Proxy Season Recap: Activism Activity Rebounds

2022’s proxy season marked the return of the activist.

After the pandemic-driven slowdown in 2020 and 2021’s spotty uptick in activist campaigns, shareholder activism as a tactic returned in full force in 2022. More than 125 public campaigns were launched during the first half of the year, according to FactSet data. The first and second quarters of 2022 accounted for the two busiest quarters in activism of the last two years. Leading this resurgence was a coterie of first-time or “emerging” activists, who often pursue aggressive, unconventional or unpredictable strategies to place companies in their crosshairs.

First-time activists are more active in public campaigns than ever before. FactSet data shows that more than one-third of activist campaigns to-date in 2022 have been led by first-time or “emerging” activists. These activists tend to be less experienced than higher-profile activists, often with a more aggressive temperament and unpredictable approach. Despite their short track records, these activists should not be taken lightly. Looking for a “win” to prove themselves to the Street and boost AUM, not to mention to raise their next fund, we routinely find that these activists are less willing to settle on reasonable terms.

This leaves a Board with no better option than to take a situation through to a proxy vote, even if dialogue with a more seasoned activist might have yielded a mutually agreeable off-ramp earlier in the process. At times, these emerging activists have run multiple campaigns at once without conducting sufficient homework on the companies they target. An activist who publicly reveals a lack of understanding about a particular business or industry can present a defense opportunity for the company.

How should Boards and management teams navigate a contested situation with a first-time activist?

  1. Build your team. Engage a trusted and experienced circle of legal, financial, proxy and communications advisers. With more first-time activists in the fray, it’s more important than ever to partner with advisers who bring an approach, temperament and broad set of experiences that you trust.
  2. Know your shareholders. Make sure you understand your shareholder base and customize your outreach plan to reach them where they are. Give your shareholders a strategy and plan to vote for, not just reasons to vote against.
  3. Stay disciplined. Resist the instinct to respond to every accusation from the activist. Be assertive but also careful not to over-react. Focus on your message.
  4. Maintain flexibility. Especially if defending against a first-time activist, a cookie-cutter response playbook is not sufficient. Your team must be nimble to effectively manage an evolving and unpredictable attack.
  5. Be prepared. Anticipate the activist’s next moves and plan ahead for proxy process milestones. Be both proactive and reactive.

Looking Ahead – Universal Proxy Card Introduces a Wild Card

We believe the SEC’s Universal Proxy Card rule, which will take effect in September 2022, will introduce new uncertainty to the proxy process. Companies and boards will have to contend with a dramatically lower cost for activists to solicit proxies, a greater risk of split slate decisions and an environment likely to be less enticing for activists to settle instead of taking a director contest to a vote.

At this stage, however, there are more questions than answers. Will passive investors be more willing to vote for one or two dissident directors than they have been to vote for an entire dissident slate? Will long-tenured directors be targeted, even at strong performing companies? Will retail investors be able to understand the new proxy cards? Regular reviews of Board composition and a governance check-up will be especially important in navigating this new landscape.

Amid rebounding activist investor activity, rising prominence of first-time activists and emerging uncertainty in the proxy process, it is essential for companies to plan ahead for the risk of activism and to have a clear, concise and well-articulated long-term strategy plainly available to investors and all stakeholders.

 

Dan Scorpio is the Head of M&A and Activism at Abernathy MacGregor. He provides communications, stakeholder engagement and reputation management counsel to executive leadership teams and Boards of Directors, with an emphasis on transactions, shareholder activism, crisis/litigation and governance matters.

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