Three Steps to Prepare for Shareholder Activism

Latham & Watkins, the law firm, provides this easy to read series of recommendations for dealing with increasing shareholder activism.  Other valuable articles for corporate executives and board members may be viewed at www.lw.com.

Three Practical Steps to Stay Ahead of Shareholder Activism

by Steven B. Stokdyk, Joel H. Trotter & Patricia Judge

Activist investors continue to shape corporate governance. Last year saw more than 300 activist proxy campaigns, proposals and contests. Activism-focused funds manage over $100 billion in assets.

In this climate, no company is too large to avoid activists’ influence. There is no guaranteed safety — not corporate governance, share price appreciation or outperforming peers. All companies should remain prepared for engagement.

Experience shows that preparation can make a decisive difference. Companies that establish and maintain a good reputation with institutional investors will have an advantage when interacting with activists.

To prepare effectively, we recommend three broad ongoing practices:

  • monitoring exposure to activists;
  • communicating with shareholders and analysts; and
  • planning for activist campaigns.

Monitoring exposure to activists

Companies should continually monitor available information to assess their exposure to activists:

  • Monitor outside groups, including the company’s peer group, sell-side analysts, proxy advisors, pension funds, activist investors, print media and online sources.
  • Understand institutional holdings and the relationships among the holders, especially those who may team up with others, by monitoring Schedule 13G, 13D, 13F and Hart-Scott-Rodino filings, parallel (wolf pack) trading and debt trading patterns.
  • Watch the proxy advisory firms and institutional investor groups, such as Institutional Shareholder Services (ISS), Glass, Lewis & Co., the Council of Institutional Investors  and TIAA-CREF. Although ISS can influence up to 30% of the vote, some investors use ISS’s position only as a starting point. For example, institutional investors such as Fidelity and BlackRock have their own internal proxy departments.
  • Review corporate governance ratings, correct any inaccuracies and identify potential changes that could improve the company’s governance rating.
  • Maintain a feedback loop by monitoring earnings call participants, conference attendees, follow-up requests and other investor contacts, always seeking candid feedback and facilitating open communication.

Communicating with shareholders and analysts

Use inbound and outbound communication to build key relationships:

  • Use relationship building to keep your friends close and your major institutional investors closer. Engage regularly with both portfolio managers and proxy departments. Know institutional investors’ guidelines, key decision makers and how to reach them. Establish credibility with shareholders and analysts in advance.
  • Seek out inbound communication and candid feedback. Use ongoing dialogue to ensure that management and the board of directors understand investor sentiment.
  • Use outbound communication as part of a concerted communications strategy. Ensure that communications consistently describe the basic strategic message. Focus especially on relative performance, proactively addressing any shortfalls as compared to peers.

Planning for activist campaigns

Formulate a plan to prepare for an activism crisis:

  • Evaluate protections in the company’s charter, bylaws and applicable laws for potential measures that could be used in response to an activist campaign.
  • Develop and maintain a public communications plan, which should include steps for strategic outreach to the media, regulators, political groups and others. Keep these relationships current to facilitate public messaging.
  • Identify team members and have key players ready in advance to assist quickly in response to emergencies. Identify your lineup of counsel, investment bankers, proxy solicitors and public relations specialists.

Taken together, these three steps — monitoring, communicating and planning — offer concrete actions that companies can use to ensure their preparedness for an activist campaign.

Steven B. Stokdyk
steven.stokdyk@lw.com
+1.213.891.7421

Joel H. Trotter
joel.trotter@lw.com
+1.202.637.2165

Patricia Judge
patricia.judge@lw.com
+1.202.637.3352

Proxy Advisors’s Success Draws Attention

It’s no surprise that as proxy advisory firms have had greater impact on corporate America (view my prior post), companies would mount a counter-offensive.

The NY Times “Dealbook” describes a recent encounter hosted by the SEC.

Click here to read the NY Times “Dealbook” article.

Post by Dennis McCarthy

Google

US Supreme Court To Address Key Fraud Ruling

The first hurdle has been met.  The US Supreme Court will address the issue of the use of the efficient market theory as the basis for determining securities class action cases.

I describe the issue in my post,Key Securities Fraud Ruling Challenged.

Click here to read a helpful Forbes article for background.

Hit the Download button to read an article by Latham & Watkins, the law firm, discussing the ramifications of the case and potential outcomes.


Post by Dennis McCarthy
Google

Key Securities Fraud Ruling Challenged

By Dennis McCarthy – (213) 222-8260 – dennis@mbsecurities.com –

US Public companies should take note. A key US Supreme Court ruling which backstops most securities fraud litigation is being challenged.  If the Supreme Court reverses this ruling, the plaintiff’s securities litigation bar loses an important tool.

Since 1986, securities fraud cases have relied on a key ruling that stock prices reflect all publicly available information.  This is known as the efficient market hypothesis.

Applying the efficient market hypothesis enabled the US Supreme Court in Basic v. Levinson to conclude that any shareholder buying or selling stock while fraudulent information was publicly available suffered from that fraudulent information.  A shareholder didn’t have to read and rely on the specific fraudulent information, it was already reflected in the stock price.

Now, compare that position with a tougher standard which some believe is the correct standard.

What if, in order to sue for securities fraud, a shareholder had to show that he actually read and relied on the fraudulent information.  Given that relatively few shareholders, buying or selling, actually read company’s publicly available information, that would set a much higher standard.

That standard would make today’s class action securities fraud lawsuits less likely.  It would remove key leverage used by the plaintiff’s bar.

 To give you an idea of the magnitude of what’s at stake here, Cornerstone Research, a financial and economic consulting firm, determined that there were over 3000 securities litigation cases brought over the last 15 years.  During this period, companies and their insurers paid over $73 billion in settlements and judgments.  The plaintiff’s bar collected $17 billion in fees.

So the stakes are high and many of us noticed when a company involved in a long-running securities litigation, petitioned the US Supreme Court to overturn the decision in the “Basic” case and apply the tougher standard.   

We’ll be watching whether the Supreme Court takes up the issue and, if it does, whether this key ruling applying the efficient market hypothesis will be overturned.

I’ve attached an excellent article on this topic by Steven M. Davidoff writing in The New York Times “Dealbook”.

Please contact me to help your company to complete any capital market project.

Click here to go to the New York Times “Dealbook” article.

Click the download button to read an article by Latham & Watkins, the law firm, on the case and implications of potential outcomes.

Update – US Supreme Court takes up question of the use of the efficient market theory which is the basis of the “Basic v Levinson” case – read Forbes background.

Postscript: In my research, I came across a blog “The D&O Diary” with several articles providing background on trends in securities litigation following the demise of the law firm Milberg Weiss and a review of the book “Circle of Greed” about the fall of Bill Lerach.
Google

Preparing for the 2014 Proxy Season

While it may seem early to be preparing for the 2014 proxy season, my colleagues at Latham & Watkins, the law firm, and Georgeson, the proxy solicitor, hosted a webinar on that topic recently

Below, you’ll find the description of the webinar and a link to the registration page.

Link to registration page.

Corporate Governance Webcasts: A Complimentary Series2014 Proxy Season: Strategically Preparing for Your Fall and Winter
Program

The fall is a critical period for US public companies and their management and directors to become educated and organized for the 2014 Proxy Season.During this 60-minute program, Latham & Watkins and Georgeson join together again to provide recommendations on the pro-active steps companies should consider taking during this period in order to prepare for the 2014 Proxy Season. Topics that will be covered include:

  • Say-on-Pay Advance Preparation: lessons learned in the first three say-on-pay vote seasons; engagement with key institutional investors regarding executive compensation policies; preparation for compensation committee deliberations; dealing with new policies from the proxy advisory firms and more compensation proposals from shareholders; the impact of the new NYSE and Nasdaq listing standards on Compensation Committee advisor independence.
  • Proxy Season Advance Preparation: constructive engagement with key institutional investors and the proxy advisory firms to identify and seek early resolution of corporate governance issues; consideration of proposed SEC rulemaking; and potential proxy season litigation.
  • Advance Preparation for other hot button shareholder proposals such as political contributions and lobbying, board declassification, independent chairmen, proxy access, environmental, social and other governance issues.
 
Registration
Click here to register online.
Don’t miss out on our upcoming programs:

  • January 15, 2014 – Drafting Your Proxy Statement and Preparations for a Successful Annual Meeting
  • June 18, 2014 – Lessons Learned and Coming Attractions

 

Invitation to follow closer to the program date. To ensure that you receive an invitation, please opt-in to our Webcast Mailing List by clicking here.

 Speakers

Jim Barrall, Partner, Latham & Watkins

Steven Stokdyk, Partner, Latham & Watkins

Rhonda Brauer, Senior Managing Director, Corporate Governance, Georgeson

 

Questions

For more information and questions about this event, please contact: Michele Bravo

Sponsors

Latham & Watkins is a leading global law firm dedicated to working with clients to help them achieve their business goals and overcome legal challenges anywhere in the world. The firm has earned considerable market recognition based on a record of landmark matters and a unified culture of innovation and collaboration. From a global platform of offices covering the world’s major financial, business and regulatory centers, the firm’s lawyers help clients succeed. For more information, visit www.lw.com.

Georgeson is the world’s foremost provider of strategic shareholder consulting services to corporations and shareholder groups working to influence corporate strategy. We offer unsurpassed advice and representation in annual meetings, mergers and acquisitions, proxy contests and other extraordinary transactions. In global transactions, our capacity and network is unmatchedOur core proxy expertise is enhanced with and complemented by our strategic consulting services, as well as by the Georgeson inVU™ platform, a software tool that provides insight into investor ownership and voting profiles. For more information, visit www.georgeson.com.

 

Canadian Activist Update Webinar

For my friends at Canadian public companies, here is an upcoming webinar (Oct 16th) recapping 2013 and suggesting what 2014 may hold in store.

Two of the webinar hosts created the following video to promote the webinar.

Click this link to take you to the related blogpost.

Dealing with Greater Shareholder Activistism

Trends suggest that companies, large and small, will encounter greater shareholder activism over the next years and should, therefore, prepare for this.

Skadden, Arps, Slate, Meagher & Flom LLP prepared a valuable article describing the forces at work to support greater activism and certain preparatory actions that companies should undertake.

Click here to take you to the article, or copy and paste the following link in your browser:

http://www.jdsupra.com/legalnews/activist-shareholders-in-the-us-a-ch-83602/

 

Proxy Season 2013 Recap and Alert

Latham & Watkins, the law firm, and Georgeson, the proxy solicitor, have teamed up again to recap the significant events of the 2013 proxy season.  I attended this webinar and, as usual, it was high quality with great information and insights.  The link to the replay is below.

Click here (registration required).

 

 

On-Demand Now Available

 

2013 Proxy Season:
Lessons Learned and Coming Attractions

 

 

 

Program

In this program, halfway through the 2013 proxy season for the Russell 300 companies, Latham & Watkins’ Jim Barrall, Mark Gerstein and Steven Stokdyk, and Georgeson’s  Rhonda Brauer review the 2013 proxy season, including Say on Pay voting results and battleground issues, the impact of executive compensation lawsuits, the positive results of shareholder engagement, increasing shareholder activism, share ownership and voting developments, and look ahead to the prospects for the remainder of the 2013 proxy season, as well as discuss coming attractions on the horizon for the 2014 season. 

Questions

For more information and questions about this webcast, please contact Michele Bravo at michele.bravo@lw.com or +1.213.892.3054.

 

 

To Access the Program

Click here to access the on-demand webcast.

 

You will automatically be directed to the lobby page to launch the webcast.

 

 

Handling an Activist Attack

My friend and colleague Moira Conlon, President of Financial Profiles, was keynote speaker at a recent National Association of Corporate Directors event addressing steps that public companies should take to be prepared for activist shareholder attacks.

Click here to take you to the article or copy and paste the link below into your browser”

http://finprofiles.wordpress.com/2013/03/19/are-you-prepared-for-an-activist-attack/

 

Zombie Shares

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

Well, “zombie shares” caught my eye.  I clicked on the article in the online magazine “Growth Capitalist” to find out just what are “zombie shares”.

Zombies, as I understand it, are the dead reanimated and controlled by someone through witchcraft.  Zombies move and react to their surroundings like they are alive but, in reality, they are not.

So, I presume that, “zombie shares” are shares of stock that look like normal shares but, in reality, are different.  In the example that follows, you’ll see that “zombie shares” may look like they’re still outstanding and held by the shareholder of record but, in reality, they are not.

In the “Growth Capitalist” article, the “zombie shares” are shares that have effectively been repurchased by and now voted by the issuing company but are left outstanding in the hands of the prior owner to permit the shares to be counted in shareholder votes. So, they’re “zombie shares”.

I mentioned something like this in prior posts on M&A defense such as “M&A Defense Checklist”.  In that context, however, a hostile investor would obtain effective voting control or effective ownership without tripping the definition of ownership to trigger a “poison pill” or 13(d) disclosure.  A hostile party, therefore, could control many more shares than its visible ownership would indicate.

At the time I posted, “M&A Defense Checklist”, I didn’t have a cool name like “zombie shares”.

The link to the article at “Growth Capitalist” is below.  Thanks to them for adding this colorful name.

As always, please contact me to assist your company to raise equity or debt or to complete M&A projects.

Article: http://www.growthcapitalist.com/2012/07/zombie-shares-race-to-bottom-at-issue-in-emmis-take-private-plan/