Boards and management all have the same fear – the ominous news story, 13D filing, or even the first phone call when an activist investor introduces themselves as one of their largest shareholders. What happens next is swift and often sets the tone for the engagement. The Board is notified, advisors are summoned, and a defense plan is assembled. Directors are flooded with counsel from advisors who claim they know the activist best and have seen this situation many times before.
In these moments, it’s easy for Boards to slip into self-preservation mode and engage in standard defensive tactics. However, many of these well-advised tactics may jeopardize trust with the activist and ultimately reduce the company’s negotiating leverage. Rather than establishing the basis for a thoughtful exchange of ideas, some standard defense tactics can inadvertently signal resistance and bad intentions, making it more difficult to maintain a constructive dialogue that could lead to a mutually beneficial outcome.
Here we examine Ten Tactics that Unnecessarily Frustrate Activists and their influence on the negotiating process to better inform companies and boards about how their actions may be perceived by the other side and may have unintended consequences.
- Approaching meetings strictly as “listen only” sessions, thereby preventing an intelligent exchange of ideas. Advisors may recommend that their clients engage in this approach to mitigate risk and better understand the activist’s objectives to get ahead of their demands. This can lead to frustration among activists, who may feel the engagement lacks genuine dialogue, which may lead the activist to make their concerns public.
- Slow-rolling discussions to delay meaningful engagement until after a key calendar event or the nomination or record dates. Activists recognize these delay tactics immediately, viewing them as an attempt to run out the clock and avoid accountability. Activists don’t necessarily need speed, but they expect clear, reliable timelines for follow-ups and next steps.
- Leaking information or stories about the ongoing private engagement to shape the public narrative. Doing so damages trust with the activist while simultaneously escalating tensions. The same can also be true when the company files a proxy statement without giving the activist advance notice, further eroding trust.
- Avoiding direct engagement with the activist and relying solely on advisors to communicate. Activists generally expect board-level engagement early, which signals seriousness and respect. Further, activists often become frustrated when they ask to speak to certain people on the board or ask to omit certain executives from discussions and the company doesn’t accommodate. Having the wrong attendees in discussions can chill direct dialogue and make it difficult for the activist to openly explain their views.
- Making unprofessional comments about the activist. Management may at times make defensive, dismissive, or emotional remarks about the activist in public communications – for example during media interviews or earnings calls. There have also been instances when a CEO has made disparaging remarks targeting the integrity of an activist’s investment process. Such incendiary comments can strengthen the activist’s narrative by undermining the company’s credibility in the eyes of long-term institutional investors, who prefer to see both sides engage in good faith negotiations instead of engaging in unproductive rhetoric.
- Filing bedbug letters. Companies sometimes nitpick nomination paperwork and regulatory filings like 13Ds and proxy statements via “bedbug” letters filed with the SEC. Efforts to invalidate nominations based on minor technicalities are rarely successful, but they are highly frustrating for activists who are focused on the broader case for value creation.
- Entrenching the board with measures such as adopting poison pills, changing advance notice bylaws, or even redomiciling the company in a more corporate friendly state. Activists and long-term investors alike interpret these moves as protecting management and the Board rather than acting in shareholders’ best interests.
- Dismissing the activist’s ideas prematurely. At times, boards and management teams reflexively reject activist proposals without giving them a fair hearing, issuing statements such as “the Board has already evaluated these options.” If leadership truly believes it has explored the activist’s recommendations, it should be willing to explain – within the bounds of Regulation FD – why the proposal is not viable. Sophisticated activists are reasonable; they recognize they lack an insider’s perspective and are open to the company’s views. At the same time, Boards and management teams should keep in mind that activist perspectives are often informed by extensive due diligence and years of experience as investors.
- Appointing directors preemptively in an attempt to get ahead of activist demands. Appointing directors preemptively can reduce the likelihood of a constructive settlement since the activist’s priorities were not considered in the selection process – even when a genuine skills gap may have been addressed. Moreover, proxy advisor firms often perceive proactive director appointments made in the face of activist pressure skeptically and view them as reactionary rather than strategic. Understandably, defensive appointments may seem preferable to leaving a material weakness unaddressed and appearing vulnerable. However, boards should carefully consider the specific circumstances and the potential implications for any settlement process, as such actions are likely to inflame the activist.
- Pushing for overly restrictive standstill terms. In settlements, standstills are designed to provide a company with a period of stability and time to implement new strategies. Companies will seek to restrict future nominations while pushing for extensive non-disparagement clauses or long-duration standstills. At times, companies will request the right to approve all trades made by an activist above and beyond the typical open trading windows and any MNPI restrictions. Pushing for atypical or unnecessarily onerous standstill terms may ultimately undermine the possibility of a settlement agreement, and further, upon the expiration of the standstill, could lead to increased risk of renewed conflict.
Though fear understandably makes aggressive defensive tactics appealing, understanding the unintended consequences of such actions can help boards increase their chances of a constructive engagement and mutually beneficial outcome. Ultimately, directors may end up sitting next to the activist or their nominees in the boardroom. Hostile tactics have the potential to cause dysfunction in the boardroom when the dust settles after a settlement or proxy contest.
True fiduciary responsibility calls for directors to view activist investors as significant shareholders with potentially value-creating perspectives. Fostering a climate of respect and lessening the probability of a combative engagement or proxy battle ultimately ensures a better outcome for all shareholders.
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