Every Public Company Must Regularly Assess Vulnerabilities to Activist Investor Threats

Here’s what you’ll learn when you read this article:

• Why periodic vulnerability assessments are critical to protect companies from activist investor campaigns.

• The key questions boards and executives must ask to strengthen defenses before activists engage.

• How timing, governance practices, and communication strategies shape success in managing activist threats.

Today, almost every public company is vulnerable to an activist investor. It is not a question of whether a company will be targeted by an activist investor, but when. Over the years, countless seminars and webinars have been held to educate public company officers and directors on shareholder activism preparedness and response. As someone who has attended numerous annual conferences hosted by the National Association of Corporate Directors, the leading association of corporate directors, it is hard to recall a conference when there was not at least one session, if not multiple sessions, focused on educating directors on shareholder activism preparedness and response.

Yet in the face of the accepted reality of shareholder activism and the numerous ways that this reality is regularly reinforced in the minds of corporate directors and officers, it is surprising that many companies still do not conduct periodic assessments of their vulnerabilities to an activist investor and their overall state of preparedness.

The goals of such an activism vulnerability assessment would be to answer the following questions:

• Is the company sufficiently prepared for an activist investor, including one seeking control of the company?

• How vulnerable is the company to an activist investor?

• Are there opportunities to reduce the company’s vulnerabilities in a thoughtful and calibrated manner that balances the need for reduced vulnerability with the need to not unduly incite the company’s institutional investors and the proxy advisory firms that advise them?

• Have the company’s bylaws been updated to reflect recent developments in how advance notice provisions are structured, as well as the universal proxy rules that were adopted several years ago?

• Are there problematic provisions in the company’s charter that should be considered for cleanup at a routine annual meeting, such as a provision that allows shareholders to use cumulative voting in the election of directors?

• Does the company have a shareholder rights plan on the shelf? If so, has it been recently updated and tailored to the company’s current circumstances?

• Does the company have corporate governance practices that could enhance its vulnerabilities?

• Does the company have a history of negative proxy advisory firm recommendations that should be addressed?

• Does the company have board members that would likely be targeted by an activist investor looking to take advantage of the opportunities presented by the universal proxy rules?

• Does the company fully understand the backgrounds of its directors and key officers so that it would not be surprised if an activist investor went digging with the assistance of one of the many business intelligence firms that advise activists?

• What are the company’s current defenses to an activist investor?

• Are there opportunities to bolster the company’s defenses in a thoughtful and calibrated manner that balances the need for enhanced defenses with the need to not unduly incite the company’s institutional investors and the proxy advisory firms that advise them?

• How is the company’s defense profile bolstered by federal and state laws and regulations, such as regulatory provisions applicable to companies in regulated industries like financial institutions and utilities, and state takeover statutes?

• Does the company fully leverage the corporate stature of its state of domicile, such as REITs domiciled in Maryland?

• Why would an activist target the company? What would be the activist’s investment thesis, and does the company have well-researched arguments to rebut that thesis?

• Has the company sufficiently and thoughtfully communicated its plans for enhancing shareholder value, including regularly reinforcing those messages in its periodic filings with the SEC and during its quarterly earnings calls?

• If an activist investor were to target the company, what would be its likely demands, such as board composition changes, strategic direction shifts, a review of strategic alternatives, replacing the CEO, or other actions intended to enhance shareholder value?

• Are there specific activist investors that could be expected to take an interest in the company because of their industry expertise or experience targeting a company with a similar profile?

• What types of activism campaigns could be brought against the company, such as annual meeting, special meeting, action by written consent, vote-no or withhold campaigns, or proxy access? Is the company prepared to respond?

• Does the company have processes in place to maximize its ability to learn early that it is being targeted by an activist investor, such as stock surveillance?

• What attack vectors could an activist investor leverage against the company, including those that are very objective, like stock price and financial performance, and those that may be subjective and intended to support a particular narrative?

These are all important questions companies should regularly ask and answer with the assistance of their activism response advisors. If your company has not previously had an activism vulnerability assessment done, or it has been some time since it was last updated, the next few weeks could be an appropriate and opportune time to have vulnerabilities comprehensively assessed.

While we are still several months away from when many advance notice windows will begin to open for companies with calendar year-ends, the fall is a time when many activist investors initiate engagements with companies. This allows them to determine whether they can reach a settlement sufficiently in advance of the time when they would need to prepare for a possible proxy contest, including identifying director nominees and preparing an advance notice of nomination to submit to the company.

In the months ahead leading to the opening of advance notice windows, companies that are potential activism targets, particularly in connection with annual meeting campaigns, can expect to be contacted by activist investors seeking to initiate engagement. To the extent that an activism vulnerability assessment identifies vulnerabilities that should be addressed, it is much better for those actions to be undertaken before the activist engages with the company. Any actions taken thereafter may be perceived as directly responsive to the activist’s engagement and, thus, could be counterproductive to the company’s efforts to manage that engagement successfully.