Why Every Public Company Should Have a Plan for Engaging With an Activist Investor

What you will learn when you read this article:

• Why planning for activist engagement is more critical than just assessing vulnerabilities

• The essential questions boards and executives must answer before meeting an activist investor

• How preparation can prevent costly escalations into proxy contests and public battles

In a previous article, I discussed the need for companies to conduct periodic assessments of their vulnerabilities to an activist investor and their overall state of preparedness, and how surprising it is that many companies don’t conduct such assessments even though the benefits should be obvious. I continue to believe that such assessments are an essential component of activism preparedness.

In this article, I discuss another essential component of activism preparedness that many companies also don’t regularly do: planning for how the company would engage with an activist investor.

Planning for how the company would engage with an activist investor should be at the top of every public company’s list of activism preparedness steps. I would argue it is a more important element than an activism vulnerability assessment. It is also a less complicated, less time-consuming and less costly exercise.

From a statistical perspective, a small percentage of companies will find themselves defending against a proxy contest, particularly one that goes all the way to a shareholder vote. However, most companies should expect to eventually engage with a shareholder adopting an activist posture or strategy. Accordingly, every public company needs a well-developed plan for how it would engage with an activist investor and how the dynamics of such engagement evolve and could escalate, regardless of whether the investor is a first-time activist, occasional activist, habitual activist, or a historically passive investor that has grown frustrated.

A well-developed activism engagement plan would address questions such as:

• If an activist investor requested a meeting with the board or management, how would the company respond, and who would communicate that response?

• What background information would the company gather about the activist investor prior to engaging (such as past campaigns, demands, assets under management, principals, and advisors)?

• Are there scenarios where the company would not engage, such as if the activist’s tone or demands made engagement unproductive?

• Which board or management members would represent the company in the initial meeting, and would that representation change as the engagement evolved?

• Would at least two representatives be present in each meeting to avoid post-meeting confusion?

• Would one person serve as the designated speaker, with others observing and taking notes?

• Are company representatives prepared for activists to potentially extract sound bites for future communications or filings, and are they trained to avoid statements that could appear in the media or SEC disclosures?

• Does the board have someone with sufficient gravitas to represent the company, or does it need to add a director with that skill?

• Have representatives accepted the time commitment and reputational risks of being publicly linked to the company’s engagement with the activist?

• Have they been sufficiently trained, given written guidelines, and advised on legal parameters such as Regulation FD?

• Does the board understand that only designated representatives should engage with the activist, and not individual directors acting independently?

• Would the company approach an initial meeting in a “listen-only” mode or share information? If sharing nonpublic information, is there a confidentiality agreement ready? If only public information is shared, would the company pre-release materials to broaden what could be discussed?

• Has the company anticipated likely activist questions—such as stock performance, value creation strategies, or leadership changes—and prepared thoughtful responses?

• Is the company ready for potential activist demands such as board seats, strategy changes, or C-suite adjustments?

• Does the company have someone skilled in drafting the letters and emails that often define activist engagements?

• Is the company aware of escalation tools activists may use, including Schedule 13D filings, inspection demands or director nominations?

• Has the company identified the advisors it would need to prevent an engagement from escalating into a costly, disruptive campaign?

• Has the board conducted scenario planning exercises to rehearse activist engagements so directors understand the dynamics and remain calm under pressure?

These are all questions boards should ask and answer with the help of their advisors. If your company has not previously developed an activism engagement plan, or if it has been some time since it was updated, the next few months may be the right time to create or refresh one.

While we are still several months away from when many advance notice windows will begin to open for companies with calendar year-ends, the weeks ahead are often when activists initiate engagements. They do so to determine whether settlements can be reached in advance of proxy season, when they would otherwise need to prepare for a contest. Companies that lack an updated plan risk being caught unprepared.

Now is the moment for boards and management teams to ensure they have a clear, disciplined engagement strategy in place.