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

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.

 

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.

 

 

2013 Proxy Season Prep

Dennis McCarthy – (213) 222-8260 – dennismccarthy@ariesmgmt.com

It may seem early, but now’s the time to get prepared for the upcoming 2013 proxy season.

Last year’s proxy season was notable for greater shareholder activism as I discuss in my posts (Just a Small Leak, Silent Majority Speaks and Initial Results). 

I suggested this trend was fostered by the rise of proxy advisors in my video (Herding Cats) and would continue.

So, in preparing for the 2013 proxy season, small cap company executives and their boards of directors can gain valuable insights about this season’s key issues by listening to a webinar produced by the law firm, Latham & Watkins, and proxy solicitor, Georgeson.

This webinar covers many issues including proxy access (Potential Trojan Horse), “say on pay”, political spending and several more topics. 

It’s definitely worth the time.  It’s packed with information.  I highly recommend that you click on the link below.

I also encourage you to contact me to help your company to complete any capital market transactions.

Webinar link – registration required: https://event.on24.com/eventRegistration/EventLobbyServlet?target=registration.jsp&eventid=548640&sessionid=1&key=137765EF6ECD99F2943DB8481BBA1B39&sourcepage=register 

Jan 24 addition – link to sign up for executive compensation consulting firm, Equilar, webinar series to prep for 2013 proxy season:

http://info.equilar.com/2013OutlookWebinarSeries_page.html?mkt_tok=3RkMMJWWfF9wsRoiuajIZKXonjHpfsX57ekkWae0lMI%2F0ER3fOvrPUfGjI4CT8pkI%2FqLAzICFpZo2FFdC%2FWccIFS

Jan 30 addition – For those of you who would like to see the quantitative data on the trends in proxy issues and proxy voting, I have two links, one to an article from the magazine, Corporate Counsel, which alerted me to survey data prepared by the Conference Board, which has its own link below.

Corporate Counsel Article Link: http://www.law.com/corporatecounsel/PubArticleCC.jsp?id=1202586196247&=&Analysis_of_Proxy_Voting_Data_Looks_at_SayOnPay_Shareholder_Engagement=&et=editorial&bu=Corporate%20Counsel&cn=cc20130130&src=EMC-Email&pt=Corporate%20Counsel%20Daily%20Alerts&kw=read%20more%20%C2%BB&slreturn=20130030132043

Conference Board Survey Link: http://www.conference-board.org/publications/publicationdetail.cfm?publicationid=2402

Silent Majority Speaks

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

Link to New York Times article: http://dealbook.nytimes.com/2012/06/07/once-reticent-investors-join-shareholder-revolts/?emc=eta1

At the end of my last post “Just a Small Leak”, I posed the question whether we could discern a visible trend in shareholder activism or were we simply seeing an isolated incident in the situation I reported.

No sooner did I hit the post button than I found an article with another interesting data point.

This article reports several instances in which typically complacent institutional investors had become vocal, and with great impact.

To quote the article, “When traditionally quieter investors join the chorus, it resonates so much more.” [Dominic J. Auld, a lawyer  at Labaton Sucharow who represents institutional investors]

There are likely several catalysts for turning typically silent shareholders into vocal ones including:

(i)    the role played by Proxy Advisory firms as I described in my post “Herding Cats”,

(ii)   weak stock price performance and

(iii) occasional outrageous corporate behavior which gets wide news coverage.

You can click on the link to find the article entitled, “Once-Reticent Investors Join Shareholder Revolts” by The New York Times “DealBook”.

Please subscribe to my blog, capitalmarketalerts.com, to stay informed on these and other capital markets topics. 

And please contact me to help your company with M&A activities and raising equity or debt.

Just a Small Leak

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

In my post entitled, “Potential Trojan Horse?”, I described a battle being waged by a small band of M&A specialists over the “advance notice bylaw and proxy access rules”.

These corporate provisions specify how shareholders can influence their corporations on selecting board members and determining many critical M&A, corporate governance and management compensation decisions.

Proxy access rules may not have a catchy name like “poison pill”, but believe me, they’re important.

Here’s some background. In a battle waged last summer, the SEC’s proposed proxy access rules for shareholder participation were stopped in court.

What was left in place, maybe because its threat was underestimated, was the ability of shareholders to submit their own proxy access rules to a vote of shareholders.

I suggested that leaving in place this provision for shareholders to submit their own proxy access rule proposal was something of a Trojan horse that might surprise corporate boards with their vulnerability. 

So it caught my eye when I read that shareholders of Nabors Industries, a $6 billion New York Stock Exchange company, had approved a proxy access proposal on June 5th, the first instance of shareholders approving proxy access rules, to my knowledge.

The proposal was submitted by several large New York City pension funds and supported by pension funds from other states.

Interestingly, the proposal approved by Nabors’ shareholders contained several of the same elements that were in the SEC’s proposed proxy access rule struck down by the court last summer.

Now, the Nabors’ proposal was non-binding on the Nabors’ Board but it signals to me increasing shareholder activism and shareholders’ determination to have a voice in corporate decision-making.

What do you think?  Will this be an isolated case or does it signal a trend?

Please subscribe to my blog, capitalmarketalerts.com, to stay up to date on this and other critical capital markets issues.  Also, please contact me to help your company to raise equity or debt or to complete M&A deals.

2012 Proxy Season – Initial Results

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

Webinar Linkhttp://www.equilar.com/webinar/2012-proxy-trends/archive.html

My recent post, entitled “Herding Cats” described proxy advisors as a powerful new voice for investors especially at proxy season.

Today’s post offers an initial recap of the 2012 proxy season:

what were the key issues on which proxy advisors played a role;

what were the companies’ responses; and  

what were the vote results?

Latham & Watkins, a law firm, and Equilar, executive compensation consultants, produced a valuable webinar covering these topics. The link is below.

The key issue this proxy season was “pay for performance”. 

Executive compensation, in general, is likely to be a hot button issue for several years so I recommend listening to the Latham and Equilar webinar.

Please subscribe to my blog to stay informed of these and other capital markets developments. 

Please call me to help your company to raise equity or debt or to complete M&A projects. Thank you. 

Shareholder Vote

Shareholder Vote

Proxy Advisory Firms – “Herding Cats”

dennismccarthy@ariesmgmt.com – (213) 222-8260

When someone describes a very difficult task, they often liken it to herding cats.

Each cat moves in its own direction, confident in its path and independent, maybe even suspicious, of others around it.  This is why herding cats in one direction is so difficult.

Another group that shares these characteristics are Wall Street investors.  It’s Wall Street investors’ independent perspectives on the stock market that makes the market.  At any moment, some are buyers and some sellers.

This is why it is so impressive that the firms, known as proxy advisory firms, have managed to gain such influence on Wall Street. These proxy advisory firms come close to herding cats.

So, what is a proxy advisory firm?

A proxy advisory firm will take a very visible position on corporate matters subject to shareholder vote.  Then the firm encourages Wall Street investors to vote as the proxy advisory firm recommends.

These proxy advisory firms have no control over Wall Street investors, only the power to sway investors by their argument supporting their recommended position.

No, shareholders don’t always vote as the proxy advisory firms recommend but often they do.

Over the years, a few proxy advisory firms have earned a powerful reputation for producing recommendations on shareholder vote issues which are supported by well-reasoned thinking and should result in outcomes which benefit shareholders and corporations.

Sure, there are times when corporations view the proxy advisory firms as adversarial.  The proxy advisory firms would likely respond that their positions on shareholder vote issues should improve corporate governance practices which are in the best longer-term interest of companies too.

Regardless of the motives, proxy advisory firms’ power is unmistakable.

These firms have changed the dynamics on Wall Street.  Under the guidance of proxy advisory firms, shareholders now act in more coordinated fashion on corporate policy issues including management compensation and M&A defense provisions. 

And, the proxy advisory firms’ influence is growing.  At some point, the balance of power may shift. 

Already, we see isolated incidents.  Over time, company after company may recognize the change.  Eventually, coordinated shareholder instruction to direct major corporate actions may come to be seen as the normal order.

I know it’s hard to imagine now. Time will tell.

Please contact me to discuss this topic or for assistance with any capital raising or M&A projects.

Herding Cats

M&A Defense – “Devil’s in the Details”

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

Roche’s hostile offer for Illumina is a great case study to follow up my post “M&A Defense Checklist” and to prove that old adage that “the devil’s in the details”.

The Roche hostile offer for Illumina highlights two of my points,

  1. Now there is higher risk of hostile activity for all companies.  Illumina, before the offer, was trading at 4x revenue and 14x EBITDA: not what you’d consider a low valuation target although its stock at $37.69 was below its 52 week high of $79.40.
  2. Companies should carefully review their M&A defenses to uncover and potentially fix any weaknesses before an aggressor uses them against the company.

As background on this case, after what appears to be a short courtship period, Roche launched a hostile tender offer to shareholders to buy Illumina at $44.50/share an 18% premium to Illumina’s closing price the day before the offer.  Roche also announced that it intends to wage a proxy battle which would result in its slate of nominees comprising a majority of the Illumina board.

In this post, I highlight key points from an impressive article entitled “The Chink in Illumina’s Defense” by Steven M. Davidoff, writing as The Deal Professor, a commentator for the New York Times’ “DealBook”.  The article speculates that Roche’s proxy battle strategy will likely include proposals to:

  1. Nominate board candidates for the 4 seats up for election this year;
  2. Propose a by-law amendment to expand the size of the board by two members to 11 and nominate those two board candidates; and
  3. Propose a shareholder vote to remove all of Illumina’s board without cause.

Illumina’s defenses include:

  1. Staggered board of nine members with only 4 up for election this year;
  2. Supermajority vote of 67% of all shares outstanding required to amend a by-law;
  3. Shareholders can’t call a special meeting;
  4. Shareholders can’t act by written consent; and
  5. Poison pill which had expired in 2011 but could be reinstated by board action alone.

Proving that time-tested maxim, “the devil’s in the details”, here’s what we might learn from issues with Illumina’s defenses that Roche may be exploiting according to “The Chink in Illumina’s Defense”.

  1. Certain key elements of Illumina’s defenses are contained in its by-laws, not as charter provisions.  A corporate provision contained in a company’s by-laws may be amended by shareholder action without board action.  In contrast, a provision in a company’s charter requires approval by both the board and shareholders.
  2. Illumina’s by-laws specify the size of the board which Roche is proposing to expand by two to eleven members of which Roche’s slate of 6 would constitute a majority. Shareholders can approve, albeit by 67%, this by-law amendments to expand the board without board approval.
  3. Illumina’s by-laws also permit removal of board members without cause upon approval by a simple majority of the votes cast at the meeting, a relatively low threshold.  Delaware law requires the provision for removal of board members without cause to be in a company’s charter so this provision will, no doubt, trigger litigation as to its validity and usefulness in Roche’s attack.
  4. Illumina’s advance notice provision for submission of proxy proposals to be included for consideration at its annual meeting requires only 90 days vs longer periods which are common.  As a result, Illumina has less time to respond before its annual shareholder meeting.

Subsequent to Roche’s offer, Illumina’s share price rose well above Roche’s offer price signaling that Wall Street thinks Illumina is worth more than Roche’s offer.  Also, Illumina reinstated its poison pill at a 15% threshold with updated definitions of beneficial ownership to include ownership through derivatives.

To read Roche’s offer letter to Illumina, click here or go to www.sec.gov for the recent documents filed under Illumina including its poison pill and various filings by both sides.

This is a valuable lesson for all of us, at Illumina’s expense.

M&A Defense Checklist

Dennis McCarthy

(213) 222-8260

dennis@mbsecurities.com

Well, no sooner did I post “It’s Déjà Vu All Over Again” than I started getting requests for suggestions of what to include on a company’s M&A defense checklist.

You know, it’s simply good practice for a company to periodically review its M&A defenses.

But now, the task of reviewing a company’s M&A defenses takes on greater urgency.  The risk of a company getting an unsolicited offer is higher than usual now because many large companies are loaded with cash but short on revenue growth.

So what would I recommend for the checklist?

Please understand, I’m not necessarily recommending implementation of these provisions but rather suggest they be on your company’s M&A defense review list.

First on my list is a recent hot topic – proxy access rules and advance notice bylaw provisions.  Public companies should be aware of recent developments and consider updating to what’s known as “second generation” provisions.

Next on my list would be a couple charter provisions which slow aggressors.  These would be (i) restrictions on a shareholder’s ability to call a special meeting, and (ii) a prohibition on shareholder action by written consent.

Of course, we can’t forget the “poison pill” or shareholder rights plan.  While poison pills have declined in popularity over the last decade, we’ve seen several recent instances, Barnes & Noble, Airgas and Lions Gate, where a pill has played a key role in a company’s M&A defenses.

Even if you have a pill in place, there are a couple developments to note.  One development is the special purpose pill which, for example, may be used to dissuade a shareholder from triggering tax law change of ownership provisions which impairs use of a company’s net operating loss.  The second development involves expanding the definition of beneficial ownership to include sophisticated new forms of corporate ownership now available.

Another checklist item would be the classified or “staggered” board, where only a portion of the board members, typically a third, are up for shareholder vote each year.  This slows an aggressor’s efforts to change a board through a proxy battle.  A staggered board plus a pill is a powerful defensive combination.

Another defense provision is the supermajority vote which requires a high percentage of shareholders to approve an action, that is, once you’ve got your defense provisions in place.

In contrast, if your company permits cumulative voting, a small but organized minority shareholder group might be able to install a board member despite the group’s small ownership.

Certain states laws permit additional defenses or variations on these provisions.  For example, certain states permit what are known as constituency statutes which enable a board to consider the impact of an acquisition on constituencies including employees or the community, rather than just shareholders.  Depending upon your state, these extra features may be useful.

I would note here that some defense provisions can be implemented unilaterally by board action.  Others require shareholder approval which affects implementation feasibility.

In addition to these items, there are a number of tactical actions like stock buybacks and recapitalizations which can be used defensively in response to or to pre-empt hostile activity.

I recommend that a company set aside time at an upcoming board meeting for a review of its M&A defense provisions.  Company management, its attorneys, bankers and IR professionals can brief the board and make recommendations.

I can help your company to review its defenses in a timely and cost efficient manner. It’s better to be prepared.