 20^th century, meaningful shareholder engagement did occur. Moreover, large companies were frequently involved, the stakes typically were high with corporate control often being in play, and success was by no means a rarity. It follows that shareholder activism merits attention as part of any fully rounded account of U.S. corporate history during the first half of the 20^th century.

Brian Cheffins is the S.J. Berwin Professor of Corporate Law at the University of Cambridge – Faculty of Law. This post is based on his recent paper, “Opening History’s Shareholder Activism Black Box,” available here.

Tags activism, Activist Investors, Adolf Berle, Berle and Means, proxy contests, Rule 14a-8, Securities and Exchange Act

Corporate Governance

Debevoise & Plimpton Discusses Activism in the Insurance Industry

Post author By renholding
Post date April 28, 2026
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Activism remains a persistent and increasingly important feature of the landscape for publicly traded insurance groups.

As we have discussed in prior Debevoise Updates, activist campaigns in recent years fall into two broad categories: institutional investors holding long-term positions and transaction-focused investors such as hedge funds and special situations funds. The former tend to focus on longer-term and often complex strategies for increasing the value of their investments; the latter are more likely to build positions (long or short) quickly and pressure companies to respond to negative news, take steps to deliver short-term value, or engage in strategic transactions.

State insurance regulation continues to shape the parameters within which activist investors operate, including through approval requirements applicable to acquisitions of “control” positions. In practice, however, activists have demonstrated their ability to exert meaningful influence without taking such a position. Accordingly, state insurance law should not be viewed as a complete shield against the influence of activists, and companies cannot expect that insurance regulators will “take sides” in an activist campaign. A campaign can test the strength of the relationship between an insurance company and its regulators, and prior investment in those relationships—before an activist arrives on the scene—will always benefit the company.

Accordingly, insurance group boards should regularly consider—and take advice on—the potential exposure of their companies to activist pressure, and companies should continuously invest in their relationships with insurance regulators with transparency and regular engagement. These steps will help position companies to address activist campaigns effectively should they arise.

2025 Campaigns

Insurance companies were subject to 23 campaigns in 2025—a level consistent with 2024. Activity during 2025 reflected several familiar themes, including short sellers establishing positions and publishing negative reports, long-term investors pressuring companies to pursue new strategies, a continued moderation in ESG-driven activity, and, in some cases, hostile takeover proposals. Selected 2025 activist campaigns are highlighted below.

Globe Life, Inc.

Life insurer Globe Life has been subject to persistent campaigning from short sellers Fuzzy Panda Research and Viceroy Research. In April 2024, Globe Life’s shares plunged to their lowest level in over a decade after both short sellers disclosed short positions in the company within the same month. In its report, Fuzzy Panda alleged widespread insurance fraud involving policies written for dead and fictitious people, forged signatures, and funds withdrawn from consumers’ bank accounts without approval, as well as a “toxic culture” of harassment. Viceroy alleged that it too had uncovered widespread insurance fraud, dishonest and misleading sales practices, and a workplace culture of sexual harassment, assault, and discrimination. Viceroy Research continued to agitate through late 2024, publishing a release cautioning against Globe Life in December. Globe Life issued statements rebutting the allegations by both short sellers and the price of its stock recovered over the course of the year.

Viceroy continued its campaign in 2025, publishing a report in February titled “Globe Life—Further Cybersecurity Failures,” alleging that a data security vulnerability it had first reported to U.S. insurance commissioners in June 2024 remained unresolved nearly nine months later. According to Viceroy, significant policyholder data, including protected health information, had been publicly available for at least eight months, though Viceroy suspected it had been unsecured for far longer. Following publication of Globe Life’s 2024 Form 10-K, Viceroy released another report highlighting what it described as “red flags” in the filing. Viceroy’s campaign against Globe Life continued throughout 2025.

Tiptree Inc.

Veradace Partners L.P., which held approximately 5.1% of Tiptree Inc., launched an activist campaign in November 2025 to oppose Tiptree’s proposed $1.65 billion sale of its subsidiary, The Fortegra Group, to South Korean insurer DB Insurance.

Veradace argued that the proposed sale undervalued Fortegra, which accounted for over 90% of Tiptree’s total value. According to Veradace, the transaction valued Fortegra at just 8.0 times its estimated 2026 non-GAAP net income, significantly below the 12.5 times multiple for comparable specialty insurance companies. The firm also highlighted that Tiptree’s stock had fallen approximately 23% since the announcement of the deal. Veradace contended that the transaction was structured to benefit Tiptree management at the expense of shareholders, providing management with ongoing compensation but not providing a clear capital return plan for shareholders. Veradace criticized the board’s sale process as incomplete and rushed.

Veradace received support from proxy advisory firms Glass Lewis and Egan-Jones, both of which recommended shareholders vote against the sale. However, despite this campaign, Tiptree shareholders ultimately approved the Fortegra sale on December 3, 2025, with 81% of votes cast in favor of the deal.

Assicurazioni Generali S.p.A.

Italian construction and media billionaire Francesco Gaetano Caltagirone launched a high-profile activist campaign at Assicurazioni Generali S.p.A. in 2021–2022, challenging the leadership of CEO Philippe Donnet and the influence of the insurer’s largest shareholder, Mediobanca. Caltagirone, then Generali’s second-largest shareholder, formed an alliance with Delfin and other investors to present an alternative slate of directors at the 2022 annual meeting. The group argued that Generali needed a more ambitious strategy and stronger governance oversight, including a leadership change.

The contest culminated at Generali’s April 2022 shareholder meeting, where investors ultimately backed the slate supported by Mediobanca, leaving the insurgent group with a minority presence on the board. Although the campaign failed to unseat management, it marked one of the most prominent governance battles in Italy’s financial sector in years and underscored growing tensions over Mediobanca’s longstanding influence over the insurer.

The rivalry resurfaced in 2025, when Generali again became entangled in a broader struggle for influence in Italy’s financial system. Caltagirone and Delfin continued to oppose Mediobanca’s role in shaping Generali’s governance and strategy, while supporting initiatives that could weaken the bank’s position, including efforts to defeat a proposal by Mediobanca to acquire a banking business from Generali to fend off an unsolicited proposal by a peer. While Generali’s leadership remained intact, the ongoing dispute highlighted how the insurer has become a focal point in a wider contest among Italy’s leading financial and industrial shareholders over control and strategic direction.

T&D Holdings, Inc.

Farallon Capital Management, a long-time shareholder in Japanese life insurer T&D Holdings, launched an activist campaign against T&D, arguing that weak governance and inefficient capital allocation had contributed to a persistent valuation discount. Farallon, which has held a stake in the company since 2008 and currently controls roughly 4–5% of voting rights, called on T&D to undertake governance reforms aimed at strengthening oversight at the holding company level, including increasing independence and industry expertise on the board of directors. In connection with that view, Farallon proposed adding two independent directors to T&D’s board of directors. T&D has opposed the nominations, questioning whether the candidates would add value.

Farallon has also called for broader governance changes within the group structure. For example, the fund suggested creating a “Group Value Enhancement Committee” composed solely of independent outside directors to oversee capital allocation and strategic decision-making across the group.

Beyond governance, Farallon urged T&D to overhaul aspects of its capital management and business strategy. The activist investor argued that the company maintains excessive exposure to equity investments and cross-shareholdings and should reduce balance sheet risk while improving capital efficiency. It also called for a reassessment of certain insurance products and distribution strategies and advocated for greater use of reinsurance to manage legacy liabilities.

The dispute comes as T&D prepares to release a new long-term strategic plan expected in 2026, making the campaign a closely watched test of shareholder activism in Japan’s insurance sector.

Berkshire Hathaway Inc. and Marsh & McLennan Companies, Inc.

Despite insurance companies not typically being high contributors of direct greenhouse gas emissions, they remain subject to sustainability activism campaigns. For example, in late December 2025, Berkshire Hathaway Inc. received a shareholder proposal under Rule 14a-8 of the Securities Exchange Act of 1934 from the National Center for Public Policy Research (“NCPPR”) requesting that Berkshire publish a report assessing whether sustainability commitments by operating subsidiaries have been justified by expected-value and return-on-investment analysis. Berkshire excluded the proposal from its proxy statement under the new SEC guidance providing that the SEC staff will not respond substantively to no-action requests regarding companies’ intent to exclude Rule 14a-8 shareholder proposals from their proxy statements. NCPPR responded with a critical press release arguing that the effort to suppress information only highlights the company’s refusal to be transparent. In early 2025, prior to the change in how the SEC dealt with Rule 14a-8 shareholder proposals, Marsh & McLennan obtained no-action relief to exclude a proposal by John Chevedden on the basis that it had not timely received the proposal by email. Mr. Chevedden filed a notice of exempt solicitation urging shareholders to vote against the chair of the Governance Committee, claiming that the company was being dishonest about not receiving the proposal. While the chair of the Governance Committee ultimately received the lowest vote total of all company directors, he was still reelected with 83% of the vote.

Preparing for Activism

Ongoing technological, regulatory, economic, political, and demographic changes affecting the insurance industry make it difficult to anticipate with precision which companies activists will target, and on what grounds. As the P&C market experiences softer market conditions than in recent years, conditions may be ripe for activist activity in this space.

Insurance companies, like other companies, should prepare for activist campaigns “on a clear day.” In addition to evaluating a company’s performance relative to its peers, boards of directors and senior management should articulate and execute business strategies that are understood by the market; prepare clear communications that address the interests of key stakeholders; have in place a program for consistent engagement with shareholders; and review their bylaws and other constituent documents to ensure that the company is well-positioned to respond to activists.

Companies should also have advisors that know the company well and can be called upon quickly when needed.

This post is based on a Debevoise & Plimpton LLP memorandum, “Activism in the Insurance Industry,” dated April 2, 2026, and available here.

Tags activism, Activist Investors, hedge funds, insurance industry, insurance regulation

Corporate Governance

How Hedge Fund Activism Creates Value in Family Firms

Post author By renholding
Post date January 7, 2026
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Hedge fund investors play an increasingly influential role in shaping corporate behavior, yet their broader economic and social effects remain the subject of debate. In a new paper, we examine how hedge fund activism operates in family-controlled firms, a common but understudied ownership structure in which founding families retain significant control over corporate decisions.

Family-controlled firms differ fundamentally from widely held corporations. While family control can promote long-term vision and stability, it can also weaken accountability and limit the effectiveness of traditional governance mechanisms. The central question addressed in our paper is whether hedge fund activists can improve such firms and if so, how.

We find, first, that hedge fund activists are less likely to target family firms, reflecting the higher barriers of concentrated ownership and entrenched control. Second, when activists do intervene, they are more effective than in non-family firms, generating greater improvements in firm value, transparency, and governance. These findings suggest that activism is especially important where other forms of external discipline are weak.

Why Family Firms Matter

Family-controlled firms account for a substantial share of publicly listed companies, both in the United States and globally. Founders or their descendants often hold senior positions or board seats and exert outsized influence over corporate decisions. While this structure can align the incentives of owners and managers, it can also create tensions between controlling families and minority shareholders. Family owners may resist changes that threaten control, extract private benefits, or reduce transparency.

These features make family firms a challenging environment for outside investors seeking change. Hedge fund activists – investors who acquire stakes in companies and push for strategic, operational, or governance reforms – are therefore expected to face greater resistance in family firms. At the same time, precisely because governance frictions are more severe, the potential gains from successful intervention may be larger.

Do Activists Avoid Family Firms?

The evidence shows that hedge fund activists do, in fact, target family firms less frequently. Even after accounting for firm size, profitability, growth prospects, and other characteristics, family-controlled firms are significantly less likely to be targets of activist campaigns. This pattern reflects the higher costs of engagement: Activists must contend with concentrated voting power, stronger emotional attachment to control, and institutional structures that insulate family owners from outside pressure.

Importantly, this avoidance does not appear to stem from family firms being better governed or less in need of reform. Instead, our paper’s later results show that when activism occurs, the impact is substantial, suggesting that activists selectively engage only when the expected payoff justifies the difficulty.

Market Reactions Signal Larger Potential Gains

When hedge fund activists target family firms, financial markets respond more positively than they do for non-family firms. Stock prices rise significantly more around the announcement of activist campaigns, indicating that investors expect greater value creation. This reaction reflects a belief that activists can unlock value constrained by entrenched control or opaque governance.

How Activism Creates Value in Family Firms

The paper identifies several ways hedge fund activism improves family firms.

First, activism plays a key role in revitalizing the market for corporate control. Family owners often resist takeovers, even when a sale could benefit shareholders, because of private benefits tied to control, legacy, or identity. We find that activist intervention significantly increases the likelihood that family firms will be acquired, suggesting that activists help overcome resistance to value-enhancing transactions rather than merely targeting firms already poised for sale.

Second, activism leads to improvements in operating performance and valuation, even when firms remain independent. Family firms targeted by activists experience stronger gains in profitability and market valuation than do non-family targets. These improvements persist over time, indicating that activists drive real operational changes rather than short-term financial engineering.

Third, activism improves corporate transparency. Family firms are often more opaque, making it harder for outside investors to assess performance and risks. After activist intervention, family firms show clearer financial reporting and attract greater analyst coverage. This enhanced transparency reduces information asymmetries and limits opportunities for insiders to hide poor performance.

Fourth, improved transparency reduces downside risk. The study finds that family firms targeted by activists experience a meaningful decline in the likelihood of sharp stock price crashes, which are often associated with the sudden release of accumulated bad news. This suggests that activism not only boosts average performance, but also improves risk profiles for investors.

Broader Implications

The findings have important implications for investors, regulators, and policymakers.

For investors, the results highlight that hedge fund activism can be particularly valuable in firms with entrenched ownership, even though such interventions are more difficult and less frequent. For activists, the paper clarifies where the greatest opportunities for value creation may lie – in firms where governance frictions are severe but not insurmountable.

For policymakers, the study underscores the role of activist investors as a complementary governance mechanism. Where boards, dispersed shareholders, and takeover markets are less effective – such as with family-controlled firms – activism can help protect minority shareholders and improve accountability without direct regulatory intervention.

More broadly, the paper contributes to debates about the role of activist investors in the economy. Rather than being purely disruptive or short-term oriented, hedge fund activism can serve as a corrective force where entrenched control limits efficiency and transparency.

Bottom Line

Family firms are harder – but more rewarding – targets for hedge fund activism. Although activists intervene less frequently in these firms, their interventions generate larger gains by overcoming entrenched control, improving transparency, facilitating efficient ownership changes, and enhancing long-term performance. Our study suggests that the true value of activism lies not in easy targets, but in challenging governance environments where the potential for improvement is greatest.

Heng An is an associate professor at the University of North Carolina at Greensboro, and Xu Niu is an assistant professor at James Madison University College of Business. This post is based on their recent paper, “Hedge Fund Activism and Value Creation in Family Firms,” available here.

Tags activism, Activist Investors, family firms, financial markets, hedge fund activists, hedge funds

Corporate Governance

How Liquid Equity Rewards Can Enhance Shareholder Loyalty Amid Rising Activism

Post author By renholding
Post date December 3, 2025
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Shareholders have evolved from passive investors into active participants, often driving transformative agendas through activism. Proxy contests, in which investors seek to influence or seize board control, have proliferated, imposing substantial financial burdens on companies – estimated in the billions – and contributing to pronounced fluctuations in share prices. The activist investment market, now valued at approximately $900 billion, is propelled by a seismic $10 trillion reallocation toward higher-risk assets.

What if corporations could encourage enduring shareholder commitment in a manner that is equitable, transparent, and technologically robust?

This is the promise of Liquid Equity Rewards (LER), a novel framework I examine in my recent essay. LER integrates blockchain innovation with established corporate defense mechanisms to cultivate loyalty among long-term investors, without compromising the liquidity of their holdings. It serves as a counterbalance to short-term opportunism in an era of heightened activism.

The Surge in Shareholder Activism

To put LER into context, it is essential to appreciate the escalating pressures of shareholder activism. This phenomenon is not new, yet its intensity has increased markedly. Hedge funds and institutional investors are initiating campaigns at unprecedented rates, addressing issues from executive compensation to environmental stewardship. In 2024, activists secured board seats in more than 20 percent of U.S. public companies, frequently precipitating stock volatility and diverting managerial focus.

Conventional defensive strategies have proven increasingly inadequate. Shareholder rights plans, commonly known as “poison pills,” which aim to dilute an aggressor’s stake, now face rigorous judicial oversight and risk estranging broader investor bases. Staggered board structures may delay incursions but fail to foster genuine allegiance. What remains absent is a mechanism that affirmatively favors steadfast shareholders – those committed to sustained value creation – over transient speculators.

LER addresses this gap by emphasizing incentive alignment rather than deterrence. Envision a system akin to a sophisticated loyalty program for equity holders, underpinned by blockchain technology like that powering digital currencies. It prioritizes positive reinforcement, transforming potential conflict into collaborative progress.

The Mechanics of LER

Fundamentally, LER employs blockchain to deliver time-weighted rewards, wherein the duration of share ownership directly correlates with the magnitude of benefits. This design discourages impulsive divestitures, particularly during proxy battles, while preserving the fluidity of capital markets. The system’s operation can be distilled into key components:

Tokenization of Equity: Corporations digitize shares as blockchain-based tokens, drawing on initiatives like NASDAQ’s tokenized securities platform. This converts conventional stock into programmable assets – secure, auditable, and immediately transferable.

Bifurcated Structure for Adaptability: LER operates across dual planes:

Off-Chain Vouchers: These facilitate seamless integration with traditional trading platforms, such as brokerage applications, manifesting as digital entitlements linked to ownership records.
On-Chain Units: Leveraging smart contracts on the blockchain, these automate reward accrual and disbursement, calibrated precisely to holding periods.

Utility-Focused Incentives: Rewards eschew voting enhancements or dilutive issuances, focusing instead on practical value. Distributions may take the form of stablecoins – digital assets pegged to fiat currencies for stability – or liquid staking derivatives inspired by decentralized finance (DeFi). In DeFi paradigms, such as those in Ethereum systems, participants earn yields on staked assets without forgoing liquidity, enabling sales or collateralization as well as the accrual of benefits.

Practical illustration: An investor acquires shares in a corporation that has implemented LER. After six months of uninterrupted ownership, the investor receives tokens equivalent to 2 percent of his position’s value, redeemable at a network of merchants. During an activist incursion, extended holders might qualify for more rewards, thereby bolstering the case for continuity. This approach builds upon validated technologies: NASDAQ’s security token protocols ensure regulatory compliance, stablecoins provide constant value, and DeFi’s liquid staking models demonstrate proven efficacy in generating yields. LER could be implemented through a straightforward board resolution, harmonized with existing capitalization tables.

Comparative Advantages Over Traditional Defensive Measures: Why innovate when refinements to existing tools, such as poison pills, suffice? LER complements rather than supplants these tools, offering a forward-looking evolution. Whereas poison pills are used defensively and may provoke antagonism, LER is a way to cultivate partnership.

Superior Efficacy:LER could diminish rates of activist victories by 15 to 30 percent. By erecting a “loyalty barrier,” time-sensitive incentives render short-term interventions less viable, as opportunistic actors forgo accruing bonuses. Proxy simulations reveal a 10 to 20 percent reduction in share-price volatility during campaigns, benefiting all stakeholders through enhanced predictability.
Broader Stakeholder Alignment: LER helps solve pressing governance challenges
- Mergers and Acquisitions: Prolonged holders gain influence over transactions, mitigating unsolicited bids.
- Political Engagement: Rewards could be conditioned on disclosures of political action committee expenditures, promoting accountability in advocacy.

Courts have constrained poison pills, as evidenced in high-profile disputes like the acquisition of Twitter by Elon Musk. LER, by contrast, promotes cohesion over confrontation. For lawyers, LER’s compatibility with prevailing norms is reassuring. Under Delaware corporate law, directors have broad discretion to implement non-dilutive, utility-based incentives, provided they uphold fiduciary duties and transparency. Absent share dilution, such measures encounter minimal resistance. Securities regulations in the United States accommodate tokenized equities through frameworks like Regulation Crowdfunding, with stablecoins regarded as cash equivalents. In the European Union, alignment with the Markets in Crypto-Assets Regulation (MiCA) supports utility token deployments.

Potential vulnerabilities, including cybersecurity risks or evolving oversight, warrant vigilance. Yet blockchain’s immutable ledger surpasses, with embedded auditing protocols, is more resilient than traditional documentation. From a fiscal perspective, the cost of initial implementation for a mid-sized enterprise might range from $500,000 to $2 million, offset by substantial savings from averted activism expenses – —often exceeding $50 million per engagement – and access to the burgeoning $900 billion activist asset pool.

Implications for Corporate Governance: LER represents not merely a tactical defense but a scalable blueprint for governance reform. Initial adoption could commence with targeted pilots, expanding to encompass S&P 500 constituents. Amid the $10 trillion migration to risk-oriented investments, LER captures enduring value by tying capital to commitment – a principle resonant with the philosophies of investors like Warren Buffett, amplified through technological precision. Concerns regarding equity, such as preferential treatment for large holders, can be mitigated via graduated thresholds and proportional allocations. For individual investors, integration with platforms like Robinhood would render these benefits universally attainable, broadening participation.

In essence, LER reorients corporate stewardship from adversarial posturing to mutual advancement. It allows directors to create value together with shareholders. As activism matures, so too must the ability to resist it.

Wulf Kaal is an associate professor at the University of St. Thomas School of Law. This post is based on his recent essay, “Liquid Equity Rewards in Corporate America,” available here.

Tags activism, Activist Investors, blockchain, investor loyalty, LER, liquid equity rewards, long-term investors, proxy contests, shareholder rights plans, short-term investors

Corporate Governance Finance & Economics

Why It’s Hard for Activists and Blockholders to Make a Difference in Banking

Post author By renholding
Post date September 18, 2025
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Activist investors and blockholders are unable to restructure and turnaround poorly performing banks, making it unlikely that they can enhance bank performance and contribute to financial stability. We argue that regulation and supervision hinder the flow of information needed to price risk effectively and as a result weaken the incentive and ability of activists and blockholders to turnaround poorly performing banks. We identify bank opacity due to regulation and supervision as the main cause of weak market discipline by banks (see Mehran and Spatt, 2024).[1] In a previous post, we noted that the regulatory environment in banking interferes with information production as disclosure of some information may be perceived by regulators as potentially causing bank runs. Weak market discipline due to regulation and supervision fuels the control market in bank restructuring, thus leading to larger institutions. In this post, we draw on examples of large investors in the banking industry.

In 1989, American businessman Laurence Tisch and his family acquired 8.9 percent of the Bank of Boston. In 1990, they made further disclosures of large investments in Continental Bank, Baybank, and Equimark. Each of these institutions had lost nearly 70 percent of its value following the savings and loan (S&L) crisis.[2] The share acquisitions by the Tisch family were the largest percentage investment in large, regional banks by individual investors and institutions at the time. The media reported in 1991 that the family reduced its investments in two of the banks,[3] selling the investments at a loss.

The Tisch family was not the only sophisticated investor to incur losses investing in bank stocks during a crisis. American hedge fund manager Bill Ackman invested about $1 billion in Citigroup for his firm, Pershing Square, following the 2007–2009 financial crisis. He concluded that Citigroup had already written down its bad loans and thus the bank’s stock price might be fair or even undervalued. Yet, the investment produced a loss of $400 million (see Partnoy and Eisinger, 2013).[4]

The Tisch and Ackman losses were not exceptions.[5] Investments in bank assets during crises are often underperforming (see Baron et al., 2021).[6] Bank charter value can dissipate when banks are in difficulty, even outside a crisis. Surprisingly, quickly restoring value even by a capital infusion or by changing the bank’s management is not easy. (The demise of the New York Community Bank provides a recent example.) Once risk is priced and opacity is partly removed, even government protection is not likely to bring back a bank’s lost charter value (at least in the short term). Equally important is that news of large, sophisticated investments in banks often has a muted price impact.

While blockholders have invested in weak banks, their presence is uncommon, and their impact is inconsequential. This is contrary to the view that, to protect their stake, large investors could be effective monitors and might exert pressure on management in poorly performing firms and influence firm corporate policies (see Shleifer and Vishny, 1986).[7] Yet, investors have little influence on corporate restructuring and other bank policies, particularly during a crisis period.

The focus of corporate restructuring is often about assets, capital structure, and labor, approaches which are not mutually exclusive. Any change in these methods, particularly in acquisition and disposition of assets, takes time and could require regulatory approval (see Adams and Mehran, 2003).[8] Potential acquirers are likely to opt out if they think that they might face regulatory opposition on quick asset restructuring. Blockholders also are less willing to invest in a share of a bank if they cannot get a fair assessment of the value of the company. The loss-sharing agreement of failed banks between acquirers and the Federal Deposit Insurance Corporation (FDIC) supports this argument (see Bennett and Unal, 2014).[9]

Bank valuation is hardly accurate as risk often is not effectively priced. Remaining unclear is whether regulators are aware of bank weak spots and, if they are, whether they would undertake corrective actions [see (Gallemore, 2016)[10] and (Mehran and Spatt, 2024)[11]]. Thus, the nature of bank assets and the role of regulation and supervision imply that very few blockholders invest in banks and attempt to turn around banking firms while they are in difficulty. The implication is that market discipline in banks would not benefit from the presence of sophisticated activist investors, unlike for non-financial companies (see Haubrich and Thomson, 1998).[12]

Another regulatory hurdle might seem to weaken the ability of blockholders and activist investors to control the banking firm’s operation. The reason was noted in the Tisch family disclosure: The purpose behind acquiring a large block of shares in the banks was purely for investment and not for control. The statement of purpose for investment was intentional as the banking rule at the time prohibited investments of more than 5 percent if the intent were to control the bank. Also, blockholders were required to contact the Federal Reserve Board for any additional investments beyond 5 percent. Investment beyond 5 percent with control intent effectively invites supervision of the investors by the Federal Reserve. Allowing regulators to examine investors’ financial data and being subject to supervision arguably is a big deterrent to becoming a large blockholder in a bank, particularly when it might be difficult to prove the intent as discussed later. The cutoff, while set arbitrarily, was intended to ensure the stability of bank operations in the presence of activist investors. Ensuring operational stability and preventing potential abuse through ownership control is also an issue in other settings, as when thrift institutions convert from mutual to stock ownership (see Cole and Mehran, 1998).[13]

Thus, blockholders’ ability and incentive to pressure management is limited, and the reward from doing so might be insufficient partly due to the banking rule on control. The 5 percent cutoff could be considered small, if investors’ desire to redirect the bank’s strategic direction or force out the management team. The Federal Reserve Board changed the cutoff to 10 percent on January 30, 2020.[14] The objective was to improve the flow of investment in bank equity and thus enhance banking firms’ capital. In the same spirit, following the financial crisis, the Federal Reserve Board and the FDIC allowed private equity firms to invest in equity of distressed banks (see Ross, et al., 2021).[15] Overall, which group of banks, large versus small, is most likely to be affected by the control rule, if at all, is unclear.

To study the market assessment of lifting the ownership cutoff to 10 percent, we conducted an event study. An announcement effect was estimated for listed banks from March 29 to March 30, 2020. Five groups were created based on bank book-asset size at the end of the last quarter of 2019, and announcement returns were calculated for banks in each group. If weaker banks were insulated from market discipline, lifting the control threshold to 10 percent would make it easier for activists to influence governance of banks, and the gain would likely to be captured in equity prices. The announcement effect for the three groups with the largest book-assets is significant and positive, while banks in the two small asset groups suffered losses.

Explaining the findings is difficult, particularly in the case of small banks. If the rise in the cutoff would have increased the likelihood of acquisition of small banks, then their stock price should have increased due to the present value of the acquisition premium. The loss then could be the result of interference on bank operations by future activist investors. The gain to large banks is likely due to potential merger and acquisitions and new investments in bank equity.

Evidence on Activism

Although there are reports of block acquisitions in small and community banks since the 2020 relaxation of the control role, there is little evidence of significant share acquisitions of large banks. Also, while 217 instances of activism were reported between 2019 and 2024, only a few large institutions were a target, such as Bank of America, Bank of New York Mellon Corporation, and State Street. Bank of America agreed to some minor changes in its governance. The other institutions are in effect custodians with very little commercial banking activities, and they agreed to some cost cutting (see for example, Benoit, 2014).[16]

Activist investors have little influence in large banks in Europe as well (see Sweney and Makortoff, 2021).[17] Overall, most activist investors have targeted small and community banks (see Graf, 2023).[18] As expected, most of the demands of activist investors are for changes in governance rather than operations of banks (see Graf and Clark, 2024).[19] Thus, in light of the influence of regulators and supervisors on bank governance, the potential impact of activist investors on bank performance and stability is likely limited. This is not the case for activist investors in non-financial firms (see Gow, et al. (2023).[20] Thus, activist investors in banking probably are just as uninformed about their ability to influence bank governance as they are about the potential for windfall gains in distressed bank stocks, at least in the short term. The takeaway is that regulation and supervision are the most likely reasons that large investors are unable to influence bank operations.

Emerging Area of Activism and Potential Control

Institutional investors hold most of banks’ equity, and the trend is continuing. For example, at the end of 2024, institutions held about 76 percent of the shares of large banks in the U.S., and the percentage is higher for the largest commercial banks. Among the largest holders are BlackRock and Vanguard, which hold large blocks of shares in major banks, such as JPMorgan Chase. Vanguard held 9.74 percent, and BlackRock 6.89 percent at the end of 2024, according to a 2025 proxy filing with SEC. Both institutions held more than the control threshold of 5 percent in the bank at the end of 2019. While below the 10 percent threshold, these holdings raised concerns among regulators about the potential influence of large institutional investors to control and thus direct bank governance in ways that might be anticompetitive or even adversely affect the goal of financial stability. The FDIC, for example, reached an agreement with Vanguard on investment passivity last year.[21]

The consequences of high institutional ownership on bank conduct are complex. Institutional ownership induces common ownership. While common ownership is considered very large in the banking industry, there is no evidence that it is anticompetitive (see Gramlich and Grundl, 2020).[22] Further, the evidence suggesting that institutional holdings induce anticompetitive behavior outside the financial industry is inconclusive (see Gerardi, et al., 2023).[23]

Thus, much more work on the topic in the banking sector might be needed to draw public policy lessons. For example, common ownership has been shown to prompt more disclosure by non-financial firms (see Park et al., 2019).[24] But, it is unlikely to enhance more disclosure by banking firms for a number of reasons: presence of a significant amount of soft information in banks, proprietary nature of borrower information (see Bhattacharya-Chiesa, 1995),[25] risk sharing (see Dang et al., 2025),[26] and reluctance of banks to disclose any information without knowing how it would be perceived by supervisors and regulators. A potential area of financial stability concerns that has not received attention by regulators and academics is concentration of holdings of bank credit by institutional investors (see Mehran and Mollineaux, 2012).[27] How institutions would manage their bank credit holdings is an important financial stability issue, particularly in a crisis period. To our knowledge, this issue has not been studied by regulators.

To underscore the benefit of effective banking activism on financial stability, we also focus on banks rather than investors. Due to weak economic conditions in New England following the S&L crisis, the Bank of Boston (established in 1784) and Baybank were forced to merge in 1996 to operate more effectively. The new entity, BankBoston, was acquired in 1999 by FleetBoston Financial. That, too, was absorbed, by Bank of America in 1999, an entity that exists today due to the financial protection of the U.S. taxpayers because of its size. Thus, when activism does not exist or has little impact in the banking industry, particularly in a crisis period, the control market could function as a substitute. However, the control market produces bigger institutions with larger supervisory challenges, a result that is also favored by regulators and supervisors as it transfers the assets of weaker institutions to stronger banks, thus lowering potential cost of the FDIC fund in the short term (see Prescott (2024) for an example).[28] However, larger institutions impose a higher cost on the economy in the event of their failure. Thus, fostering effective activism could reduce the extreme events that increasingly seem routine.

Conclusion

Regulation and supervision have weakened the influence of activist investors and blockholders on bank governance and conduct as well as on financial stability. Further, no evidence yet exists that an increase in the permitted level of block ownership from 5 percent to 10 percent has had any measurable impact on bank conduct. While more activism has been evident in the past five years, instances were not likely to be related to changes in 2020 control ownership, as a similar trend existed outside financial firms. Moreover, increased activism in the banking sector was mostly targeted at smaller institutions and with no clear evidence of having made banks more valuable or healthier. Arguably, activism and block ownership are critical to the functioning of the U.S. capital market and businesses. But bank supervision and regulation have made these tactics ineffective. More disclosure and more timely disclosure by regulators could lift the imposed opacity and could make activism more vibrant (see Mehran and Spatt, 2024).

This post comes to us from Hamid Mehran, a financial economist, and Chester Spatt, the Pamela R. and Kenneth B. Dunn Professor of Finance at Carnegie Mellon’s Tepper School of Business.

ENDNOTES

[1] https://clsblueskybstg.wpenginepowered.com/2024/05/14/how-bank-regulation-and-supervision-can-weaken-financial-stability/

[2] https://www.nytimes.com/1990/09/01/business/tisch-family-invests-in-3-banks.html

[3] https://www.nytimes.com/1991/02/09/business/tisch-group-cuts-stakes-in-2-banks.html

[4] https://www.theatlantic.com/magazine/archive/2013/01/whats-inside-americas-banks/309196/

[5] While Warren Buffet’s investments in Goldman Sachs in 2008 and the Bank of America in 2011 resulted in gains for his company, his investments were in preferred stock and warrants and not in common stock. Further, unlike most investors, he had a significant influence over the U.S. Treasury, an influence that goes back to his investment in Salomon Brothers in 1987, he was able to reverse the ban on the company’s participation in bond auctions. During the financial crisis, apparently he contributed to the Secretary of the Treasury’s decision to infuse capital into banks directly.

[6] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3845170

[7] https://www.journals.uchicago.edu/doi/abs/10.1086/261385

[8] https://www.newyorkfed.org/research/epr/03v09n1/0304adam.html

[9] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2482359

[10] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2838541

[11] https://clsblueskybstg.wpenginepowered.com/2024/05/14/how-bank-regulation-and-supervision-can-weaken-financial-stability/

[12] https://www.clevelandfed.org/publications/working-paper/1998/wp-9803-large-shareholders-and-market-discipline-in-a-regulated-industry-a-clinical-study

[13] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=981274

[14] https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200130a.htm

[15] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3828789

[16] https://www.wsj.com/articles/bank-of-new-york-mellon-gives-activist-trian-fund-a-board-seat-1417524537?gaa_at=eafs&gaa_n=ASWzDAiRloon68XI4cx7kNuFK59wS9z9NpTkWGHwrd781QdFh3XAlHc8vKDt&gaa_ts=6863dab2&gaa_sig=9yKj6-85-1EA0gVEIuquXugCRzj71DVwTrDHFNbCqCg6jzG0xRkvY_Od_Xyz05sqSsnMwVNijt41MlTjEzZRRg%3D%3D

[17] https://amp.theguardian.com/business/2021/may/07/activist-edward-bramson-ends-barclays-battle-by-selling-stake

[18] https://www.spglobal.com/market-intelligence/en/news-insights/articles/2023/3/community-banks-increasingly-grapple-with-activist-shareholders-74768090

[19] https://www.spglobal.com/market-intelligence/en/news-insights/articles/2024/6/us-bank-investor-activism-reaches-highest-level-in-the-past-5-years-82090566

[20] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4321778

[21] https://www.reuters.com/business/finance/fdic-strikes-passivity-deal-with-vanguard-2024-12-27/

https://www.fdic.gov/bank-examinations/passivity-agreement-vanguard-group-december-27-2024

[22] https://www.federalreserve.gov/econres/feds/the-effect-of-common-ownership-on-profits-evidence-from-the-us-banking-industry.htm

[23] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4630765

[24] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3333451

[25] https://www.sciencedirect.com/science/article/abs/pii/S1042957385710145

[26] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2460574

[27] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2170932

[28] https://www.clevelandfed.org/people/profiles/p/prescott-edward-s/ec-202406-failure-of-bank-of-the-commonwealth

Tags Ackman, activism, Activist Investors, banking, blockholders, financial institutions, institutional investors, Pershing Square, Tisch

Corporate Governance International Developments

The Strategic Evolution of Shareholder Activism

Post author By renholding
Post date April 15, 2025
Sticky post

Shareholder activism has undergone a striking transformation over the past four decades. What began in the 1980s as a brash and often combative movement led by so-called corporate raiders has matured into a sophisticated, globally attuned, and strategically agile phenomenon. In a new paper, I explore how activism has evolved in both form and function – becoming an essential feature of modern corporate governance, especially in times of economic uncertainty and regulatory flux.

Today’s activists – particularly hedge funds – are a far cry from their swashbuckling predecessors. These funds operate with remarkable precision, carefully analyzing regulatory frameworks and ownership structures to identify where and how pressure can be most effectively applied. Their playbook includes not only public proxy battles, but also quieter forms of engagement: closed-door negotiations with management, calculated media campaigns, and strategic alliances with institutional investors. In a world where influence is often about credibility and cooperation rather than confrontation, coalition-building has emerged as a key strategy. These alliances not only lend activists added legitimacy but also allow them to frame their campaigns in terms of long-term value creation rather than short-term financial engineering.

The paper takes a comparative perspective, analyzing how activism plays out in jurisdictions with different corporate governance environments. For example, in the United States and the United Kingdom, where dispersed ownership structures dominate , activists have considerable room to maneuver. In continental Europe and other parts of the world, however, the presence of controlling shareholders complicates such efforts, forcing activists to adopt more indirect and collaborative tactics.

One of the most compelling developments in recent years has been activist hedge funds’ remarkable capacity to adapt to shifting economic and political currents. Far from being derailed by the 2008 global financial crisis, they emerged stronger and more versatile. Since then, they have shown a keen ability to ride new waves, pivoting toward environmental, social, and governance (ESG) themes when it became clear that sustainable investing could serve both moral and financial imperatives. This pragmatism was on full display again during the Covid-19 pandemic and the energy market disruptions following the war in Ukraine. Each time, activists recalibrated their strategies, taking advantage of volatility while navigating public scrutiny.

Now, as we enter a new era marked by rising protectionism, regulatory rollback, and geopolitical uncertainty, activists are adapting once again. The paper suggests that their continued success hinges on this very adaptability – not just in spotting underperforming companies, but in reading the room politically, culturally, and economically.

Activism is no longer just about unlocking shareholder value; it is increasingly about navigating and shaping the broader governance landscape. As my paper argues, the future of shareholder activism will be defined by those who can build credible coalitions, balance short-term pressures with long-term goals, and move fluidly across borders and business cultures.

This post comes to us from Wolf-Georg Ringe, a professor of law and finance and director of the Institute of Law & Economics at the University of Hamburg and visiting professor at the University of Oxford. It is based on his new paper, “Adaptive Advocacy: The Reinvention of Shareholder Activism,” forthcoming as a chapter in the second edition of the Oxford Handbook of Corporate Law and Governance and available here. A version of this post appeared on the Oxford Business Law Blog.

Tags activism, corporate raiders, ESG, financial crisis, hedge funds, protectionism, proxy battles, shareholder activism, UK

M & A

Wachtell Lipton Discusses What Awaits M&A in 2025

Post author By renholding
Post date February 4, 2025
Sticky post

After a relative low in global M&A in 2023, the past year witnessed a moderate uptick as the pandemic receded further into the rear-view mirror, the U.S. economy stabilized, inflation declined (albeit with some renewed concern toward the end of the year), financing markets brightened, albeit modestly, and equity markets climbed ever higher. Global M&A deal volume reached $3.17 trillion, reflecting a 9.8% increase compared to 2023. Though overall volume increased, heightened regulatory enforcement, among other factors, led to fewer very large transactions in 2024. No deals surpassed the $40 billion threshold in 2024, and there were only four $25 billion-plus deals announced in 2024, below the average of seven deals per year over the prior three years. The impending return of President-elect Donald Trump to the White House, with the Republican party having majorities in both houses of the U.S. Congress, is expected to bring a more business-friendly, deregulatory approach to policymaking, and further solidifies widespread expectations among market participants that M&A activity will increase in 2025.

But for any particular company, or deal, the details matter. It remains to be seen whether the global environment will be hostile to M&A that crosses borders (for example, in response to or as part of tariffs and trade wars); geopolitical volatility remains high, including in several war zones; tech-lash has not gone away and may even increase with respect to the largest technology companies; market valuations are high and interest rates may not decline further. Opportunity surely will exist, and many companies have been waiting for regulatory change prior to commencing in-industry M&A. Here, we review some of the key themes of 2024 and our thoughts on what may lie ahead in the new year.

*****

Regulatory Reset. The change in the U.S. administration is likely to bring a significant reduction in overall aggressiveness of the federal antitrust agencies’ M&A enforcement. The Biden administration clearly telegraphed its expansive views of harms remediable by the antitrust laws, including in its 2023 Merger Guidelines, and sought to rein in transactions through a variety of means, notably including litigation seeking to block a number of deals, sometimes successfully (e.g., Albertsons/Kroger in the grocery space; JetBlue/Spirit in the airline industry), and sometimes not (e.g., Microsoft/Activision Blizzard in gaming). The President-elect’s selection of Andrew Ferguson to lead the Federal Trade Commission and Gail Slater to lead the Department of Justice’s Antitrust Division suggests that the new administration will adopt a more restrained approach to M&A antitrust enforcement.

Some of this conclusion is, however, sector-specific. After several years of a challenging regulatory environment for bank M&A, the bank regulatory agencies are widely expected to be more receptive to bank mergers that meet the required statutory factors and to reducing the burdens for new entrants. There may also be areas, such as technology transactions, where enforcement policy continues to be more assertive than potential M&A participants would hope. So too, we expect CFIUS transaction review to be active, and industries regarded as being strategic to U.S. national interests may find themselves with fewer, domestic-only options for transaction partners.

In the face of continuing uncertainties in the United States and abroad, we expect the provisions of transaction agreements that allocate regulatory risk to remain an area of focus. Transacting parties should assume that regulatory review processes will be burdensome, and while appropriate drop-dead dates may shorten, one area deserves prompt regulatory action— eliminating or revising the amended filing and disclosure requirements under the Hart-Scott- Rodino Antitrust Improvements Act, which dramatically expanded the information, effort and time required to commence HSR review, with little, if any, relevant benefit to the agencies.

Optimism for Bank M&A. The incoming Trump administration has fueled a burst of optimism for a resurgence in bank M&A, which had suffered from a challenging regulatory environment under the Biden administration. A rare exception was Capital One’s $35 billion pending acquisition of Discover in February 2024, which was one of the largest announced M&A transactions globally across all industries and the largest announced bank M&A transaction in the United States since the financial crisis. In 2024, M&A across the broader financial services sector remained active in asset management, insurance, payments, fintech and other areas. In contrast, bank M&A was negatively impacted by heightened supervisory expectations following several large 2023 bank failures. In addition, protracted approval processes and the Department of Justice officially departing from longstanding guidelines for reviewing bank M&A transactions, as noted above, also dampened deal activity. However, in no sector is the adage that “personnel is policy” truer than in banking, and industry expectations for the next several years are high.

Industries to Watch. Industries that experienced significant activity in 2024, or may be poised for additional dealmaking in 2025, include energy, technology and healthcare. After a boom in energy M&A at the end of 2023, strategic realignments and consolidation continued to transform the energy sector in 2024 despite a slight decrease in overall volume from 2023, with significant transactions including Diamondback/Endeavor and ConocoPhillips/Marathon Oil. Heightened activity in energy M&A is expected to continue in 2025, including as a result of an anticipated lighter regulatory touch under a new administration, increased AI-driven energy demand from data centers and the strong industrial logic of enhanced scale in the sector. Technology transactions, meanwhile, accounted for the largest share of M&A activity of all industries in 2024 at 16%, reclaiming the mantle that sector had held for several years before being outpaced by energy transactions in 2023. Technology transactions showcased a focus on AI, cybersecurity and cloud technologies, including the Synopsys/Ansys and HPE/Juniper transactions, and telecom growth, including the T-Mobile/Metronet, T-Mobile/Lumos, Verizon/Frontier and Bell Canada/Ziply transactions, which reflected significant investments into fiber infrastructure. Another industry to watch is healthcare, which declined in overall volume in 2024 due to a dearth of large transactions, but may make a comeback in 2025 as large pharma and medical device players continue to look to acquisitions to drive growth—a trend we have already begun to see with the Stryker/Inari transaction announced at the start of this year.

Private Equity Evolution. With (modestly) lower interest rates, elevated volumes of untapped dry powder and financing markets offering options from a broader array of capital providers (including sponsors that have transformed themselves into alternative asset managers that can provide structured solutions across the entire capital stack), sponsors continued to deploy capital in creative ways in 2024. Private equity exits increased from $754 billion in 2023 to $902 billion in 2024, but total exit volume remained well below pandemic-era highs. Muted M&A exit opportunities, coupled with an IPO market in which significant transactions were few and far between, exacerbated a growing industry-wide “sell-side” backlog. With many funds nearing the ends of their life cycles, there continues to be much focus on diverse exit routes, such as cross-fund deals, continuation funds, minority deals and co-control deals, and limited partners have continued to be active in the secondary market. Additionally, an increasing number of transactions have involved multiple sponsors in club deals or sponsors partnering with strategics to tackle deal size, execution risk, investment horizon and other complexities, trends that we expect to continue in 2025 and to facilitate “partnered” exits. As activity in the broader M&A market increases, expect sponsors to continue to act opportunistically as buyers, sellers and financing parties, leveraging their trademark creativity and willingness to grapple with complexity in order to unlock value.

Activism & M&A. Activism engagement remained robust in 2024, with a 6% increase in volume of global and U.S. campaigns compared to 2023. While major activists continue to dominate campaigns, in 2024, new or occasional activists led a record number of publicly disclosed campaigns. In addition, companies continued to face attacks from multiple activists at once, whether acting together in a “wolf pack” or “swarming” the company independently and with differing demands. Although campaigns have focused on a range of matters—including board and CEO changes, capital allocation, cost-cutting and other operational, strategic and governance matters—M&A continued to be a prominent theme, with activists focusing on M&A in 22% of 2024 publicly disclosed campaigns. In a number of undisclosed campaigns, we regularly see activists disputing the success of prior M&A—urging divestitures or spinoffs to “reduce the harm.” As the regulatory environment and market conditions become more favorable for M&A in 2025, activists should be expected to target boards for missing M&A opportunities as one more arrow in the quiver. Companies that were able to resolve an activist situation in 2024, but continue to underperform this year, may find themselves subject to a second round of activism focused on the implementation of a publicly disclosed “strategic alternatives” review.

A Busy Year in Delaware. There were numerous important legal developments in 2024 in Delaware, the most popular place of incorporation of large American businesses. A series of decisions by the Court of Chancery called into question common M&A market practices: holding that a merger was not properly statutorily authorized based on the process by which the target’s board of directors approved the merger agreement (Activision Blizzard); striking down a variety of provisions in a shareholders agreement as impinging on the authority of the board of directors to govern the business and affairs of the corporation (Moelis); and finding that a company could not pursue damages (based on the agreed merger consideration) against a buyer for breaching a merger agreement (Crispo). The Delaware legislature reacted quickly with amendments to the Delaware General Corporation Law responding to each of these decisions, although the process for approving those amendments was more contentious than usual.

The Delaware Court of Chancery also rejected Tesla’s attempted ratification of Elon Musk’s enormous pay package after the Court previously struck it down (Tornetta v. Musk), and permitted a challenge to TripAdvisor’s decision to reincorporate in Nevada to survive a motion to dismiss (Palkon v. Maffei). In addition, the Delaware Supreme Court held that the MFW framework—requiring approval of both a special committee of independent directors and a fully informed majority of the minority shareholders in order to shift the standard of review to business judgment—applies to all transactions with controlling shareholders, not only squeeze- out mergers (In re Match Group, Inc.). The Match decision continues the trend of not only expanding the scope of heightened review of any transaction involving controllers, but also potentially puts the protections of the MFW doctrine further out of reach: the Court held that every single member of a special committee must be “wholly independent” and “not that only a majority of the committee must be independent.” Taken together, these cases should cause transaction parties to closely consider the deal risk inherent in a majority-of-the-minority shareholder approval condition, and whether it is worth the increased risk of trying, but failing, to satisfy MFW.

Other states, such as Nevada and Texas, are seeking to use the current Delaware corporate climate, especially in situations involving controlling shareholders, as an opportunity to chip away at Delaware’s dominant share of the market for incorporations. Given the range of decisions relating to M&A in Delaware in 2024, it can be expected that litigation will be a consistent feature in the interlocutory period for most M&A deals, especially those involving interested parties or controllers.

Lightning Round—Heading into 2025. In addition to the above, the trends and topics that we will be monitoring in 2025 include:

Hostile and unsolicited transactions, which accounted for approximately 11% of global M&A activity in 2024, may experience a boost from relaxed regulatory enforcement and increased dealmaking interest generally.
Cross-border M&A, which grew by 5.9% in 2024 compared to 2023 and represented 32% of global M&A volume last year, will require even greater care as protectionist policymaking and geopolitical tensions persist.
For the first time, U.S. companies will grapple with “Reverse CFIUS,” which went into effect on January 2, 2025 and gives the Committee on Foreign Investment in the United States the authority to review outbound foreign investments by U.S. businesses for potential national security issues in countries of concern, as determined by the President.
Artificial intelligence will continue to be a focal point, as AI advances and adoption affect productivity across virtually all industries, and as the companies that do everything from offering AI services to providing the chips, data centers and energy required to power them explore opportunities for inorganic growth and capital-raising.
IPO activity may pick up—and affect the dynamic for sales processes by providing private companies with a credible alternative to an M&A deal—if markets cooperate and long-anticipated offerings by companies that have commanded substantial private valuations (including Stripe, Shein and Databricks) are finally able to list.
The real estate industry’s focus on technology infrastructure assets seems unlikely to subside in the near-term, while office, retail and other sectors look to continue their comeback.
Businesses will need to pay close attention to tax legislation expected from the Republican Congress, which may include extending some or all of the expiring provisions of the Tax Cuts and Jobs Act enacted under the first Trump administration or further reductions in corporate tax rates. These changes could potentially be offset, in part, by the imposition of tariffs on imports, which may be implemented through executive order. While these developments could have significant implications for M&A transactions, as well as for companies and individuals more broadly, it remains to be seen what tax legislation will ultimately emerge under the incoming administration.
Although traditional financing markets are open and available, private credit, which has claimed an increasing share of M&A financing in recent years (particularly in private equity transactions), will be poised for further growth and larger transactions in 2025.
Counterparties will need to continue to proactively tailor their M&A deals, including social provisions and risk allocation terms, as well as messaging and outreach strategies, to account for labor considerations, which have generated attention in a number of recent transactions (such as U.S. Steel/Nippon) and are likely to remain an area of focus, with the potential to attract scrutiny across the political landscape.
*****

M&A activity shows optimistic signs of growth in 2025, as market participants anticipate more favorable macroeconomic conditions and reduced regulatory scrutiny from the new U.S. administration. But deals are not getting easier. Dealmakers will need to navigate market, regulatory, political and other developments, in the context of a new and active U.S. administration, as well as a number of significant political changes in major jurisdictions such as Canada, Mexico, France, Germany and the United Kingdom, to name just a few. Dealmaking will need to be both careful and creative to navigate the changing times.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “Mergers and Acquisitions—What Awaits in 2025?” dated January 14, 2025.

Tags acquisitions, activism, bank m&a, delaware, merger guidelines, merger regulation, mergers, private equity

Corporate Governance International Developments

Asia’s Corporate Governance Shift Is Less Than Meets the Eye

Post author By renholding
Post date December 9, 2024
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Asia appears to be rapidly embracing Anglo-American corporate governance models – but looks can be deceiving. Our recent research reveals a striking paradox: While Asian jurisdictions widely adopt Anglo-American governance mechanisms in form, they often use these tools for remarkably different purposes. In a recent paper, we demonstrate how this “faux convergence” challenges conventional wisdom about global corporate governance and carries important implications for investors, regulators, and corporations operating across Asia or even around the world.

Our concept of faux convergence fundamentally differs from Professor Ronald Gilson’s influential theory of functional convergence.[1] While Gilson suggested that jurisdictions might achieve similar functional outcomes through different formal means, we observe the opposite: Jurisdictions often adopt similar formal mechanisms but deploy them to serve radically different functions. This distinction is crucial for understanding how corporate governance actually evolves across borders.

Our observation stems from years of studying how corporate governance has evolved across Asia. On the surface, the region appears to have enthusiastically embraced Anglo-American corporate governance models. Independent directors, which we trace to 1970s America, now populate boardrooms throughout Asia. Stewardship codes, a UK innovation following the 2008 Global Financial Crisis, have been adopted by most major Asian economies. Derivative actions, whose roots are in Anglo-American corporate law, are now enshrined in company laws across the region.

However, our research reveals that this apparent convergence masks a far more complex reality: Similar corporate governance mechanisms often serve radically different functions. Take independent directors. In Japan, they champion investors’ interests as part of the government’s economic revitalization strategy. In Singapore’s family-controlled firms, they act as mediators in family disputes rather than monitors of management. In China, many independent directors have historically been academics who may lack business expertise but provide legitimacy and vital government connections – functions far removed from the original Anglo-American conception.

The case of derivative actions further illustrates this pattern of faux convergence. While many Asian jurisdictions have adopted similar formal rules allowing shareholders to sue on behalf of a company in which they own stock, the actual operation of these mechanisms varies dramatically. Japan provides a particularly striking example of unexpected evolution. After decades of lying dormant, in the 1990s derivative actions suddenly became a powerful force for both social activism and shareholder rights, culminating recently in a massive, 13 trillion yen judgment against former directors of Tokyo Electric Power Company. By contrast, in commonwealth jurisdictions like Singapore, which inherited the English common law system and adopted statutory derivative actions to make them more accessible, these mechanisms remain remarkably rare. Indeed, until 2020, there was no record of even a single derivative action being filed in a Singapore listed company, and since then, only two such actions have been attempted – both dismissed at the pre-filing stage known as a “leave application.”. These differences largely derive not from legal origins or cultural factors but jurisdiction-specific institutional arrangements, including rules about legal costs, procedural requirements, and the interaction with controlling shareholder structures.

The case of stewardship codes particularly illuminates this phenomenon. While Asian jurisdictions have widely adopted UK-style codes since 2014, the codes are used for very different purposes. Japan’s code aims to promote growth by encouraging more corporate risk-taking – completely inverting the UK code’s original purpose of controlling excessive risk-taking after the financial crisis. Meanwhile, one of Singapore’s stewardship codes uniquely targets controlling families rather than institutional investors, fundamentally reimagining what shareholder stewardship means in a region dominated by family-controlled firms.

Faux convergence serves an important strategic function: It allows jurisdictions to signal compliance with international standards while maintaining governance systems that reflect local norms, power structures, and institutional logic. Recent empirical research by Nguyen and Wang provides compelling evidence for this “halo signaling” effect, showing that the adoption of stewardship codes attracts broader U.S. institutional investment, particularly in firms that previously had limited U.S. investment. Understanding this dynamic is crucial because it suggests that the global spread of corporate governance practices may be creating an illusion of convergence, potentially misleading both scholars and policymakers about the actual state of corporate governance around the world.

Our research suggests that understanding corporate governance evolution requires moving beyond simple convergence-divergence dichotomies. Instead, we need frameworks that can account for how governance mechanisms are strategically adapted and repurposed as they move across borders. The concept of faux convergence provides one such framework, helping explain how jurisdictions can simultaneously adopt global forms while maintaining distinctive local practices.

These findings have significant implications for global market participants. For international investors, understanding faux convergence is important because familiar governance mechanisms may create a false sense of security without delivering expected protections. For policymakers, our research suggests that transplanting governance models without considering local contexts is likely to produce unexpected outcomes. For corporations and their advisers, recognizing the jurisdiction-specific operation of these mechanisms is essential for effective cross-border operations in Asia and likely around the world.

As the world moves toward more regional approaches to corporate governance, understanding them becomes increasingly important. This is especially evident as Asia develops regional approaches that reflect its unique mix of state, family, and institutional capitalism. The message is clear: When it comes to corporate governance, looking beneath the surface of formal adoption is essential. Perhaps it is time to recognize that, in this context, what you see is not always what you get.

ENDNOTE

[1] Ronald J. Gilson, ‘Globalizing Corporate Governance: Convergence of Form or Function’, 49 American Journal of Comparative Law 329 (2001).

This post comes to us from professors Gen Goto at the University of Tokyo’s Graduate Schools for Law and Politics and Dan W. Puchniak at Singapore Management University’s Yong Pung How School of Law. It is based on their recent paper, “Faux Convergence in Asian Corporate Governance: Unmasking the Illusion of Anglo-American Transplants,” available here and forthcoming as a chapter in “Inter-Asian Law” (Cambridge University Press), edited by Matthew S. Erie & Ching-Fu Lin.

Tags activism, Asia, Corporate Governance, derivative actions, faux convergence, independent directors, Japan, shareholder rights, Singapore, Stewardship Code, UK Stewardship Code

Corporate Governance

The Determinants and Consequences of Appointing Activist Directors

Post author By renholding
Post date February 22, 2023
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In recent years, an increasingly popular strategy among hedge fund activists has been to acquire seats on the boards of target companies. These board seats are held by what we refer to as “activist directors,” who may be affiliated with the activists or nominated by them. However, obtaining board representation has costs, which include the direct costs of getting board representation and the risk of staking one’s reputation on the company’s future performance. Additionally, board positions come with fiduciary responsibilities to all shareholders, and access to inside information may limit the ability of activists to trade the stock of targets.

Hedge fund activists are nonetheless still eager to obtain board representation. Some speculate that “introducing individuals into the boardroom who are sympathetic or at least open to the changes sought by the activist is an intermediary step that often facilitates such changes” (Bebchuk et al., 2020). However, since activist directors rarely constitute a majority of the board, they must still persuade other directors of the merits of any course of action. One possible reason for seeking board representation is that access to private information is required to identify the optimal course of action; the activist director can provide advice with better information by gaining board representation.

Thus, studying the actions of firms with activist directors can provide new insight into the reasons and the effects of hedge fund activism. In a recent paper, we examined the characteristics of activist directors, the circumstances surrounding their appointments, and their impact on the board.

Activist Directors – Characteristics

Of the 3,259 activism events targeting U.S. companies from 2004 to 2016, we identify 1,623 activist directors appointed to boards through proxy fights or settlements. About 40 percent of activist directors are directly employed by hedge fund activists (affiliated directors), while the remaining are sponsored or supported by the activists (unaffiliated directors). Activist-affiliated directors are on average nine years younger than other activist directors, more likely to possess finance and accounting skills, and much less likely to be female (only 1 percent). Activist directors were also found to quickly assume important roles on the board and tended to receive more support in their initial elections compared with other incoming directors.

Furthermore, our study finds that activists hold stock in a target firm for a median of approximately 2.2 years when their demands do not include board representation. This holding period increases to 2.4 years when the activists appoint unaffiliated directors and further increases to 3.2 years with affiliated directors. This suggests that activists with board representation may be considered long-term investors.

Activist Directors – Determinants

Our research shows that activists are more likely to demand or acquire board representation if the firm has higher levels of institutional ownership, a smaller market capitalization, worse stock market performance, and, in particular, lower dividend payouts. Furthermore, we find that the demands the activists can make as board members, such as divestiture, removal of takeover defenses, and changes in compensation, are associated with a higher likelihood of requesting a board seat and obtaining one.

Activist Directors – Consequences

The appointment of activist directors has a number of possible consequences for firms. Our analysis shows that board representation by activists is generally associated with more divestitures, fewer acquisitions, more frequent CEO turnover, higher payouts, greater leverage, lower capital expenditures, and less R&D spending. Notably, we find that activist-affiliated directors have a particularly strong association with higher payouts, with a coefficient equal to nearly 15 percent of EBITDA, as well as lower R&D spending. Furthermore, we find that having an activist director can increase the success rate for attempts to block mergers and acquisitions, induce divestiture, and increase shareholder payouts. We find, however, that activist-director events are associated with a lower likelihood of the target firm being acquired relative to other activism events, suggesting that, when activists acquire board representation, their impact is not primarily about the “ability of activists to force target firms into a takeover” (Greenwood and Schor, 2009).

The results of our research additionally show that, following the appointment of activist directors, target firms improve operating performance, evidenced by a 1.8 percentage-point increase in return on assets over five years. Moreover, when activist-affiliated directors are appointed, the improvement in operating performance is even more significant, with returns on assets rising by an additional 1.5 percent to 3.2 percent two to five years after the announcement. There is also a positive risk-adjusted market reaction around the announcement of activism, with returns ranging from 3.0 percent to 3.7 percent from -1 to +1 trading days. The market also responds positively to the appointment of activist directors, with market-adjusted returns of 1.1 percent for affiliated directors and 1.0 percent for unaffiliated directors from -1 to +1 trading days around the announcement.

However, it is important to note that these effects may not always be beneficial to shareholders. For example, lower R&D spending could be seen as either curtailing excessive investments or not making productive investments and focusing on the short term. Nevertheless, the relatively long-term holding periods in cases where activists become directors, positive stock market effects, and long-term operating performance improvements seem to contradict the notion that activist directors are short-term focused.

Overall, our study provides new insights into the determinants and the consequences of hedge fund activism, particularly regarding activist directors. Our research shows that activist directors are associated with significant strategic and operational actions by firms. With the SEC’s recent adoption of rules that may make it easier for activist directors to join boards, it seems likely that activist directors will continue to play an important role in the governance of public U.S. firms. Thus, it is important to understand the increasingly important phenomenon of hedge fund activism and the role of activist directors in driving changes at targeted firms.

This post comes to us form professors Ian D. Gow at the University of Melbourne, Sa-Pyung Sean Shin at National University of Singapore Business School, and Suraj Srinivasan at Harvard Business School. It is based on their recent article, “Activist Directors: Determinants and Consequences,” available here.

Tags activism, activist directors, activists, Board of Directors, board representation, hedge funds, proxy fights

Antitrust M & A

Wachtell Lipton Discusses Mergers and Acquisitions–2022 and 2023

Post author By renholding
Post date February 2, 2023
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2022 was a tale of two halves for M&A. The beginning of the year was active, as robust dealmaking carried over from the record-breaking levels of 2021 to drive approximately $2.2 trillion worth of global deals through the first half of the year, compared to approximately $2.7 trillion worth of such deals announced over the same time period in the previous year. M&A activity slowed considerably after the first half of 2022, however, as significant dislocation in financing markets, an increasingly volatile stock market, declining share prices, concerns over inflation, rapidly increasing interest rates, war in Europe, supply chain disruption and the possibility of a global recession undermined business and consumer confidence and created hesitancy to agree to major transactions. The year ended with total deal volume of $3.6 trillion globally, down from $5.7 trillion in 2021 but in line with the $3.5 trillion of volume in 2020 as well as with the five-year average (excluding 2021), and in a sense was the inverse of 2020, which saw a precipitous decline in M&A activity in the first half at the outset of the Covid-19 pandemic, followed by a surge in the second half driven by massive liquidity and low interest rates. Transactions involving U.S. targets and acquirors continued to represent a substantial percentage of overall deal volume, with U.S. M&A totaling over $1.5 trillion (approximately 43% of global M&A volume) for the year, as compared to approximately $2.5 trillion (roughly 43% of global M&A volume) in 2021.

Notwithstanding lower overall activity, 2022 witnessed a number of megadeal announcements, including Elon Musk’s $44 billion acquisition of Twitter, Broadcom’s $61 billion acquisition of VMware, Adobe’s $20 billion purchase of Figma, Prologis’s $26 billion acquisition of Duke Realty, Microsoft’s $68.7 billion acquisition of Activision Blizzard and Kroger’s $24.6 billion purchase of Albertsons. The overall number of megadeals decreased, however, with only six $25 billion-plus deals and thirty $10 billion-plus deals announced in 2022, compared to 10 and 53, respectively, during 2021, likely reflecting greater reluctance to pursue large transactions in the current regulatory environment as well as valuation gaps between buyers and sellers and more challenging financing markets than in the previous year. A wide number of companies also announced separations, divestitures, carve-outs and spin-offs across industries over the course of the year, with over thirty $1 billion-plus divestitures and nearly forty spin-offs announced. In addition, both during the first half of 2022 and even during the second half of the year, companies faced unsolicited overtures and takeover bids, public and private, requiring advance preparation and tailored strategies in order to handle such acquisition interest effectively.

As we kick off the new year, we review below some of the key themes that drove M&A activity in 2022 and discuss expectations for 2023.

Technology Transactions

Following a pandemic-driven boom that accelerated years-long trends, the technology industry faced significant headwinds in 2022 as remote work, online shopping and other changes driven in part by the Covid-19 pandemic began to ease or reverse and ongoing interest rate hikes sapped the attractiveness of future growth relative to present earnings. Most notably, the IPO market for tech companies (and generally) ground to an almost complete halt, with the number of tech companies raising at least $1 billion in their IPOs falling from twelve in 2021 to zero in 2022 and major anticipated IPOs, such as those of Instacart and WeTransfer, shelved for the foreseeable future.

Consistent with trends in recent years, technology transactions continued to play a significant role in the M&A story in 2022, with tech deals responsible for approximately 20% and 32% of overall global deal volume and U.S. deal volume, respectively, and with four of the six transactions over $20 billion announced in 2022 being in technology-related sectors. In addition to Elon Musk’s acquisition of Twitter, one of the most prominent M&A sagas in recent memory, significant tech transactions included large public company transactions, such as Microsoft’s $68.7 billion acquisition of Activision Blizzard, Broadcom’s $61 billion acquisition of VMware and Adobe’s $20 billion acquisition of Figma, as well as a number of large private equity-backed deals, including the $16.5 billion acquisition of Citrix Systems by affiliates of Vista Equity Partners and Evergreen Coast Capital, Zendesk’s $10.2 billion acquisition by a consortium led by Permira and Hellman & Friedman and Thoma Bravo’s $10.7 billion acquisition of Anaplan and $8 billion acquisition of Coupa Software.

Technology M&A was not immune from the broader downturn in the technology space, however, and global tech M&A volume declined by approximately 36% year-over-year (from over $1.1 trillion in 2021 to approximately $720 billion in 2022), as dramatically reduced public and private tech valuations, diminished growth prospects, belt tightening in anticipation of a possible recession (including a number of layoff announcements in the tech sector) and intense regulatory and media focus dampened boardroom enthusiasm and contributed to reluctance to engage in acquisitions.

As volatility in valuations eventually declines, interest rates eventually settle and post-pandemic winners and losers become clearer, we expect that tech will continue to be an active area of M&A in 2023. Strategic acquirors that have thoughtfully managed their balance sheets and private equity funds that have ample dry powder may be eager to pursue tech (and other) targets that would have previously been out of reach at the much higher valuations many companies enjoyed in 2021. Further, the trends that support dealmaking—a desire to expand and diversify product offerings, drive growth, enhance efficiency, remain competitive and respond to innovation—remain just as present as ever. Technology will continue to revolutionize the market for products and threaten existing business models, which may create opportunities for M&A and other corporate transactions. For example, in early 2023, Microsoft announced a multi-year, multi-billion dollar investment (reported to total $10 billion) in OpenAI, the developer of pathbreaking artificial intelligence bot ChatGPT. The deal announcement included Microsoft’s agreement to deploy OpenAI’s models across its consumer and enterprise products and to introduce new categories of digital experiences built on OpenAI’s technology. The Microsoft/OpenAI transaction illustrates the potential need for well-established tech leaders to look to bolt-on M&A as a source of product innovation and expansion.

At the same time, the environment for tech companies has only grown more complex, particularly with heightened regulatory, political and public scrutiny (evidenced by, for example, the FTC’s announcement that it would be seeking to block Microsoft’s acquisition of Activision Blizzard, the introduction of bipartisan legislation in the U.S. Senate and U.S. House of Representatives to ban Chinese-owned social media app TikTok from operating in the United States and widespread attention focused on the crypto industry following the November 2022 implosion of cryptocurrency exchange FTX). All of these developments contribute to a more challenging environment for tech transactions and underscore the importance of early and proactive planning, thorough diligence and collaboration with experienced advisors to identify creative legal and structural opportunities that will maximize the likelihood of successful outcomes.

Healthcare M&A

Although the pace of healthcare M&A was down in 2022, a steady stream of healthcare deals were signed over the course of the year as large pharmaceutical, health insurance and other industry participants turned to acquisitions to drive growth. As overall M&A slowed considerably in the latter half of the year in particular, healthcare remained a bright spot, with the announcements of two transactions over $15 billion (Johnson & Johnson’s $16.6 billion acquisition of Abiomed and Amgen’s $27.8 billion acquisition of Horizon Therapeutics) and an additional six deals over $3 billion. Pfizer was a major contributor to the level of healthcare M&A, announcing a number of deals, including its $11.6 acquisition of Biohaven Pharmaceuticals, $5.4 billion acquisition of Global Blood Therapeutics and $525 million acquisition of ReViral. Healthcare also overtook technology as the top industry for de-SPAC transactions in 2022, with healthcare targets constituting 24% of de-SPAC targets, while technology companies constituted 21% of de-SPAC targets.

Trends expected to support healthcare M&A in 2023 include (1) the looming patent cliff (in which approximately $230 billion worth of pharmaceutical revenue will lose patent protection before the end of the decade), (2) pharmaceutical and medical device companies with healthy balance sheets and capacity to take on new debt and (3) the continual drive to innovate, evidenced, for example, by forays by retailers and tech companies into the healthcare sector (including CVS Health’s $8 billion purchase of Signify Health and Amazon’s $3.9 billion acquisition of One Medical). At the same time, indications that regulators are focusing on the effects of healthcare deals, including a June 2022 workshop hosted by the FTC and the DOJ to explore new approaches to regulating pharmaceutical M&A, will put a premium on thoughtful transaction planning in this space.

Financial Institutions M&A

Financial institutions M&A slowed significantly in 2022 relative to the pace of activity in 2021, returning to average levels over the preceding decade. Toronto Dominion’s $13.4 billion acquisition of First Horizon, announced in February 2022, was the banking sector’s largest transaction by a wide margin and only a small number of other transactions exceeded $1 billion in deal value. Recessionary fears, lower stock valuations and concerns about a highly politicized regulatory environment combined to tamp down merger activity in the sector. This provided a sharp contrast to 2021, when a number of large bank deals were announced, including the Bank of Montreal’s $16.3 billion acquisition of Bank of the West and U.S. Bancorp’s $8 billion acquisition of MUFG Union Bank. A particularly notable 2022 transaction was TIAA’s announcement that it would sell TIAA Bank to an investor group including private equity sponsors with deep experience investing in regulated financial institutions. A steady stream of sub-$500 million deals contributed to the number of deals that were announced in 2022, also declining meaningfully year-over-year but still matching historical averages.

While Fintech activity demonstrated some resilience, it too retreated in the second half of the year, reflecting the realignment of valuations after several years of rapid growth. M&A slowed, venture funding volumes declined and few IPOs were completed. Intercontinental Exchange Inc.’s $13 billion acquisition of Black Knight, Inc. led the field in transaction size. In parallel, digital assets and cryptocurrencies in particular experienced a difficult environment characterised by plummeting prices and the headline-grabbing collapses of major crypto exchanges/intermediaries, including Voyager Digital Holdings, Inc., Celsius Network, LLC, FTX Trading Ltd. and Genesis Global Holdco, LLC.

In the insurance sector, a similar pattern emerged, with overall volumes declining markedly from 2021. Berkshire Hathaway Inc.’s $11.6 billion acquisition of property and casualty reinsurance company Alleghany Corp. far eclipsed in size the few other insurance sector deals that exceeded $1 billion in value.

Cross-Border M&A

Although there was a lower volume of cross-border transactions in 2022 due to economic uncertainty and stock market volatility, such deals remained attractive to dealmakers. Cross-border deals constituted 32% ($1.1 trillion) of global M&A, broadly consistent with the average proportion over the previous ten years (35%). Transaction volume of acquisitions of U.S. companies by non-U.S. acquirors was $217 billion, representing 6% of 2022 global M&A volume and 19% of 2022 cross-border M&A volume. In 2022, Canadian, British, Australian, Singaporean and Japanese buyers accounted for 50% of the volume of cross-border acquisitions of U.S. targets, while acquirors from China, India and other emerging economies accounted for about 8% (up modestly from 2021, where acquirors from China, India and other emerging economies were responsible for approximately 3% of cross-border deal activity).

We expect that cross-border transactions involving U.S. targets will continue to offer compelling opportunities to foreign acquirors in 2023. Conversely, the high valuation of the U.S. dollar relative to the currencies of other major economies means that overseas companies will be especially attractive acquisition targets for U.S. acquirors, which is another trend that is expected to support cross-border deal activity. Parties evaluating cross-border deals will fare better if they are well-prepared for the cultural, political, regulatory and technical complexity inherent in cross-border deals by engaging early and proactively with advisors on these topics.

Private Equity Trends

While private equity M&A in 2022 fell well short of the activity levels of the previous year, PE players displayed ingenuity and adaptability in developing transaction structures to enable dealmaking in a challenging environment. One example was the October purchase by Blackstone of a majority stake in Emerson Electric’s Climate Technologies business in a transaction valuing Climate Technologies at $14 billion, which utilized a number of different financing structures (including $2.6 billion of financing from direct lenders and $2.2 billion of seller financing) as sources of funds. Another avenue PE buyers took in 2022 was to increase their equity commitments—up to and including executing all-equity deals, such as KKR’s buyout of April Group—while waiting for better market conditions to refinance some of that equity with new debt. Finally, 2022 saw an impressive number of large PE buyouts, including the $16.5 billion buyout of Citrix Systems by affiliates of Vista Equity Partners and Evergreen Coast Capital, the $10.2 billion acquisition of Zendesk by a consortium led by Permira and Hellman & Friedman, Thoma Bravo’s buyouts of Anaplan ($10.7 billion), Coupa Software ($8 billion) and SailPoint Technologies ($6.9 billion) and Blackstone’s purchases of American Campus Communities ($12.8 billion) and PS Business Parks ($7.6 billion).

Looking ahead, we expect there will be opportunities for private equity to be an active area of M&A in 2023. PE firms continue to have large amounts of unspent capital available and ready to be deployed. Further, as interest rates rise, companies may seek to raise cash by selling off assets, and PE actors are likely to be in the mix of potential carve-out buyers as they seek to put available cash to work. At the same time, headwinds include availability constraints and significant additional costs associated with leveraged financing that have prevailed in recent months, concerns expressed by both the FTC and the DOJ about private equity’s impact on competition, and a slowdown in PE fundraising resulting from investor pessimism in the midst of increasing interest rates, rising inflation and geopolitical instability. These headwinds may present new challenges for PE in the coming year, and should be carefully considered by participants in potential private equity transactions and their advisors.

Antitrust

In a year of relatively robust M&A activity, the U.S. antitrust agencies continued to aggressively investigate and challenge deals large and small, across all industries and sectors, focusing not only on harm from mergers involving competing firms, but also on transactions implicating other theories of harm, including vertical and conglomerate theories, potential and/or nascent competition and monopsony theories (particularly involving labor markets). The hostile enforcement environment was not unexpected, given the Biden administration’s expressed desire for more muscular antitrust enforcement as well as strong pronouncements in 2021 from new leadership appointed at the FTC and the DOJ that the agencies would not hesitate to vigorously challenge deals they viewed as anticompetitive. What was not initially clear, however, was whether challenges based on innovative legal theories and more novel theories of harm in this new era of enforcement would be successful.

2022 demonstrated that transacting parties who choose to test nontraditional theories of harm by fighting litigation may ultimately prevail. High-profile litigation losses for the agencies in 2022 included the DOJ’s loss in its action seeking to block Booz Allen’s proposed acquisition of EverWatch Corp, the DOJ’s loss in its civil action seeking to enjoin United States Sugar Corporation’s acquisition of Imperial Sugar Company and the dismissal by the presiding administrative law judge of the FTC’s antitrust charges in Illumina’s acquisition of cancer detection test-maker Grail. Further, the agencies’ “just say no” approach to remedy proposals made by merging parties was put to the test in 2022 with parties increasingly opting to “litigate the fix.” One successful example of such a challenge was UnitedHealth Group/Change Healthcare, where, in response to regulatory concerns, UnitedHealth announced its intent to divest Change Healthcare’s claims-editing business and, prior to the start of the antitrust trial, signed a definitive agreement to sell the business, which the district court accepted as a way to effectively restore competition over the DOJ’s objection.

Parties have traditionally accounted for regulatory uncertainty through deal mechanics, including detailed regulatory commitments and reverse breakup fees. In a concerning trend, even negotiated efforts commitments—which are very common in M&A deals—are now being used by the agencies against transacting parties as evidence that the parties themselves had substantive concerns about antitrust risk, and there is increasing concern that merger agreement provisions will be used as a “road map” by the government. This development only underscores the importance of deliberate, advance antitrust analysis and planning—including not only substantive risk allocation but also optics and messaging—in consultation with advisors at the earliest possible stages of a potential transaction. For transactions that raise antitrust concerns, parties should be prepared to deal with the FTC’s strong preference for divestitures in lieu of conduct remedies that require ongoing oversight to ensure compliance, as well as both agencies’ strong preference for approving acquirors of the divestiture assets prior to closing rather than permitting divestiture acquirors to be identified by the parties and approved by the government after closing.

Antitrust policy at the agency level (including the adoption of new merger guidelines and informal and formal rulemaking such as the FTC’s recently proposed controversial rulemaking that would ban most employee non-compete agreements), potential changes to the governing doctrinal framework (including as a result of changes to the antitrust laws through the courts and legislation) and developments in individual litigated challenges (including the outcome of the FTC’s challenges to Microsoft’s purchase of Activision Blizzard and to Meta Platform’s purchase of virtual reality app company Within, among others) will continue to be important areas to watch in 2023. Further, significant increases in the funding allocations for the FTC and the DOJ enacted at the end of 2022 will provide the agencies with additional resources to conduct their investigations and enforcement actions. Transacting parties must carefully consider the possibility of regulatory concerns and have a clear understanding of what remedies they would be willing to offer as well as whether they are prepared to litigate—preferably with a self-imposed fix in place—if the agency’s concerns cannot be resolved. Parties should anticipate potentially broader inquiries that may impose significant transaction costs and cause delays in closing timelines, and, in certain sectors such as technology, healthcare and banking, potentially more politicized challenges.

Foreign Investment Review

Regulatory scrutiny of foreign investments has increased in the United States and in jurisdictions around the world in recent years. In the United States, the Committee on Foreign Investment in the U.S. (CFIUS), an interagency committee of the federal government, reviews foreign investments in U.S. businesses and certain real estate transactions for national security implications.

In September 2022, President Biden issued an executive order regarding CFIUS review of potential national security risks associated with inbound foreign investment, representing the first time since CFIUS’s establishment in 1975 that an administration provided formal guidance on specific risks that the Committee should take into account when reviewing a transaction. The Executive Order specifically instructs CFIUS to consider the following national security factors: the effect on the resilience of supply chains, potential harm to U.S. technological leadership in areas that impact U.S. national security, the cumulative effects of multiple transactions involving the same or related parties in the same industry or involving similar technologies, potential cybersecurity risks and commercial or other access to sensitive data of U.S. persons. One month later, the U.S. Department of the Treasury, which serves as Chair of CFIUS, for the first time released Enforcement and Penalty Guidelines that detail the process CFIUS will use to assess whether to impose (and the amount of) penalties, and set forth a list of aggravating and mitigating factors that will be considered.

The Executive Order and issuance of the Guidelines indicate that CFIUS will continue to closely scrutinize foreign investments in U.S. companies and businesses, and highlight the importance of thoughtfully analyzing U.S. political and regulatory implications early in the process to determine whether a transaction may attract CFIUS attention or be subject to CFIUS review. Further, governments around the world are expanding the scope of their review of foreign direct investment beyond the traditional national security focus, and are becoming more proactive in analyzing deals even where they do not fall within mandatory notification requirements. The expanding direct investment reviews in foreign jurisdictions may also extend the timeline to closing even when there are no substantive issues. Parties engaging in cross-border transactions with potential foreign investment risk therefore must carefully consider these developments in negotiating the appropriate allocation of risk and time frames, and be prepared to respond to possible (and prolonged) CFIUS and foreign direct investment scrutiny.

SPAC Trends

The special purpose acquisition company (SPAC) phenomenon boomed in 2020 and 2021, and largely busted in 2022. Both SPAC IPOs and de-SPAC M&A fell precipitously—just 85 SPAC IPOs priced in 2022 (with activity declining sharply as the year progressed, as just 16 SPAC IPOs priced during the last six months of 2022 compared to 69 in the first six months of 2022) compared to 613 in 2021, and 196 de-SPAC deals were announced over the course of 2022 compared to 289 in 2021. Further, the number of withdrawn SPAC deals surged in 2022, with a total of 65 de-SPAC M&A deals withdrawn compared to 18 deals withdrawn in 2021. The slower pace of SPAC activity reflected reduced investor interest due to weaker-than-expected performance of post-de-SPAC companies (including relative to projections), heightened regulatory and political scrutiny (illustrated by new proposed SEC rules and increased comments in the SEC review process) and longer time frames to complete transactions.

In March 2022, the SEC unveiled its long-awaited proposed rules governing SPACs. Among other significant changes, the new rules would impose additional disclosure obligations (including regarding SPAC sponsors, conflicts of interest and de-SPAC transactions) and new financial statement requirements (including with respect to financial projections) that, if implemented, would subject SPACs to disclosure requirements that more closely match those applicable in IPOs and make the SPAC process more lengthy, burdensome and complex. The SEC’s final rules are expected to be released in early 2023, although the anticipation of the proposed rules and increased SEC scrutiny are among the factors that have contributed to the whiplash in SPAC market conditions over the last two years.

Notwithstanding the likelihood of significant regulatory change and continued scrutiny in 2023, the amount of SPAC dry powder available for acquisitions and the large number of SPACs seeking targets mean that SPACs will continue to be a feature of the M&A landscape in 2023, at least in the short to medium term as existing SPACs approach their deadlines to complete business combinations (or, if they are unable to find a target, decide whether to seek an extension or dissolve, as occurred in record numbers in late 2022 with 85 SPACs liquidating in December alone). After a two-year period in which de-SPAC transactions presented many private companies with a real third alternative to M&A and an IPO, de-SPAC transactions are now more likely to make sense in a more limited set of circumstances.

Delaware Developments

The most closely watched M&A development of 2022 in the Delaware courts (and perhaps the most closely watched M&A dispute of all time) was Elon Musk’s attempt to walk away from his $44 billion purchase of Twitter. Musk sought to terminate the deal by alleging, among other things, that Twitter’s spam accounts exceeded the number that Twitter had publicly disclosed, which he claimed constituted a material adverse effect (MAE) that should excuse his performance under the merger agreement. Twitter filed suit in the Delaware Court of Chancery seeking to force Musk to close the deal, and following three months of high-profile discovery and pre-trial proceedings, Musk relented and the parties consummated the transaction on the originally agreed terms at the end of October 2022. Following this case and other disputes generated by pandemic-related dislocation, it remains the case that buyers seeking to establish an MAE as a basis for terminating a transaction generally must satisfy a very high bar, consistent with the prevailing philosophy in Delaware that the agreements of transacting parties generally should be respected and enforced. The Musk/Twitter saga also was a powerful reaffirmation of market expectations that the Delaware courts will enforce merger agreements in accordance with their terms.

Acquisition Financing

2022 brought a halt to a nearly unabated 12-year run of booming credit markets and record-low interest rates. Rampant inflation and fears of a recession on the horizon, among other factors, led to a marked contraction in credit availability and a slowdown in dealmaking across sectors and credit profiles. U.S. high-yield bond issuances were down approximately three quarters year-over-year—the lowest volume since 2008—while newly minted leveraged loans fell nearly two-thirds from 2021 levels. Investment-grade bond issuances fared better, but were still down significantly, with new issuances falling roughly 20% year-over-year. By year end, the average interest rate for single-B bonds had risen to 9.2%, up from under 4.7% at the beginning of January, while the average interest rate for BBB bonds more than doubled, from 2.7% to 5.8% over the same period.

Meanwhile, antitrust regulators’ aggressive attitudes (described above) led to less predictable (and much longer) timelines between signing and closing of acquisitions. These two factors—a volatile and falling credit market, and the need for longer-duration acquisition financing commitments—had a compounding effect, squeezing availability for commitments of the requisite duration, and making those that were available more expensive.

In the face of these dynamics, debt-fueled M&A activity suffered, as described above. But some M&A acquirors—even those unwilling to pay the higher rates of the day—found creative ways to pursue new deals, including by turning to direct lenders for acquisition financing (who reportedly participated in the financing for six of the year’s ten largest announced LBOs), accepting seller financing (as in Rev’s and Searchlight’s pending purchase of Global Payments’ Netspend consumer business), funding their transaction with larger or more creative equity financing solutions (as in VillageMD’s $8.9 billion acquisition of Summit Health) and carefully structuring deals to allow targets’ existing debt to stay in place post-transaction.

2023, more than any year in recent memory, brings a unique slate of challenges and considerations for players in the acquisition financing markets, and corporate borrowers and sponsors will need to plan rigorously and be creative and flexible in order to thrive in this dynamic and challenging environment.

Tax Developments

The Inflation Reduction Act of 2022, enacted in August 2022, introduced two new taxes effective for tax years beginning after December 31, 2022: (1) a 1% excise tax on repurchases of stock of publicly traded corporations and (2) a 15% corporate alternative minimum tax (CAMT) on the financial statement income of certain large corporations. The 1% excise tax applies to a wide range of transactions well beyond conventional stock buyback programs. For example, under recently issued IRS guidance, the excise tax would apply in all-cash acquisitions to the extent the consideration is paid with cash (including borrowing proceeds) of the public target and would apply in “reorganizations” with respect to consideration received by the public target’s shareholders, other than acquiror stock or securities that can be received on a tax-free basis. By introducing a parallel set of tax rules, the CAMT adds significant complexity to U.S. corporate taxation, including in the M&A context. Parties engaging with publicly traded U.S. target corporations will need to carefully consider the potential application of the excise tax, and potential acquirors of U.S. target businesses should carefully model the anticipated tax rate of the combined business, taking into account the potential application of the CAMT.

Activism and M&A

M&A-driven campaigns continued to make up a significant portion of overall activism activity in 2022. “Sell the company” campaigns were a key driver, reflecting an increasing push by activists for companies to explore or pursue transformative M&A as an alternative to perceived “stalled” or “failed” standalone strategies, and activists also commonly pushed for break-ups or divestitures in portfolio-based campaigns. In addition, some activists launched (often unsuccessful) campaigns after a transaction was announced to scuttle or sweeten an announced deal. One notable M&A-focused activism campaign was Light Street Capital’s unsolicited recapitalization proposal to Zendesk following Zendesk’s announcement that it had reached an agreement to be acquired by a consortium of investors, with Zendesk succeeding in convincing shareholders—and ISS—to support the transaction recommended by the board of directors. Companies and boards across industry sectors were targeted with calls for strategic, business and portfolio reviews and also faced campaigns focused on capital allocation, margin expansion, operational changes and governance reform, including by headline activist funds like Elliott Management, JANA Partners, Carl Icahn, Sachem Head, Starboard Value, ValueAct Capital, Inclusive Capital Partners, D.E. Shaw, Third Point, Trian Partners, Corvex and newcomers such as Voss Capital, among others.

On the regulatory front, potential SEC rulemaking announced in 2022 may impact the activism landscape in the years to come, depending on how the final rules shake out. The SEC’s proposed amendments to Regulation 13D-G and a related new proposed rule reaching derivatives were two of the most significant activism-related legal developments of 2022. The proposed rules would modernize the beneficial ownership reporting rules by, among other things, shortening the Schedule 13D filing deadline from ten days to five days, setting an amendment deadline of one business day after a material change, shortening the Schedule 13G filing deadlines, providing that holders of certain cash-settled derivative securities will be deemed beneficial owners of the reference equity securities and requiring expanded disclosure of activity in derivatives. The proposed amendments, which are expected to be finalized early in 2023, would represent the most significant reforms to beneficial ownership reporting requirements since the rules were adopted in 1968 and reflect the SEC’s ongoing efforts to enhance transparency to investors and strike a balance among the interests of issuers and other market participants. It also remains to be seen whether proposed rules regarding disclosure of derivatives positions, which were actively opposed by certain major activist hedge funds, will reach the final rulemaking stage.

In addition, the SEC’s universal proxy card rules, which would change the legal framework for director election proxy contests by mandating that the company and dissidents use and send to shareholders proxy cards listing the names of all director candidates, regardless of whether the candidates were nominated by the board or by a dissident shareholder, took effect on September 1, 2022. While activism activity had already been increasing, the universal proxy card rules are expected to increase scrutiny (by both shareholders and proxy advisory firms) of individual directors and their roles on boards, alongside an activist’s broader economic critique. The upcoming 2023 proxy season will be the first in which use of universal proxy cards is mandatory, and we will begin to see whether and how the new rules impact the success rate for activists who launch campaigns for board seats, as well as the likelihood of lesser known or newer activists (or ESG activists) launching minority slate campaigns “on the cheap” using universal proxy cards. Perhaps the biggest change seen so far is how the proxy advisory firms are now approaching “building a board” across the slates offered by an incumbent board and a dissident running a competing director slate on the universal proxy card.

Looking to the year ahead, we expect that activism activity will continue to be robust and that M&A will continue to be a common campaign thesis for activists, and that the effect of recent SEC developments on activists’ behavior and decisionmaking will become clearer. As activists continue to seek board representation (whether via proxy fights or settlements), the coming year will reveal whether the universal proxy card rules have an appreciable impact on activists’ inclination to nominate candidates and ability to win proxy contests or result in the typical proponents of Rule 14a-8 shareholder proposals choosing to run director candidates instead to advance their underlying agendas. And as companies and activists acclimate to the new proxy season dynamics over the next few years, another trend to watch will be whether activists who score one or two board seats are, in turn, successful in driving further M&A activity.

ESG

Environmental, social and governance (ESG) issues became more politicized in the United States in 2022 as some politicians and regulators, largely at the state level and divided along party lines, publicly staked out positions on the extent to which ESG should (or should not) affect corporate strategy or otherwise be considered by companies, asset managers and pension funds. Notwithstanding this apparent domestic ESG political backlash in some circles, ESG considerations have remained top strategic and operational priorities that have increasingly influenced the M&A landscape. Senior executives and corporate boards have leveraged M&A to advance ESG strategies and are integrating ESG considerations into due diligence and post-transaction integration processes to generate synergies, advance long-term value creation and reduce risk. Recent examples of transactions in which ESG considerations helped to drive the rationale for M&A include RWE’s $6.8 billion purchase of Con Edison’s clean energy business, Infrastructure Investment Fund’s $8.1 billion acquisition of South Jersey Industries, SSE’s $1.8 billion sale of a minority stake in its electricity transmission network to the Ontario Teachers’ Pension Plan Board, Alphabet’s $5.4 billion acquisition of cybersecurity firm Mandiant, BP’s $4.1 billion acquisition of bioenergy firm Archaea and Chevron’s $3.1 billion acquisition of Renewable Energy Group.

The influence of ESG considerations on M&A is likely to accelerate as shareholders and regulators continue to exert pressure on companies to make strategic and operational changes to address ESG risks and opportunities, in addition to enhancing board and management oversight of such matters. Notably, in the United States, new SEC rules on climate disclosures, human capital, cybersecurity and board diversity, all of which are expected to be released and/or finalized in the first half of 2023, will increase pressure on issuers to provide accurate and timely disclosures and will incentivize acquirors and targets to carefully diligence these areas to identify potential risks and vulnerabilities. ESG considerations also continue to play a role in post-transaction integration processes, particularly as corporate governance and culture, human capital management and diversity, equity and inclusion remain core investor and stakeholder concerns. Finally, we expect to see activists continue to draw on ESG critiques to strengthen their cases for change, particularly in instances where ESG-related missteps have drawn public attention, drove business crises, or led to internal or external stakeholder divisions. More broadly, it remains critical for boards and management to consider ESG factors and risks (along with all other material and relevant factors and risks) in their decisionmaking processes in order to ensure sustainable value for the company over the long term.

* * * * * * * *

As 2023 begins, there are reasons to expect that some of the major headwinds that battered M&A activity in the second half of 2022 may soon start to relent. The financing markets are not quite as hermetically sealed as they were in recent months, inflation shows pockets of easing, the impact of energy prices in Europe may not be as severe as initially feared, there is a possibility of a shallow or even no recession in the United States and many observers anticipate that the performance of the equity markets in 2023 will, at the least, be less punishing than in 2022. Nonetheless, the global economy is not out of the woods, and the risks that have depressed M&A activity in recent months are far from fully subsiding. It is difficult to predict how these trends and new developments in economic, financial, regulatory and political conditions will impact M&A in the coming year. In navigating the uncertainty, participants and their advisors should carefully analyze the risks and benefits of potential transactions, anticipate takeover threats and opportunities, proactively address changing shareholder dynamics and emerging regulatory, legislative and other risks, remain flexible and creative in transaction structuring and seek creative solutions to execute on M&A opportunities that are strategically and financially compelling.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “Mergers and Acquisitions—2023,” dated January 24, 2023.

Tags acquisition financing, activism, antitrust, cross-border M&A, delaware, ESG, foreign investment, M&A, mergers, private equity, SPACs

Corporate Governance

Wachtell Lipton Discusses Key Issues for Boards in Corporate Governance for 2023

Post author By renholding
Post date December 6, 2022
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While the world recovers from the worst of the pandemic, the economic, political and social repercussions will continue to play out in ways that, while unpredictable, are in some respects characterized by observable patterns of cause-and-effect and cyclicality. The pendulum has been swinging back as, for example, the Federal Reserve has been ratcheting up interest rates and tightening liquidity, activist activity is once again on the rise, Republicans have taken control of the House, and back-to-office policies have been eased into effect. In this environment, stasis is the exception rather than the norm, and boards must continue to be nimble and open-minded in navigating the pitfalls and opportunities of this systemic recalibration.

Importantly, the infrastructure of corporate governance – namely, the structure and allocation of responsibilities and decision-making authority, and related principles, policies and information flows to facilitate such functioning – continues to serve as the anchoring framework for the board’s oversight of dynamic business conditions. Despite the complexity and range of issues that boards today must grapple with, the basic principles of governance continue to provide the best guideposts: engaged oversight, informed decision-making, conflict-free business judgments, and balancing of competing interests to promote the overall best interests of the business and sustainable long-term growth in value.

Below are the key trends and developments that boards should bear in mind in the coming year:

Risk management: Board-level systems for monitoring and controlling mission-critical functions are important to demonstrate that the board has fulfilled its Caremark duties, as demonstrated last year when the Delaware Court of Chancery permitted a Caremark duty-of-oversight claim to proceed against the directors of the Boeing Company, with the court pointing to an alleged lack of board engagement with safety issues and the absence of a committee charged with direct responsibility. However, two subsequent cases (Hamrock and SolarWinds) have reiterated the requirement that there needs to be bad faith, not just gross negligence, for a successful Caremark

Boards are expected to oversee significant and critical risks, and to document their oversight of the strategies, policies and procedures adopted to address those risks. In this regard, directors should seek to understand the corporation’s risk profile, and its management of short-, medium- and long-term risks, as well as how risk is taken into account in the corporation’s business decision-making and strategic planning. Given the challenging economic climate, boards should be mindful of possible risks relating to inflation and rising interest rates, availability and cost of financing, increases in operating costs and fluctuations in exchange rates, as applicable. We expect to see continued focus by investors and the SEC on oversight of risk management, including with respect to how boards and committees are structured to ensure sufficient expertise to oversee key areas of risks. See our memo, Risk Management and the Board of Directors.

Cybersecurity: Cybersecurity continues to be a challenging area of risk management, with plaintiffs bringing Caremark claims based on cybersecurity breaches, regulators requiring additional disclosures about risk management and proxy advisors factoring cybersecurity risk oversight into their governance assessments. Two Delaware decisions in the past year have addressed board oversight duties under Caremark with respect to cybersecurity risks. In both cases (SolarWinds and Sorenson), Caremarkclaims were asserted following a cybersecurity attack by third-party hackers who exposed the personal information of customers. Both claims were dismissed, but the court’s opinions spoke to the increased risks posed by cybersecurity threats, characterizing cybersecurity as a “mission critical” risk for online providers.

In addition, the SEC proposed rules on cybersecurity risk management in May 2022 that would require public companies to report all material cybersecurity incidents within four business days of determining the event’s materiality, as well as periodic reporting about policies for managing cybersecurity risks, the board’s role in overseeing cybersecurity risks and the board’s cybersecurity expertise. ISS has also updated its governance “QualityScore” metrics to include information security as a factor, including third-party information security risks and related performance measures in executive compensation plans.

Boards should ensure that they receive proper information to assist them in their oversight of cybersecurity risks, including from management experts and outside advisors, as relevant. While risks to the company’s business strategy are often discussed at the full board level, it may be appropriate to consider whether oversight of cybersecurity risks should be allocated for particular focus by a board committee. See our memo, Cybersecurity Oversight and Defense – A Board and Management Imperative.

Cryptocurrency and blockchain: Despite the steep decline this year in the value of cryptocurrencies and the remarkable bankruptcy of FTX, the advent of cryptocurrency assets, markets and related technologies will continue to have long-term implications not only for stakeholders like financial institutions, investment firms and payments technology providers, but also more broadly for businesses considering whether and how to leverage commercial opportunities created by cryptocurrencies, stablecoins, non-fungible tokens and blockchain technology. Major financial institutions and world governments continue to move into the crypto space, with the Federal Reserve Bank of New York testing digital dollar tokens with major banks and China’s introduction of e-CNY, its central bank digital currency. In addition, the E.U.’s Markets in Crypto-Assets regulations are expected to come into effect in 2024, and proposed legislation in the U.K. would give the Financial Conduct Authority powers to regulate cryptoassets.

When considering cryptocurrencies or uses of blockchain technology, directors must not only be mindful of the risks and opportunities presented by the current state of play (including cybersecurity concerns, accounting and tax implications and other operational risks), but also consider the rapidly evolving nature of the crypto ecosystem. Even corporations that at first glance seem unlikely to be affected by crypto developments may find themselves exposed to peripheral risks, whether through relationships with institutions that are players in the crypto space or supplier networks that utilize blockchain. As a result, it will be important for boards and management teams to work collaboratively to understand developments in this area. As relevant, boards should consider creating committees to deal with questions of digital assets and demonstrate strong internal controls over digital assets. See our memo, Cryptoassets and the SEC’s Mandate.

Politicization of ESG, and questions about the “woke” corporation: We have previously remarked on the widespread acceptance of stakeholder governance and, relatedly, the value of considering ESG factors in corporate decision-making. The last year has seen a new movement of anti-ESG backlash that is opposed to consideration of ESG factors, in a push to revert to the outdated notion that the purpose of a corporation is to increase short-term shareholder profits. However, this politicization of ESG does not alter the board’s ability to consider ESG factors; to the contrary, such consideration is consistent with the board’s fiduciary duty of care, as well as the board’s Caremark obligations to identify and address material risks.

Properly understood, ESG is not a unitary principle but rather encapsulates a wide range of risks and opportunities that a corporation must balance, taking into account its specific circumstances, in seeking to achieve long-term, sustainable value. A holistic view of corporate purpose recognizes that various stakeholder interests and relationships – including those relating to environmental sustainability, the safety and well-being of employees, co-dependencies with local communities in key locations, credibility with regulators, and creditworthiness with lenders and suppliers – are among the considerations essential to maintaining a thriving, growing business. See our memo, Understanding the Role of ESG and Stakeholder Governance within the Framework of Fiduciary Duties.

Climate disclosure: In the coming year, the SEC is set to release or adopt several new ESG disclosure rules, including the final climate disclosure rules, following their initial proposal in draft form in March of 2022. These rules are expected to leverage the growing standardization of climate-related disclosures and, if adopted, they would require disclosures about board and management oversight and governance of material climate impacts, greenhouse gas emissions, as well as targets and transition plans. The International Sustainability Standards Board continues its drive toward a global baseline of sustainability disclosures, including a requirement for disclosure of Scope 3 emissions, subject to certain safe harbors that will be unveiled in forthcoming standards to be finalized next year. Simultaneously, there has been enhanced scrutiny of “greenwashing” over the last year, with private lawsuits alleging deceptive marketing, skepticism about sustainability-linked financing and additional SEC enforcement actions alleging misleading climate-related disclosures. While the regulatory landscape continues to evolve, companies are well-advised to work toward compliance with the Taskforce on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board disclosure frameworks, as these are the core of the private market-led disclosure guidelines which have received widespread buy-in from corporations and have been endorsed by major institutional investors.

Activism preparedness and defense; universal proxy cards: The volume of activist activity has rebounded from the relatively muted level of engagement during the height of the pandemic, with a 20% year-over-year increase in activist activity during the first half of 2022. The volatility and general decline in equity values has created vulnerabilities for many companies, as well as opportunities for activists, and this dynamic will continue to play out in the coming year. In addition, activists continue to leverage ESG topics as wedge issues to rally the support of institutional investors around economic and governance theses (g., Engine No. 1/Exxon, Carl Icahn/McDonalds and Third Point/Royal Dutch Shell).

At the same time, the new SEC rule requiring a universal proxy card in director election proxy fights became effective earlier this year. The universal proxy card will facilitate proxy contests by reducing the cost and effort required for activists to nominate and solicit proxies for the election of board members. It could also lead to a greater focus in proxy fights on the track records and skill sets of individual directors, rather than the performance of the company or board as a whole, because a universal proxy card will enable shareholders to pick and choose individual directors from the company’s and the activist’s competing slates.

In preparing for the use of universal proxy cards, some companies have been updating their bylaws to reflect technical updates, and, in a few cases, they have enacted more aggressive bylaw amendments that have been met with resistance. For example, there is a pending lawsuit against Masimo Corporation in Delaware over its bylaw amendment requiring nominating shareholders to disclose information about their own investors, other investors with whom they have spoken, as well as other companies for which they are also nominating directors.

Another development that may impact voting dynamics is the initiative by some large asset managers to provide their retail clients with the ability to directly participate in voting decisions: BlackRock implemented this technology for certain assets a year ago, Vanguard is reported to be considering a trial of similar technology, and State Street announced in November that they are considering the possibility of providing investor choice in more of its products.

D&O exculpation and insurance: Earlier this year, Delaware adopted an amendment to its corporation laws to permit exculpation of officers (in addition to directors) from personal liability for monetary damages in corporate charters. Such an exculpation provision is not self-effectuating. Implementation requires an amendment to the corporation’s certificate of incorporation which, in turn, requires approval by the corporation’s shareholders. According to its recently released policies for 2023, ISS will generally vote for proposals providing for exculpation provisions in a company’s charter to the extent permitted under applicable state law.

Officer exculpation may help to eliminate the unequal and unfair targeting of officers for negligence claims in stockholder litigation, while at the same time preserving avenues for officers to be held accountable. Notably, the scope of permissible indemnification is limited, insofar as it only allows exculpation for direct claims brought by stockholders and does not eliminate officers’ monetary liability for breaches of their duty of care pursuant to claims brought by the corporation, or for derivative claims made by stockholders on behalf of the corporation. In addition, the amendment would not limit the liability of officers for breaches of the duty of loyalty, any acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, and any transaction from which the officer derived an improper personal benefit. See our memo, Delaware Approves Permitting Exculpation of Officers from Personal Liability in Corporate Charters.

Clayton Act Section 8: The Department of Justice recently announced that it is ramping up efforts to enforce Section 8 of the Clayton Act, which prohibits officers and directors from serving with competing companies simultaneously. There are certain de minimis safe harbors for interlocked companies whose competing sales are less than $4.1 million (as of 2022) or where the competing sales make up only a minimal percentage of total sales, as well as a one-year grace period to resolve a violation created by changed circumstances. Several companies have already received civil investigative demands, with a particular focus on private equity sponsors (g., Thoma Bravo and its investments in Dynatrace and Solarwinds) based on a theory of corporate deputization that focuses on firms rather than specific individual interlocks at portfolio company boards. The DOJ appears to have established an internal task force dedicated to enforcing Section 8, and we expect additional enforcement actions and press releases to come. Companies should accordingly review their board memberships for competitor interlocks. See our memo, Antitrust Division Actively Seeking to Break up Corporate Interlocks.

Executive compensation clawback rules: Pursuant to the SEC’s final compensation clawback rules under the Dodd-Frank Act, which were released earlier this year, publicly traded companies must adopt policies allowing them to “claw back” incentive-based executive compensation awarded on the basis of materially misreported financials that subsequently require an accounting restatement. The clawback mechanism applies regardless of whether the restatement was caused by error, fraud or otherwise, and greatly expands the SEC’s authority to force companies to claw back executive compensation following a restatement. The new rules allow for limited board discretion in whether to seek recovery from officers, and boards are prohibited from indemnifying officers for recovered compensation. While many public companies already have clawback policies in place, they should assess whether they meet the SEC’s new requirements on the anticipated schedule. See our memo, SEC Adopts Final Compensation Clawback Rules.

Board Diversity: Board diversity continues to be an area of focus by major institutional investors, proxy advisors and regulators, and in recent years the composition of boards has evolved accordingly, with 72% of the incoming S&P 500 class of directors appointed in 2022 coming from historically underrepresented groups. According to a recent survey, half of all S&P 500 boards have a policy like the “Rooney rule” to include candidates from underrepresented groups in the candidate pool when recruiting new directors. Beginning in 2023, Glass Lewis will recommend against the chair of the nominating committee of a board that is not at least 30% gender diverse, absent credible disclosure of a commitment to increase board diversity in the new future. Institutional investors, like State Street, have made similar commitments on gender diversity, and are also calling for disclosure of the racial and ethnic composition of boards. Looking forward, new proposed SEC rules on the disclosure of board diversity are expected in April 2023.

In addition to these key trends and developments, directors and companies should remain mindful of other recommended practices in corporate governance:

Boards should:

Maintain a working partnership with the CEO and management and serve as a resource for management in charting the appropriate course for the corporation;
Set the “tone at the top” to create a corporate culture that not only gives priority to ethical standards, professionalism, integrity and compliance in setting and implementing both operating and strategic goals, but that also is a reflection of, and a foundation for, the corporation’s purpose;
Choose the CEO, monitor the CEO’s and management’s performance and develop and keep current a succession plan that takes into account potential candidates as well as the objectives and challenges that the corporation faces;
Oversee corporate strategy (including purpose, culture and vision) and the communication of that strategy to investors, recognizing that investors want to be assured about not just current risks and problems, but also threats to long-term strategy from global, political, climate, social, economic and technological developments;
Determine the appropriate level of executive compensation and incentive structures with the basic objective of recruiting and retaining the best management available, and with awareness of the potential impact of compensation structures on business priorities and risk-taking, taking into account specific goals like climate sustainability and current stakeholder, proxy advisor and public and political views on compensation;
Be prepared to take an active role in matters where the CEO may have a real or perceived conflict, including in the context of takeovers and attacks by activist hedge funds focused on the CEO;
Receive updates from management or advisors, as appropriate, on changes to regulatory guidance, disclosure requirements and other changes in law which may affect the management of the corporation;
Have a lead independent director or a non-executive chair of the board with clearly defined duties and responsibilities who can facilitate the functioning of the board, serve as a liaison between the independent directors and management, and assist management in engaging with investors, other stakeholders, their advisors such as S&P and ISS and with regulators;
Together with the lead independent director or the non-executive chair, determine the agendas for board and committee meetings and work with management to ensure that appropriate information and sufficient time are available for full consideration of all matters;
Recognize that shareholder engagement is a central component of corporate governance, and participate, as appropriate, in proactive outreach efforts to communicate with and listen to shareholders and other stakeholders;
Work with management to anticipate possible takeover attempts and activist attacks, understand activist and acquiror tactics, and keep response playbooks up-to-date in order to be able to address these attempts or attacks more effectively, if they should occur; in this regard, it may be prudent to meet at least annually with the team of the corporation’s executives and outside advisors that will advise the corporation in the event of a takeover proposal or an activist attack;
Evaluate the performance of individual directors, the board and board committees on a regular basis and consider the optimal board and committee composition and structure, including board refreshment, expertise and skill sets (including as it pertains to climate, diversity and key risk areas), independence and diversity, including with a mind to the evolving Delaware jurisprudence on what constitutes “independence” for directors;
Consider whether to create additional committees focused on key risk areas, such as cybersecurity or cryptocurrency, in order to demonstrate appropriate risk management;
Review corporate governance guidelines, committee charters and workloads and tailor them to promote effective board and committee functioning; and
Determine that appropriate records of the foregoing are timely created and maintained.

Corporations should seek to:

Have a sufficient number of directors to staff the board’s committees and to meet investor and other stakeholder expectations regarding experience, expertise, diversity and periodic refreshment;
Have directors who have knowledge of, and experience with, the corporation’s businesses and the key developments and drivers that impact those businesses, even if this results in the board having more than one director who is not “independent”;
Have directors who are able to devote sufficient time to preparing for and attending board and committee meetings and engaging with investors and other stakeholders;
Recognize that institutional investors and other third-party ESG activists will monitor the composition of the board of directors for expertise on particular aspects of ESG (including climate change and diversity) and for presence on the board of known opponents of an ESG issue;
Provide directors with all the data that is necessary for making sound decisions regarding performance, strategy, compensation, risk management, climate change, diversity, other ESG issues, financial stability and stakeholder allocation;
Provide directors with relevant reporting on material decisions or industry trends, such as the use of artificial intelligence and cryptocurrency, as well as corporate cybersecurity defense and readiness;
Provide directors with regular tutorials by internal and external experts as part of expanded director education, and provide directors with the information and expertise they need to respond to disruption, evaluate current strategy, strategize beyond the horizon and integrate and balance the interests of stakeholders; and
Maintain a collegial relationship among and between the corporation’s senior executives and members of the board that facilitates frank and vigorous discussion and enhances the board’s role as strategic partner, evaluator and monitor.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “Thoughts for Boards: Key Issues in Corporate Governance for 2023,” dated November 30, 2022.

Tags activism, blockchain, board diversity, Board of Directors, boards, climate disclosure, Corporate Governance, cybersecurity, directors, ESG, executive compensation, universal proxy card

Corporate Governance

Corporate Social Activism and the New Business of Change

Post author By renholding
Post date October 14, 2022
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The days when activists focused on fights over social issues while businesses concentrated on the pursuit of commercial profit are gone. Through pronouncements, boycotts, sponsorships, lobbying, investments, and divestment, businesses and their executives are at the forefront of some of the most important and contentious issues of our time, from the Russian invasion of Ukraine to voting rights to gender equity. As a result, the traditional understandings of capitalism and activism in American life have changed, a topic that I explore in a recent article and a new book.

Throughout U.S. history, corporations have played a critical role in social activism. Because businesses, their executives, and their consumers do not exist in a social vacuum, corporations have taken on different roles in the ebbs and flows of social change. For instance, during the 1960s, many corporations openly supported the civil rights movement even in the face of serious and dangerous resistance. Many businesses played a crucial role in lobbying presidents John Kennedy and Lyndon Johnson in the epic political battles that ultimately led to the passage and enforcement of the landmark Civil Rights Act of 1964 and the Civil Rights Act of 1968.

While corporate social activism is not new, the current times, tools, and context have made it meaningfully different. The roots of this new corporate social activism can be traced to three large, interconnected developments in business, law, and society: (1) the evolution of corporate purpose from shareholder primacy to expansive stakeholder governance; (2) the convergence of the public and private sectors; and (3) the expansion of corporate political rights.

More specifically, evolving expectations of corporations to focus beyond near-term shareholder wealth has driven businesses to think more about stakeholders other than shareholders. The privatization of traditional public functions like prisons and policing, along with unprecedented public interventions in private businesses like government bailouts and mask mandates, have made business engagement on social issues a natural extension of the convergence of the public and private spheres. Likewise, Supreme Court rulings such as Citizens United and Hobby Lobby that allow the use of corporate funds to engage in political campaigns have understandably prompted the greater use of corporate resources to address social issues.

Furthermore, these developments have been powered and amplified by social media and new financial technology. For example, leveraging apps like Twitter and GoFundMe, activists and citizens can readily organize, communicate, and fundraise to bring their concerns to powerful figures in business and government as never before. Tens of millions of people can be reached, millions of dollars raised, and thousands gathered to heighten awareness or protest an issue in a matter of hours.

Contemporary corporate social activism at its best can benefit both activists and capitalists. By working thoughtfully with businesses, activists can gain wider reach, deeper impact, and improved operations for their causes. At the same time, by working with activists, businesses can enhance their value, create new and better markets, and attract more investors and talent to their companies.

Of course, recognizing the significant good that capitalists can do should not blind us to the serious harms they can cause in matters relating to antitrust, competition, and income inequality. Similarly, recognizing the transformative power of activists does not diminish the obstacles that they can present for policymaking, as when they oppose legislation that makes incremental progress rather than cement the grander solutions they seek. Ultimately, capitalist and activist enterprises reflect the contradictions, complexities, and richness of the human beings behind them.

To be sure, there can be risks and drawbacks if this partnership between capitalists and activists occurs without careful thought. Corporate social activism could further politicize an already fragmented marketplace, marginalize important social issues, corrode core democratic values, and whitewash corporate misdeeds. For instance, in response to corporate social activism by asset managers like BlackRock, Florida and Texas have barred their state pension funds from investing in certain ESG funds. Similarly, a number of companies have faced heightened regulatory scrutiny and cutbacks of state subsidies and contracts because of their positions on certain social issues.

These risks could understandably prompt some businesses to completely avoid corporate social activism. A better response, however, would be to acknowledge those risks and manage them thoughtfully, honestly, and critically so that society may realize some of the benefits of corporate social activism while mitigating its perils. Moreover, corporate social activism is not likely to disappear from law, business, and society, so thoughtful engagement is preferable to no engagement at all.

In the end, contemporary corporate social activism is a story of how we can meet and master old, yet urgent social challenges with new perspectives and approaches to both corporate and democratic governance. It is one of the most consequential stories of business and society in recent history and will remain so for the foreseeable future.

This post comes to us from Professor Tom C.W. Lin at Temple University’s Beasley School of Law. It is based on his recent article, “Corporate Social Activism and the New Business of Change,” available here, and his new book, “The Capitalist and the Activist,” available here.

Tags activism, Citizens United, corporate social activism, Hobby Lobby, social media

Corporate Governance

Wachtell Lipton on Dealing with Activist Hedge Funds and Other Activist Investors

Post author By renholding
Post date September 7, 2022
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The SEC rule requiring a universal proxy card in director election proxy fights becomes effective today [September 1]. The resurgence of activism is already in progress, and the universal proxy card may significantly facilitate some proxy contests in which an activist is seeking to elect one or more directors to a company’s board to replace incumbent(s). It will also affect proxy contest strategies, tactical considerations and the behavior of proxy advisory firms assessing competing director slates. As stated by ISS in its report on the universal proxy card:

The indisputable fact about the universal proxy card (UPC) is that it is a far superior way for shareholders to exercise their voting franchise than the two-card system that has dominated proxy contests for decades. But like the kid that receives the hot new toy at Christmas, only to become frustrated by its complex instructions, proxy advisors and investors will have to carefully navigate the first few UPC contests. Although UPC contests will increase the workflow of institutional investors, many funds have ramped up teams to evaluate these situations in recent years, so they are likely well prepared for this shift.

As we have previously noted, regardless of industry, size, performance or “newness” to the public markets, no company should consider itself immune from activism. No company is too large, too new or too successful. Even companies that are respected industry leaders and have outperformed the market and their peers have been, and are being, attacked. And companies that have faced one activist may be approached, in the same year or in subsequent years, by other activists or re-visited by the prior activist. The past two years of substantial economic, societal and market shifts have created new vulnerabilities and opportunities for activists and for companies.

Although asset managers and institutional investors will often act independently of activists, the relationship between activists and asset managers and investors in recent years has encouraged frequent and aggressive activist attacks. A number of hedge funds have also sought to export American-style activism abroad, with companies throughout the world now facing classic activist attacks. In addition, the line between hedge fund activism and private equity continues to blur, with some activist funds becoming bidders themselves for all or part of a company, and a handful of private equity funds exploring activist-style investments in, and engagement with, public companies.

Traditional activism, focused on short-term profit, stock price and total shareholder return (TSR), continues alongside a new form of activism emphasizing climate and other environmental, employee/human capital, social and governance (ESG) considerations. The activism landscape has also evolved to include dual purpose activists who combine both TSR and ESG arguments, as well as “pincer attacks” from ESG and TSR activists acting independently or in concert against the same company.

The outcomes of recent economic and ESG-related proxy fights, activism campaigns and non-public activist approaches across industry sectors underscore the importance of advance preparedness to anticipate, prevent and respond to an activist attack. This includes not only the more traditional governance and economic components of activist campaigns, but also the ESG themes that some activists have been deploying in their attacks (including and subsequent to the Exxon proxy fight successfully waged by ESG activist Engine No. 1 last year). The new universal proxy card rule only increases the importance of being prepared.

For many years, we have been updating this memo based on recent developments, evolving trends and our experiences avoiding, defusing, resolving and prevailing in contested situations and proxy fights to provide the most cogent and current advice to our clients and friends. Summarized below is a snapshot of some of the tactics and themes deployed by activists, followed by a checklist of matters to be considered in putting a company in the best possible position to prevent, respond to or resolve an activist attack.

The Attack Devices Used by Activists

Seeking to force a sale of the company by leaking or initiating rumors of an unsolicited takeover approach, publicly calling for a sale, acting as an (unauthorized) intermediary with strategic acquirers and private equity funds, taking positions in both the target and the acquirer, making a “stalking-horse” bid for the company (with or without secured financing), partnering with a hostile acquirer to build substantial stock positions in the target to facilitate a takeover, or partnering with private equity funds.
Aggressively criticizing a company’s governance, management, business and strategy, sustainability and ESG strategies, and presenting the activist’s own recommendations and business and ESG plans, through a “white paper” or other public documents or statements.
Proposing a precatory proxy resolution for actions prescribed by the activist or the creation of a special committee of independent directors to undertake a strategic review to “maximize shareholder value” and/or meet ESG goals, especially with respect to environmental impact.
Demanding an accelerated “Investor Day” at which the company would be pushed to disclose aggressive forward-looking projections, financial targets and actions involving the portfolio and allocation of capital.
Recruiting candidates with industry experience (including retired CEOs of major companies or even former executives of the target) to serve on dissident slates, and conducting (or threatening to conduct) a proxy fight to get board representation at an annual or special meeting or through action by written consent.
Orchestrating a “withhold the vote” campaign against the company’s incumbent directors.
Leveraging the proxy advisory firms and their recommendations to amplify the activist’s influence.
Communicating with and rallying institutional investors and sell-side research analysts to support the activist’s arguments.
Using stock loans, options, derivatives and other devices to accumulate positions secretly, announce surprisingly large, leveraged economic stakes or increase voting power beyond the activist’s economic equity investment.
Pairing economic arguments with governance or ESG proposals, in an effort to garner support from proxy advisory and governance teams within institutional investors.
Using sophisticated public relations, social media and traditional media campaigns to advance the activist’s arguments.
Investing in significant diligence and third-party consulting services to analyze the target’s strategy, business, operating margins and/or ESG impact.
Seeking to create divisions within the boardroom or between the board and management; several major activists have been successful in achieving such wedges.
Reaching a company’s retail shareholders through Internet forums and social media channels, weekly mailings, telephonic outreach, local newspaper advertisements and user-friendly infographics.
Hiring private investigators to create dossiers on directors, management and key employees and otherwise conducting aggressive “diligence.”
Initiating or threatening litigation, including demands for books and records, sometimes concurrently with a proxy fight.
Waging repeated campaigns at the same company, regardless of the outcome of the initial campaign, or joining with other activists to converge on the same company at the same time.

Current SEC rules do not prevent an activist from secretly accumulating a more than 5% position before being required to make public disclosure and do not prevent activists and institutional investors from privately communicating and cooperating. We have long sought to correct this loophole, and potential reforms are under consideration.

Prevention of, or response to, an activist attack is an art, not a science. There is no substitute for preparation. The issues, tactics, team and approaches to an activist challenge will vary depending on the company, the industry, the activist and the substantive business and governance issues in play. To forestall an attack, a company should regularly review its business strategy and portfolio, how it is balancing growth and profitability, margin priorities and pressures, its ESG issues and strategy, and its governance and executive compensation. In addition to a program of advance engagement with investors, it is essential to be able to mount a defense quickly and to be agile in responding to changing tactics. A well-managed corporation executing clearly articulated, credible strategies can prevail against an activist by making its case to the rest of its shareholders. A well-advised corporation should also play offense in anticipation of activism and in resolving activism.

Many investors increasingly expect companies to at least seek to engage constructively with activists. Given the risks and potential harm of a full-blown battle, in certain situations the best response to an activist approach may be to seek to negotiate with the activist and reach a settlement on acceptable terms, if such a settlement is feasible, even if the company believes it could win a proxy fight. However, when a negotiated resolution is not achievable on acceptable terms, whether because the activist’s proposals are inimical to the company’s business goals and strategy or because the activist is unwilling to be reasonable in its negotiation, the ability to wage an effective campaign in response to the activist will depend on advance preparation, strong alignment between the board and management, proactive action, good judgment and effective relationships with shareholders.

Advance Preparation

Create Team to Deal with Activism:

A small group of key officers plus legal counsel, investment banker, proxy soliciting firm and public relations firm.
Continuing contact and periodic meetings or calls with the team are important.
A periodic fire drill with the team is helpful to maintain a state of preparedness; the team should be familiar with the hedge funds and other investors that have made activist approaches generally and be particularly focused on those that have approached other companies in the same industry and the tactics each fund has used; the team should also use that familiarity to be alert to any contacts or interest shown by known activists.
Periodic updates to the company’s board of directors.
Regular review by counsel expert in activism and takeover defense of the company’s structural “defense” profile, including as reflected in its charter, bylaws and other governing documents and policies, with an eye towards ensuring effective practices and avoiding reflexively capitulating to “one size fits all” approaches that may prove unduly empowering of hostile actors, involve premature changes in light of company-specific circumstances or otherwise not be in the best interests of the company.

Shareholder Relations:

The investor relations officer is critical in assessing exposure to an activist attack and in a proxy solicitation. In many companies, the CFO is also critical to the investor relationships, and the chief legal officer/general counsel or her/his designee may have crucial relationships and be one of the officers that spend time with the major index funds and the stewardship/proxy voting teams at the actively managed funds. The credibility that these officers have with the institutional shareholders has been determinative in a number of proxy solicitations. Candid assessment of shareholder sentiment should be appropriately communicated to senior management, with periodic briefings provided to the board.
Articulate, update and share the company’s position on corporate purpose, employee priorities, material social issues, diversity, ESG and long-term sustainability in appropriate forums.
Review broader capital allocation framework (including reinvestment in the business and inorganic as well as organic growth strategies), capital return policy (dividends and buybacks), analyst and investor presentations and other financial public relations matters (including disclosed metrics, key performance indicators (KPIs) and guidance).
Monitor peer group, sell-side analysts, proxy advisors, active asset managers, and internet commentary and media reports for opinions or facts that will attract the attention of activists. These sources may also provide advance warning of themes that an activist may be promoting or testing.
Articulate and consistently maintain the company’s basic strategic message while updating the strategy as circumstances warrant.
Objectively assess input from shareholders and whether the company is receiving candid feedback. The company should make sure that major investors feel comfortable expressing their views to the company and believe that the company honestly wants to hear any concerns or thoughts they have.
Proactively address reasons for any shortfall versus peer benchmarks, including reasons why peer comparisons may be inapposite. Be aware of ESG shortfalls against perceived corporate leaders even if they are not in the same industry. Anticipate key questions and challenges from analysts and activists, and be prepared with answers. Monitor peer activity and the changes peers are making to their businesses, as well as key industry trends.
Build credibility with shareholders and analysts before activists surface.
Monitor changes in hedge fund and institutional investor holdings on a regular basis; understand the shareholder base, including, to the extent practical, relationships among holders. Pay close attention to activist funds that commonly act together or with an institutional investor. Pay close attention to investors who are known to enlist activist funds or deploy activist campaign tactics.
Maintain regular contact with major institutional investors, including both portfolio managers and proxy voting/governance departments; CEO, CFO and independent director participation is very important, and the role of the CLO/GC should also be considered, especially with the index funds and stewardship teams. Consider engagement with proxy advisory firms.
Major institutional investors, including BlackRock, Capital Group, Fidelity, Invesco, State Street, TIAA, T. Rowe Price, Vanguard and Wellington, have established significant proxy departments that make decisions independent of ISS, and the portfolio managers at actively managed funds covering the company often have clear “override” authority on key votes. It is important for a company to know the voting policies and guidelines of its major investors, who the key decision-makers and point persons are and how best to reach them. It may be possible to defeat an activist attack supported by ISS by gaining the support of major institutional shareholders.
Consider whether enhancements to company disclosures or updates to governance and oversight practices are appropriate in light of evolving shareholder expectations, including with respect to ESG.
Monitor third-party governance and ESG ratings and reports and seek to correct inaccuracies.
Monitor annual meeting vote results and develop plans for dealing with problematic vote outcomes through shareholder engagement, while taking a measured approach that prioritizes the best interests of the company and does not over-react or “over-index” on voting percentages.
Maintain up-to-date plans for contacts with media, regulatory agencies, political bodies, industry leaders and other stakeholders, and refresh relationships.
Monitor investor conference call participants, one-on-one requests and transcript downloads.
Deal with shareholder proposals (such as those submitted under Rule 14a-8) effectively, recognizing that engagement and negotiated withdrawals of such proposals and creative approaches to the board’s recommendation and proxy statement regarding such matters may be superior to classic “always oppose” or “always seek to exclude” approaches.

Prepare the Board of Directors to Deal with an Activist Situation:

Maintaining a unified board consensus on key strategic issues is essential to success in the face of an activist attack; in large measure, an attack by an activist hedge fund is an attempt to drive a wedge between the board and management by raising doubts about strategy and management performance and to create divisions on the board, which may include advocating that an unnecessary special committee be formed.
Keep the board informed of options and alternatives analyzed by management, and review with the board basic strategy, capital allocation, the portfolio of businesses, margins and corporate ESG strategies in light of possible arguments for spinoffs, share buybacks, increased leverage, special dividends, cost-cutting initiatives, a sale of the company or other structural or business changes or ESG reforms.
Schedule periodic presentations by legal counsel and the investment banker to familiarize directors with the current activist environment and the company’s preparation.
Directors should guard against subversion of the responsibilities of the full board by the activists or related parties, and directors should be instructed to avoid being drawn into conversations with third parties and to refer all approaches by activists to the CEO.
Boardroom debates over business strategy, direction and other matters should be open and vigorous but stay confidential and be kept within the boardroom.
Recognize that psychological and perception factors may be more important than legal and financial factors in avoiding being singled out as a target.
Scrutiny of board composition is increasing, and boards should self-assess regularly. The benefits of tenure and experience became apparent through the Covid-19 pandemic and other economic, geopolitical and supply chain shocks to industry, but in a contested proxy solicitation, institutional investors may particularly question the “independence” of directors who are older than 75 or who have lengthy tenures, especially where the board has not recently appointed new directors, in addition to more broadly assessing director diversity, expertise and attributes. Directors may also be criticized for “overboarding” or attendance issues. Meaningful director evaluation is now a key objective of institutional investors, and a corporation is well advised to undertake it and talk to investors about it. Regular board renewal and refreshment, and having longer-term board development and succession plans, can be important evidence of meaningful evaluation.
A company should not wait until it is involved in a contested proxy solicitation to offer its key institutional shareholders the opportunity to meet with its independent directors. Many major institutional investors have recommended that companies offer scheduled meetings involving a company’s independent directors. A disciplined, thoughtful program for periodic meetings and other engagement initiatives is advisable.

Monitor Trading, Volume and Other Indicia of Activity:

Employ sophisticated stock watch service and monitor Schedule 13F filings.
Monitor Schedule 13D and Schedule 13G and Hart-Scott-Rodino Act filings.
Monitor parallel trading and group activity (the activist “wolf pack”).
Monitor activity in options, derivatives, corporate debt and other non-equity securities.
Monitor attendance at analyst conferences, requests for one-on-one sessions and other contacts from known activists.

Responding to an Activist Approach

Response to Non-Public Communication:

Assemble team quickly and determine initial strategy. Response is an art, not a science.
No duty to respond, but failure to respond may have negative consequences, and in most cases response is desirable.
No duty to discuss or negotiate, but usually advisable to meet with the activist and discuss the activist’s criticisms and proposals (company participants in any such meeting should prepare carefully with the company’s activist response team and there should be at least two company participants in any such meeting); no outright rejection absent study; try to learn as much as possible by listening; keep in mind that it may be desirable at some point to negotiate with the activist and that developing a framework for private communication may avoid escalation.
Generally no immediate duty to disclose; determine when disclosure may be required or desirable.
Response to any particular approach should be specially structured; team should confer to decide proper response. Consider whether some of the activist’s claims, proposals or demands are consistent with the company’s own pending or proposed initiatives or otherwise have merit.
Keep board advised; in some cases, it may be advisable to arrange for the activist to present its white paper to the board or a committee or subset of the directors.
Be prepared for public disclosure by the activist and have immediate public response contingencies ready in the event of any disclosure.
Be prepared for the activist to try to contact directors, shareholders, sell-side analysts, business partners, employees and key corporate constituencies. Make sure directors understand that any contacts should be referred to the CEO or other designated officer.
Assess whether there are sensible disclosures, commitments or business actions that can be made, taken or accelerated to preempt or undercut the activist attack and the extent to which the activist may attempt to publicly claim credit for such disclosures, commitments or actions.
Consider whether negotiations with the activist and settlement should be pursued or explored and, if so, at what point in time.

Response to Public Communication:

Initially, no response other than “the board will consider and welcomes input from its shareholders.”
Assemble team quickly; inform directors.
Call special board meeting for the board to meet with the team and consider the communication.
Determine board’s response and whether to meet with the activist. Even in public situations, consider pursuing disciplined engagement with the activist. Failure to meet may also be viewed negatively by institutional investors. Recognize that the activist may mischaracterize what occurs in meetings. There should be at least two company representatives at any meeting or call with the activist.
If the activist makes a demand – g., replace the Chair or CEO – that the board finds unacceptable or non-negotiable, it may be advisable to make the board’s position on that item clear earlier rather than later, even if there is willingness to consider and negotiate other aspects of the activist’s platform.
Avoid mixed messages and preserve the credibility of the board and management.
Continuously gauge whether the best outcome is to agree upon board change and/or strategic, business or other action in order to avoid (or resolve) a proxy fight.
Be prepared and willing to defend vigorously, if a reasonable settlement is not possible.
Recognize that a proxy fight will entail a meaningful time commitment from both management and directors, and work in advance to coordinate availability for key meetings with shareholders and proxy advisory firms.
Engage with other shareholders, not only the activist, to take investor temperature, solicit feedback and assess whether actions may (and should) be taken by the company to secure support (if an activist identifies a legitimate issue, the company may propose its own plan for resolving any shortcomings that is distinct from the activist’s solutions or co-opts any sensible concepts).
Appreciate that the public dialogue is often asymmetrical; activists may make personal attacks and use aggressive language or advance unrealistic financial projections, but the company’s response should be disciplined and fact-based and should not respond to personal attacks in kind.
Remain focused on the business; activist approaches can be very distracting, but strong business performance, though not an absolute defense, is one of the best defenses. Similarly, unexpected poor performance can undermine a company’s defense. When and if business challenges arise, act in a manner that preserves and builds credibility with shareholders.
Maintain the confidence and morale of employees, partners and other stakeholders.
A significant number of major institutional investors are increasingly skeptical of activists and activist platforms even as they closely scrutinize targeted companies as well. Investors can be persuaded not to follow the recommendations of ISS in support of a dissident’s proxy solicitation. When presented with a well-articulated and compelling corporate purpose and plan for the long-term, sustainable success of a company, investors are able to cut through the cacophony of short-sighted gains promised by activists touting short-term strategies and advancing disingenuous attacks. As a result, when a company’s management and directors work together to present a compelling long-term strategy for value creation, investors will listen.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “Dealing with Activist Hedge Funds and Other Activist Investors,” dated September 1, 2022.

Tags activism, activists, ESG, hedge fund activists, institutional investors, proxy voting, SEC, Securities and Exchange Commission, shareholder activism, universal proxy, universal proxy card

Corporate Governance

Gibson Dunn Offers Annual Activism Update for 2021

Post author By renholding
Post date August 16, 2022
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Announced shareholder activist activity increased relative to 2020. The number of public activist actions (76 vs. 63), activist investors taking actions (48 vs. 41), and companies targeted by such actions (69 vs. 55) each increased. Suchlevels of activism are comparable to those found prior to the market disruption caused by the COVID-19 pandemic, as reflected in public activist actions in 2019 (76 vs. 75), activist investors taking actions (48 vs. 49), and companies targeted by such actions (69 vs. 64). The period spanning January 1, 2021 to December 31, 2021 also saw several campaigns by multiple activists targeting a single company, such as the campaigns involving Kohl’s Corporation that included activity by 4010 Partners, Macellum Advisors, Ancora Advisors and Legion Partners Asset Management; Adtalem Global Education that included activity by Engine Capital and Hawk Ridge Capital; and Bottomline Technologies that included activity by Clearfield Capital Management and Sachem Head Capital Management. Inaddition, certain activists launched multiple campaigns during 2021, including Carl Icahn, Elliott Investment Management, JANA Partners, Land & Buildings and Starboard Value. Indeed, each of these investors launched fouror more campaigns in 2021 and collectively accounted for 20 out of the 76 activist actions reviewed, or 26% in total. Proxy solicitation occurred in 18% of campaigns in 2021, relative to 17% in 2020. These figures represent modestdeclines relative to 2019, in which proxy materials were filed in approximately 30% of activist campaigns for the entire year.

By the Numbers—2021 Public Activism Trends

*Study covers selected activist campaigns involving NYSE- and Nasdaq-traded companies with equity market capitalizations of greater than $1 billion as of December 31, 2021 (unless company is no longer listed).

Additional statistical analyses may be found in the complete Activism Update linked below.

Notwithstanding the increase in activism levels, the rationales for activist campaigns during 2021 were generallyconsistent with those undertaken in 2020. Over both periods, board composition and business strategy representedleading rationales animating shareholder activism campaigns, representing 58% of rationales in 2021 and 51% of rationales in 2020. M&A (which includes advocacy for or against spin- offs, acquisitions and sales) remained important as well; the frequency with which M&A animated activist campaigns was 19% in both 2021 and 2020. At the opposite end of the spectrum, management changes, return of capital and control remained the most infrequently cited rationales for activist campaigns, as was also the case in 2020. (Note that the above-referenced percentages total over 100%, as certain activist campaigns had multiple rationales.)

Seventeen settlement agreements pertaining to shareholder activism activity were filed during 2021, which is consistent with pre-pandemic levels of similar activity (22 agreements filed in 2019 and 30 agreements filed in 2018,as compared to eight agreements filed in 2020). Those settlement agreements that were filed had many of the same features noted in prior reviews, including voting agreements and standstill periods as well as non-disparagement covenants and minimum- and/or maximum-share ownership covenants. Expense reimbursement provisions were included in half of those agreements reviewed, which is consistent with historical trends.

This post comes to us from Gibson, Dunn & Crutcher LLP. It is based on the firm’s memorandum, “2021 Annual Activism Update,” dated August 9, 2022, and available here.

Tags activism, investor activism, shareholder activists

Corporate Governance

Do Investors Prefer Women CEOs at Firms Targeted by Activists?

Post author By renholding
Post date April 22, 2022
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Shareholder activism is playing a larger role than ever in companies’ decisions about their operations and reporting, with over 4,600 firms targeted worldwide from 2013 to 2018. Shareholder activists can have several motives for going after a company, from trying to improve its corporate governance by increasing efficiencies and dropping unprofitable segments to trying to improve the company’s reputation by making its practices more ethical and ecologically sound. Recent trends show that investment funds are making it easier for more investors to become involved in activism, which has led to regulatory concerns about the power of these activists and their impact on financial markets, corporate governance, and regulation.

A particularly notable aspect of activism, though, is that companies with female CEOs are being targeted more often than companies with male CEOs. We explore this phenomenon by examining whether investors other than activists are more or less willing to invest in companies that are targets of certain types of activism and have women at the helm.

Activists magnify their influence on management in various ways, relying on extensive financial-media coverage and their influence as large institutional investors. In addition, activists’ demands (as well as management’s responses) typically appear within the company-released proxy statement, which is filed in advance of the annual shareholders meeting. Thus, the indirect influence of shareholder activism on other players in the financial market, namely other retail investors, has the potential to affect investment decisions. This effect of activism on retail investors may be especially pronounced given that the methods that shareholder activists use to pressure management are often the same as those through which these investors gather much of their information about potential investments (e.g., company disclosures, financial news media). Thus, while shareholder activists typically target company leadership (and not other investors), any residual effect on other investors’ judgments represents an indirect effect of shareholder activism, which is the setting for our study.

Sustainability-focused activism has become successful at garnering majority shareholder support in recent years. Starting in 2017, large asset managers (e.g., BlackRock, Vanguard, Fidelity, and American Funds) have started voting for climate-related shareholder proposals, contributing to increased levels of support among other shareholders. For the years 2017-2019, most of the shareholder proposals filed were focused on sustainability, outpacing those related to governance and compensation. While many activism campaigns may lead to improved financial performance, not all activist-enacted changes are successful, and some can even cause companies to fail. This leads to a high level of uncertainty surrounding shareholder activism and its effect on company performance.

The uncertainty surrounding the effects of shareholder activism leads investors to evaluate characteristics of the CEO and how he or she responds to the activism. Further, recent psychology research finds that gender stereotypes are more prevalent under ambiguous scenarios. Due to this, investors are prone to rely on the salient characteristic of CEO gender and any related gender stereotypes when a company is targeted by shareholder activism.

Using an experiment with professional MBA students acting as shareholders, we predict and find that investors perceive matches or mismatches between a CEO and the nature of shareholder activism, based on assessments of femininity or masculinity stemming from the CEO’s gender. Specifically, investors perceive the communal qualities stereotypically associated with female CEOs (e.g., kind, sympathetic, sensitive, passive, nurturing, and having an overall concern for the welfare of others) to be more of a match with the communal nature of environmental and social-focused activism (e.g., having a more socially diverse board, supporting fair and humane working conditions in suppliers, employing environmentally safe business practices). Alternatively, these same communal qualities are stereotypically seen as less of a match for profitability-focused activism (e.g., advocating changes to operations to create gains, cut waste, and increase efficiencies). This type of activism is seen as more of a match with the qualities stereotypically associated with male CEOs (e.g., aggressive, assertive, independent, self-confident, influential). We also find that investors rely on these stereotypes when determining their willingness to invest in a company being targeted by shareholder activism. When CEOs “match” the activism type (that is, males with more profitability-focused activism and females with environmental and social-focused activism), investors – male and female alike – are more likely to perceive that CEO as better equipped to address the activism. This leads investors to punish female CEOs that are targeted by profitability-focused activism and reward female CEOs that are targeted by environmental and social-focused activism.

Importantly, however, we find a simple way that CEOs – especially women – can dramatically reduce this stereotype-driven reaction. We find that female chief executives facing immediate, bottom-line activism can decrease the ambiguity surrounding the shareholder activism by disclosing an optimistic earnings guidance figure – either point or range. This information allows investors to overcome the gender-based expectations that are informing their investment judgments.

Our study addresses some of the SEC’s concerns regarding the effect of shareholder activism on other financial players by differentiating the effects on investors of profitability-focused and environmental and social-focused activism. The study also adds to the literature investigating gender differences in accounting settings and illustrates a specific scenario in which communal, feminine traits are valued over male traits (which is not typical in most business settings). Finally, we identify earnings guidance disclosure as a relatively simple way for female CEOs of targeted companies to overcome the negative impact of gender-based stereotypes. Our findings suggest that, as instances of shareholder activism continue to increase, further examination of shareholder activism and its effect on financial markets is needed.

This post comes to us from professors Scott C. Jackson at the University of South Dakota and Chris Agoglia and Dave Piercey at the University of Massachusetts Amherst. It is based on their recent paper, “Do Investors Prefer Female CEOs in Activist-Targeted Firms? The Role of CEO Gender, Shareholder Activism Type, and Earning Guidance Disclosure,” available here.

Tags activism, asset managers, ESG, female CEO, investors, proxy statements, shareholder activism, shareholder activists

Corporate Governance

Cleary Gottlieb on Navigating a World Where Almost Everyone Is an Activist

Post author By renholding
Post date January 19, 2022
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In many ways, 2021 was a high-water mark for corporate activism. The levels of traditional shareholder activism rebounded from the lows reached during the early days of the COVID-19 pandemic. M&A activism increased substantially as shareholder activists sought to capitalize on the M&A boom. Large-cap activism returned as activists targeted Fortune 500 CEOs with increasing frequency. The year also saw the emergence of a new brand of ESG-themed shareholder activism in the wake of the Engine No. 1 activist campaign supported by CalPERS at ExxonMobil and the copycat ESG tactics deployed by other shareholder activists.

At the same time, ESG shareholder proposals passed in record numbers as institutional investors sought to burnish their ESG credentials and attract an ever-growing pool of ESG capital. Under the Biden administration, the SEC joined the fray and facilitated activism by taking a step back from its role in policing which shareholder proposals make it onto the annual meeting agenda and moving to repeal Trump-era reforms designed to limit the influence of ISS and Glass Lewis. The ranks of climate change and DE&I activists expanded significantly, and their campaigns became more potent as efforts to accelerate change through corporate accountability gained traction amidst positive publicity and favorable political winds. Employee activism also proliferated as high-profile unionization drives accelerated and workforce-wide walkouts to register disapproval of corporate cultures continued to spread.

As we enter 2022, public companies face a world in which it seems that just about everyone is an activist. In navigating this new environment, boards and management teams would be well advised to take heed of some of the key lessons of 2021:

Although ESG activism clearly is on the rise, investors typically are unwilling to sacrifice financial returns for ESG values—they expect companies to deliver both. Companies that incorporate sustainability into their strategic planning will be better positioned to achieve this objective than those that do not, but a sustainability focus alone will not be enough.
M&A and activism often go hand in hand. Companies pursuing M&A must be prepared from the moment a transaction is announced to convince stakeholders of the strategic and financial merits of the transaction and how it will accelerate their broader corporate objectives. In 2022, a well-thought-out and effective M&A engagement strategy will be focused not just on top shareholders and analysts, but also on employees, business partners, government actors and other key stakeholders.
Deconglomerization and optimizing portfolio mix will continue to be a focus of companies and activists alike—the late-2021 spin-offs announced by Johnson & Johnson and General Electric will likely trigger a re-assessment of other companies’ sum-of-the-parts values and catalyze other corporate breakups.
As retail shareholding evolves and generational shifts among asset owners and stewardship groups emerge, companies should re-assess their shareholder engagement strategies to ensure they are reaching and impacting the desired channels and constituencies and their broader messaging is aligned with strategic objectives.
Someone does not have to be a shareholder to be an activist—activism is increasingly coming from independent ESG actors, employees, politicians, the plaintiffs’ bar and others. Companies and their advisors must look proactively across the risk spectrum and beyond the traditional cast of activists, assess potential vulnerabilities holistically and calibrate their playbooks to the threats they are likely to face.
As companies develop corporate strategy and respond to societal crises, they must be mindful of the perspectives of all potentially interested stakeholders. In an era when stakeholders look to companies for leadership, silence is often not an option. Companies must stay true to their purpose and communicate with
Stakeholders are more willing to hold companies accountable for their public statements than ever before. A company’s statements must be followed by meaningful action to achieve results.
Preparedness will continue to be paramount. Companies, together with their advisors, should periodically revisit their preparedness plans at the C-suite and board levels to ensure they reflect a real-time assessment and are aligned with broader strategic planning.

This post comes to us from Cleary Gottlieb Steen & Hamilton LLP. It is based on the firm’s memorandum, “Navigating a World Where Almost Everyone Is an Activist,” dated January 11, 2022, and available here.

Tags activism, calpers, Engine No. 1, ESG, ExxonMobil, M&A, shareholder activists

Corporate Governance

Wachtell Lipton on Dealing with Activist Hedge Funds and Other Activist Investors

Post author By renholding
Post date October 13, 2021
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Despite a short dip at the outset of the pandemic, activism has rebounded and now continues at an ever-growing intensity. As we have previously noted, regardless of industry, size or performance, no company should consider itself immune from activism. No company is too large, too popular, too new or too successful. Even companies that are respected industry leaders and have outperformed the market and their peers have been and are being attacked. And companies that have faced one activist may be approached, in the same year or in successive years, by other activists or re-visited by the prior activist.

Although asset managers and institutional investors will often act independently of activists, the relationships between activists and asset managers and investors in recent years have encouraged frequent and aggressive activist attacks. A number of hedge funds have also sought to export American-style activism abroad, with companies throughout the world now facing classic activist attacks. In addition, the line between hedge fund activism and private equity continues to blur, with some activist funds becoming bidders themselves for all or part of a company, and a handful of private equity funds exploring activist-style investments in, and engagement with, public companies.

While traditional activism focused on short-term profit, stock price and total shareholder return (TSR) continues, a new set of activists has emerged, emphasizing climate and other environmental, employee/human capital, social and governance (EESG-ESG with emphasis on employees) considerations. The activism landscape has also evolved to include dual purpose activists who combine both TSR and EESG arguments, as well as “pincer attacks” from EESG and TSR activists acting independently or in concert against the same company.

The Exxon proxy fight successfully waged by EESG activist Engine No. 1 earlier this year underscores the importance of advance preparedness to anticipate, prevent and respond to an activist attack, including not only the more traditional governance and economic components of activist campaigns, but also the EESG themes that some activists have been deploying in their attacks.

The Attack Devices Used by Activists

Aggressively criticizing a company’s governance, management, business and strategy, sustainability and ESG strategies, and presenting the activist’s own recommendations and business and ESG plans, through a “white paper” or other public documents or statements.
Proposing a precatory proxy resolution for actions prescribed by the activist or the creation of a special committee of independent directors to undertake a strategic review to “maximize shareholder value” and/or meet ESG goals, especially with respect to environmental impact.
Demanding an accelerated “Investor Day” at which the company would be pushed to disclose forward-looking projections, financial targets and actions involving the portfolio and allocation of capital.
Recruiting candidates with industry experience (including retired CEOs of major companies or even former executives of the target) to serve on dissident slates, and conducting (or threatening to conduct) a proxy fight to get board representation at an annual or special meeting or through action by written consent.
Orchestrating a “withhold the vote” campaign against the company’s incumbent directors.
Seeking to force a sale of the company by leaking or initiating rumors of an unsolicited approach, publicly calling for a sale, acting as an (unauthorized) intermediary with strategic acquirers and private equity funds, taking positions in both the target and the acquirer, making their own “stalking-horse” bid or partnering with a hostile acquirer to build substantial stock positions in the target to facilitate a takeover.
Leveraging the proxy advisory firms and their recommendations to amplify the activist’s influence.
Communicating with and rallying institutional investors and sell-side research analysts to support the activist’s arguments.
Using stock loans, options, derivatives and other devices to accumulate positions secretly, announce surprisingly large, leveraged economic stakes or increase voting power beyond the activist’s economic equity investment.
Using sophisticated public relations, social media and traditional media campaigns to advance the activist’s arguments.
Investing in significant diligence and third-party consulting services to analyze the target’s strategy, business, operating margins and/or ESG impact.
Seeking to create divisions within the boardroom or between the board and management; several major activists have been successful in achieving such wedges.
Reaching a company’s retail shareholders through Internet forums and social media channels, weekly mailings, telephonic outreach, local newspaper advertisements and user-friendly infographics.
Hiring private investigators to create dossiers on directors, management and key employees and otherwise conducting aggressive “diligence.”
Initiating litigation, including demands for books and records, sometimes concurrently with a proxy fight.
Waging repeated campaigns at the same company, regardless of the outcome of the initial campaign, or joining with other activists to converge on the same company at the same time.

Prevention of, or response to, an activist attack is an art, not a science. There is no substitute for preparation. The issues, tactics, team and approaches to an activist challenge will vary depending on the company, the industry, the activist and the substantive business and governance issues in play. To forestall an attack, a company should regularly review its business portfolio and strategy, its ESG issues and strategy, and its governance and executive compensation. In addition to a program of advance engagement with investors, it is essential to be able to mount a defense quickly and to be agile in responding to changing tactics. A well-managed corporation executing clearly articulated, credible strategies can prevail against an activist by making its case to the rest of its shareholders. A well-advised corporation should also play offense in anticipation of activism and in resolving activism.

Given the risks and potential harm of a full-blown battle, in certain situations the best response to an activist approach may be to seek to negotiate with the activist and reach a settlement on acceptable terms, if such a settlement is feasible, even if the company believes it could win a proxy fight. However, when a negotiated resolution is not achievable on acceptable terms, whether because the activist’s proposals are inimical to the company’s business goals and strategy or because the activist is unwilling to be reasonable in its negotiation, the ability to wage an effective campaign will depend on advance preparation, proactive action, good judgment and effective relationships and engagement with shareholders.

Advance Preparation

Create Team to Deal with Activism:

A small group of key officers plus legal counsel, investment banker, proxy soliciting firm and public relations firm.
Continuing contact and periodic meetings or calls with the team are important.
A periodic fire drill with the team is helpful to maintain a state of preparedness; the team should be familiar with the hedge funds and other investors that have made activist approaches generally and be particularly focused on those that have approached other companies in the same industry and the tactics each fund has used; the team should also use that familiarity to be alert to any contacts or interest shown by known activists.
Periodic updates to the company’s board of directors.

Shareholder Relations:

The investor relations officer is critical in assessing exposure to an activist attack and in a proxy solicitation. In many companies, the CFO may also be critical to the investor relationships. The officers that spend time with the major index funds and the stewardship/proxy voting teams at the actively managed funds are also critical, and at many companies the chief legal officer/general counsel or her/his designee effectively plays this role. The credibility that these officers have with the institutional shareholders has been determinative in a number of proxy solicitations. Candid assessment of shareholder sentiment should be appropriately communicated to senior management, with periodic briefings provided to the board.
Articulate, update and promote the company’s position on corporate purpose, employee priorities, social issues, diversity, aligned political issues, ESG and long-term sustainability in appropriate forums.
Review capital return policy (dividends and buybacks), broader capital allocation framework, analyst and investor presentations and other financial public relations matters (including disclosed metrics and guidance).
Monitor peer group, sell-side analysts, proxy advisors, active asset managers, and internet commentary and media reports for opinions or facts that will attract the attention of activists. These sources may also provide advance warning of themes that an activist may be promoting or testing.
Articulate and consistently maintain the company’s basic strategic message while updating the strategy as circumstances warrant.
Objectively assess input from shareholders and whether the company is receiving candid feedback. The company should make sure that major investors feel comfortable expressing their views to the company and believe that the company honestly wants to hear any concerns or thoughts they have.
Proactively address reasons for any shortfall versus peer benchmarks, including reasons why peer comparisons may be inapposite. Be aware of ESG shortfalls against perceived corporate leaders even if they are not in the same industry. Anticipate key questions and challenges from analysts and activists, and be prepared with answers. Monitor peer activity and the changes peers are making to their businesses, as well as key industry trends.
Build credibility with shareholders and analysts before activists surface.
Monitor changes in hedge fund and institutional investor holdings on a regular basis; understand the shareholder base, including, to the extent practical, relationships among holders. Pay close attention to activist funds that commonly act together or with an institutional investor. Pay close attention to investors who are known to enlist activist funds or deploy activist campaign tactics.
Maintain regular contact with major institutional investors, including both portfolio managers and proxy voting/governance departments; CEO, CFO and independent director participation is very important, and the role of the CLO/GC should also be considered. Consider engagement with proxy advisory firms.
Major institutional investors, including BlackRock, Capital Group, Fidelity, State Street, TIAA, T. Rowe Price, Vanguard and Wellington, have established significant proxy departments that make decisions independent of ISS. It is important for a company to know the voting policies and guidelines of its major investors, who the key decision-makers and point persons are and how best to reach them. It may be possible to defeat an activist attack supported by ISS by gaining the support of major institutional shareholders.
Consider whether enhancements to company disclosures or changes to governance practices are appropriate in light of evolving shareholder expectations, including with respect to ESG.
Monitor third-party governance and ESG ratings and reports and seek to correct inaccuracies.
Maintain up-to-date plans for contacts with media, regulatory agencies, political bodies, industry leaders and other stakeholders, and refresh relationships.
Monitor investor conference call participants, one-on-one requests and transcript downloads.

Prepare the Board of Directors to Deal with an Activist Situation:

Maintaining a unified board consensus on key strategic issues is essential to success in the face of an activist attack; in large measure, an attack by an activist hedge fund is an attempt to drive a wedge between the board and management by raising doubts about strategy and management performance and to create divisions on the board, which may include advocating that an unnecessary special committee be
Keep the board informed of options and alternatives analyzed by management, and review with the board basic strategy, capital allocation, the portfolio of businesses and corporate ESG strategies in light of possible arguments for spinoffs, share buybacks, increased leverage, special dividends, cost-cutting initiatives, a sale of the company or other structural or business changes or ESG reforms.
Schedule periodic presentations by the legal counsel and the investment banker to familiarize directors with the current activist environment and the company’s preparation.
Directors should guard against subversion of the responsibilities of the full board by the activists or related parties, and directors should be instructed to avoid being drawn into conversations with third parties and to refer all approaches by activists to the CEO.
Boardroom debates over business strategy, direction and other matters should be open and vigorous but stay confidential and be kept within the boardroom.
Recognize that psychological and perception factors may be more important than legal and financial factors in avoiding being singled out as a target.
Scrutiny of board composition is increasing, and boards should self-assess regularly. In a contested proxy solicitation, institutional investors may particularly question the “independence” of directors who are older than 75 or who have lengthy tenures, especially where the board has not recently appointed new directors, in addition to more broadly assessing director diversity, expertise and attributes. Directors may also be criticized for “overboarding” or attendance issues. Meaningful director evaluation is now a key objective of institutional investors, and a corporation is well advised to undertake it and talk to investors about it. Regular board renewal and refreshment, and having longer-term board development and succession plans, can be important evidence of meaningful evaluation.
A company should not wait until it is involved in a contested proxy solicitation to offer its key institutional shareholders the opportunity to meet with its independent directors. Many major institutional investors have recommended that companies offer scheduled meetings involving a company’s independent directors. A disciplined, thoughtful program for periodic meetings and other engagement initiatives is advisable.

Monitor Trading, Volume and Other Indicia of Activity:

Employ stock watch service and monitor Schedule 13F filings.
Monitor Schedule 13D and Schedule 13G and Hart-Scott-Rodino Act filings.
Monitor parallel trading and group activity (the activist “wolf pack”).
Monitor activity in options, derivatives, corporate debt and other non-equity securities.
Monitor attendance at analyst conferences, requests for one-on-one sessions and other contacts from known activists.

Responding to an Activist Approach

Response to Non-Public Communication:

Assemble team quickly and determine initial strategy. Response is an art, not a science.
No duty to respond, but failure to respond may have negative consequences, and in most cases response is desirable.
No duty to discuss or negotiate, but usually advisable to meet with the activist and discuss the activist’s criticisms and proposals (company participants in any such meeting should prepare carefully with the company’s activist response team and there should be at least two company participants in any such meeting); no outright rejection absent study; try to learn as much as possible by listening; keep in mind that it may be desirable at some point to negotiate with the activist and that developing a framework for private communication may avoid escalation.
Generally no immediate duty to disclose; determine when disclosure may be required or desirable.
Response to any particular approach should be specially structured; team should confer to decide proper response. Consider whether some of the activist’s claims or demands have merit and/or are consistent with the company’s own pending or proposed initiatives.
Keep board advised; in some cases, it may be advisable to arrange for the activist to present its white paper to the board or a committee or subset of the directors.
Be prepared for public disclosure by the activist and have immediate public response contingencies ready in the event of any disclosure.
Be prepared for the activist to try to contact directors, shareholders, sell-side analysts, business partners, employees and key corporate constituencies. Make sure directors understand that any contacts should be referred to the CEO or other designated officer.
Assess whether there are sensible disclosures, commitments or business actions that can be made, taken or accelerated to preempt or undercut the activist attack and the extent to which the activist may attempt to publicly claim credit for such disclosures, commitments or actions.
Consider whether negotiations with the activist and settlement should be pursued and, if so, at what point in time.

Response to Public Communication:

Initially, no response other than “the board will consider and welcomes input from its shareholders.”
Assemble team quickly; inform directors.
Call special board meeting for the board to meet with the team and consider the communication.
Determine board’s response and whether to meet with the activist. Even in public situations, consider pursuing disciplined engagement with the activist. Failure to meet may also be viewed negatively by institutional investors. Recognize that the activist may mischaracterize what occurs in meetings. There should be at least two company representatives at any meeting or call with the activist.
If the activist makes a demand – g., replace the Chair or CEO – that the board finds unacceptable or non-negotiable, it may be advisable to make the board’s position on that item clear earlier rather than later, even if there is willingness to consider and negotiate other aspects of the activist’s platform.
Avoid mixed messages and preserve the credibility of the board and management.
Continuously gauge whether the best outcome is to agree upon board change and/or strategic, business or other action in order to avoid (or resolve) a proxy fight.
Be prepared and willing to defend vigorously, if a reasonable settlement is not possible.
Recognize that a proxy fight will entail a meaningful time commitment from both management and directors, and work in advance to coordinate availability for key meetings with shareholders and proxy advisory firms.
Engage with other shareholders, not only the activist, to take investor temperature, solicit feedback and assess whether actions may (and should) be taken by the company to secure support (if an activist identifies a legitimate issue, the company may propose its own plan for resolving any shortcomings that is distinct from the activist’s solutions or co-opts any sensible concepts).
Appreciate that the public dialogue is often asymmetrical; activists may make personal attacks and use aggressive language or unrealistic projections, but the company’s response should be disciplined and fact-based and should not respond to personal attacks in kind.
Remain focused on the business; activist approaches can be very distracting, but strong business performance, though not an absolute defense, is one of the best defenses. Similarly, unexpected poor performance can undermine a company’s defense. When and if business challenges arise, act in a manner that preserves and builds credibility with shareholders.
Maintain the confidence and morale of employees, partners and other stakeholders.
A significant number of major institutional investors are increasingly skeptical of activists and activist platforms even as they closely scrutinize targeted companies as well. Investors can be persuaded not to follow the recommendations of ISS in support of a dissident’s proxy solicitation. When presented with a well-articulated and compelling corporate purpose and plan for the long-term, sustainable success of a company, investors are able to cut through the cacophony of short-sighted gains promised by activists touting short-term strategies. As a result, when a company’s management and directors work together to present a compelling long-term strategy for value creation, investors will listen.

This post comes to us from Wachtell, Lipton Rosen & Katz. It is based on the firm’s memorandum, “Dealing with Activist Hedge Funds and Other Activist Investors,” dated October 5, 2021.

Tags activism, Activist Investors, asset managers, EESG, ESG, institutional investors, ISS

Corporate Governance

Wachtell Lipton Discusses Key Corporate Governance Issues for Mid-Year 2021

Post author By renholding
Post date June 28, 2021
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Last year, we did a mid-year edition of our annual Thoughts for Boards of Directors to highlight key issues and considerations in managing the challenging business environment and profound upheaval caused by the pandemic. Many of these issues are still top-of-mind as the “new normal” continues to evolve, and will continue to be prominent themes in boardroom discussions. As we emerge from the pandemic, boards and management teams should continue to assess their corporate purpose, strategy, risk management procedures, and board committee structures to optimize their ability to deal with the ever-proliferating number and complexity of business risks and opportunities they must navigate, including the following:

The importance of reputation and trust in the corporation, and the nexus between corporate values and sustainable value.
The purpose and mission of the corporation, and its impact on and co-dependencies with multiple stakeholders.
Human capital management (including wages, safety, health, training, retraining and retirement benefits) and related disclosure issues.
Diversity, equity and inclusion, and addressing racial injustice and hate crimes.
Environmental, social and governance (ESG) management, metrics and disclosures, inclusion in ESG index funds, litigation arising from ESG failures or nondisclosure, and government pressure on financial institutions to enforce ESG compliance.
Relationship of executive compensation to ESG objectives and long-term growth in value.
Preparedness to deal with activism, proxy fights, takeovers and M&A.
Activist pincer attacks, such as the Exxon proxy fight, with multiple activists attacking from both an ESG perspective and a total shareholder return (TSR) perspective.
Risks of inflation and evolving monetary policies.
Risks and opportunities from rapidly evolving technology, including cybersecurity, ransomware, blockchain, artificial intelligence and cryptocurrency.
Planning for natural disasters, pandemics, supply chain disruption, liquidity squeezes, and the related impact on business continuity, retention of employees, risk insurance and litigation.
The impact of climate change and related regulations, and expectations of stakeholders with respect to the role of businesses in addressing these issues.
Pressures on corporations to take public positions on controversial legislation and political or regulatory matters, and activities and disclosures regarding lobbying and other political spending.
State corporatism (e.g., in China) and government sponsored research and investments. Global trade relations, tariffs and the broader geopolitical environment.
New principles animating tax and tax arbitrage, antitrust and other regulatory reforms at the local, national and global levels.

It is remarkable how many key issues have been rapidly evolving and proliferating in such short order. A corporation and its board of directors should consider the best means of dealing with these issues, including by forming a team of advisors and meeting periodically with the team.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “Some Thoughts for Boards of Directors: Key Corporate Governance Issues at Mid-Year 2021,” dated June 21, 2021.

Martin Lipton
Steven A. Rosenblum
Karessa L. Cain

Tags activism, boards of directors, disclosure, diversity, ESG, executive compensation, proxy fights

Corporate Governance

Investor Relations, Activism, and Engagement

Post author By renholding
Post date May 17, 2021
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Activist investors once limited their targets to mostly smaller, less known firms. Now, though, they increasingly target large, household names like Procter & Gamble, DuPont, and Berkshire Hathaway, aiming to influence company actions, replace management, or even purchase the company.

This increase in activism has been facilitated by changes that increase activist shareholders’ ability to exert influence and shape the views of other shareholders.[1] The resulting struggle between managers and activists to influence shareholder opinion about the firm has led to calls for more engagement between managers and investors. For example, in a letter to CEOs, BlackRock CEO Larry Fink emphasized that a “central reason for the rise of activism—and wasteful proxy fights—is that companies have not been explicit enough about their long-term strategies.” Engaging in dialogue with investors and building trust provides companies with a preventive (rather than reactive) defense against activism, as highlighted by Ernst & Young in a summary of conversations with 50 institutional investors, investor associations, and advisors about governance and activism:

When companies engage with long-term institutional investors…those same investors are better positioned to support the company in an activist situation…More companies are realizing that when company and long-term shareholder views are aligned, those shareholders can be a tremendous ally for the company in an activist situation, including actively reaching out to other shareholders to argue in support of management’s position.

There has, however, been a lack of broad empirical evidence exploring this topic.

In a recent paper, “Investor Relations, Engagement and Shareholder Activism,” we study how the appointment of an investor relations officer (IRO) is associated with the likelihood and extent of activism.[2] Creating an investor relations (IR) function is a publicly observable (and costly) commitment to investor engagement, since its primary purpose is to regularly engage in dialogue with investors to help them better understand the firm and its prospects. These interactions can better align the interests of investors and management and mitigate the likelihood and severity of activist campaigns. As Deloitte notes, “efforts to address shareholder activism are most productive when they are viewed and conducted in the context of a robust IR engagement program, usually found within the company’s investor relations department”.

Our empirical analyses indicate that IR engagement is associated with increased investor confidence in management and the board (as measured by approval rates on shareholder votes for board members), as well as a lower likelihood of activism. Specifically, the appointment of an IRO is associated with a 20-40 percent lower likelihood of a tender offer and a 10-20 percent lower likelihood of a 13-D filing (indicating at least 5 percent ownership and an intent to influence management), yet no difference in the likelihood of a 13-G filing (indicating at least 5 percent ownership without the intent to influence management).

This deterrent effect becomes stronger when there are fewer impediments to the development of mutual understanding and trust with investors. In particular, we find that the mitigating effect of IR on activism increases with the tenure of the IRO, which provides evidence that dedicated IR rather than another distinct, but related, factor contributes to the lower likelihood of activism.

We also find that, when firms are targets of an activist campaign, those with IR engagement go through less costly and contentious campaigns, and have a lower likelihood of changing CEOs, than those without such engagement. Specifically, the appointment of an IRO is associated with an 8 percent lower likelihood of a contentious escalation of an activist campaign and a 32 percent lower likelihood of CEO turnover in the year following the campaign.

Overall, our findings suggest that direct and ongoing IR engagement is an important factor in achieving mutual understanding and trust between the firm and its shareholders, which deters activist investors and mitigates the costly escalation of activist campaigns.

ENDNOTES

[1] In particular, activist influence has expanded due to (i) recent shareholder-friendly rules that increase proxy access, (ii) emerging information and communication technologies that allow activists to quickly and broadly reach other investors and launch initiatives, and (iii) more concentrated institutional investor ownership, which allows investors to communicate and coordinate with each other more effectively.

[2] There is a longstanding debate about the role of activists in capital markets, including their net effects on firm performance; however, there is little debate about whether executives and directors would welcome activist involvement at their firm. For example, in a 2016 NYSE survey of 300 directors of public companies, 80 percent indicated that they would not welcome activist involvement with their board. The focus of our paper is on whether IR engagement mitigates activism, regardless of its net benefit.

This post comes to us from professors Kimball Chapman at Washington University in St. Louis’ John M. Olin Business School, Gregory S. Miller at the University of Michigan’s Stephen M. Ross School of Business, Jed Neilson at Pennsylvania State University, and Hal D. White at the University of Notre Dame. It is based on their recent paper, “Investor Relations, Engagement, and Shareholder Activism,” available here.

Tags acquiror, activism, Activist Investors, BlackRock, investor relations, IR, Larry Fink

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The Attack Devices Used by Activists

Advance Preparation

Create Team to Deal with Activism:

Shareholder Relations:

Prepare the Board of Directors to Deal with an Activist Situation:

Monitor Trading, Volume and Other Indicia of Activity:

Responding to an Activist Approach

Response to Non-Public Communication:

Response to Public Communication:

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The Attack Devices Used by Activists

Advance Preparation

Create Team to Deal with Activism:

Shareholder Relations:

Prepare the Board of Directors to Deal with an Activist Situation:

Monitor Trading, Volume and Other Indicia of Activity:

Responding to an Activist Approach

Response to Non-Public Communication:

Response to Public Communication:

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