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Shareholder Activism Defense
In recent years, activist shareholders increasingly have looked to exert pressure on company boards and executives to seek changes to company policies. In most, but not all, cases these companies are publicly traded. Activist campaigns can involve social policies, including those involving environmental or political issues, governance changes to corporate practices or management structure, or economic changes. While some activist shareholders push their changes for ideological reasons, others do so presumably to extract value from the company that they believe current management is failing to maximize.
Activist campaigns can come in various forms. Sometimes an activist shareholder or group launches an outright hostile takeover bid for control of the company, but very often activists start by acquiring small stakes and then threaten a proxy battle. Shareholders who are activists typically attempt to build a sizeable enough stake in the company to influence its decision-making, which triggers various regulatory requirements on the part of the activist, most notably the 13D filing with the SEC within 10 days of acquiring a 5 percent beneficial ownership (excluding derivatives), or a 13G filing upon acquiring 5 to 20 percent (within 45 days of year end if less than a 10 percent holding or within 10 days after the end of the month if more than 10 percent).
Activists can engage with, or attempt to pressure, companies in a variety of ways. They might ask for meetings with management or write letters to managers or the Board, or they may take a more public posture and issue press releases. In more adversarial situations, activists might engage with regulatory bodies, write a poison pen letter to the SEC, or litigate with the company for access to books and records or for other corporate wrongdoing or neglect. Finally, activists can issue proxy contests either for new directors,officers, or policies through Securities and Exchange Act Rule 14a-8.
Companies typically want to avoid activist shareholders whoare seeking to change the way a company operates and, in some cases, may evenwant to take the over control of the company. Managers rightfully fear that these campaigns can lead to them losing their jobs. There are several things that companies can do, however, to ward-off activist investors. As usual, many of the most effective strategies are those that are implemented long before an activist becomes an imminent threat.
Corporate Structure Strategies
Many anti-takeover strategies can be implemented through more effective drafting of corporate documents, with various provisions regarding meetings, by-law amendments, board size changes, director service requirements,and voting mechanisms designed to give incumbent managers flexibility. Change of control provisions in company contracts can also make an activist turnover more challenging.
One of the most effective anti-takeover strategies to deter activist investors is a shareholder rights plan, also known as a poison pill. Poison pills essentially allow companies to issue warrants to holders of common stock (excluding the activist) when an activist investor acquires a certain threshold (typically 10 percent) in order to dilute the investor’s overall ownership and control. Large investors often oppose poison pill plans because they are seen as entrenching management and possibly bad practices. However, companies can have their corporate counsel draft these plans so they are ready and can be “pulled off the shelf” and adopted on short notice. Courts recognize the legitimacy of poison pills to ward off unsolicited takeovers. There are two primary kinds of poison pills (flip-in, which allows common shareholders to purchase additional shares at a major discount or flip-over, which allows common shareholders to purchase shares of the acquiring company in the event of a merger or similar transaction).
It is important that experienced counsel draft these plans to ensure that companies and existing management are fulfilling their fiduciary duties.