Boy Scouts know it and today's boards and executive officers
know it too: be prepared. In a recent article by Martin Lipton, Mr. Lipton
makes it clear that advance preparation may be the key to
successfully dealing with an attack from an activist hedge
Dealing with hedge fund activism appears to be the new normal
for companies, even the successful ones, and all companies should
consider preparing an activist defense strategy. Trevor Zeyl
discusses the increase in hedge fund activism
in his recent post and outlines certain trends, including
"wolf packs", that have contributed to hedge fund
The Activist Hedge Fund Strategy
Through comprehensive research and analysis, activist hedge
funds aim to prove that their strategy will boost shareholder value
at a target. Mr. Lipton sets out a number of common tactics used by
activist hedge funds, including: (i) aggressive criticism of a
target's plans and the announcement of alternative, so-called
superior plans; (ii) proposing non-binding resolutions for specific
actions or the initiation of a strategic review process; (iii)
conducting a proxy fight for board representation; (iv) publically
calling for a sale or using various approaches to force the sale of
the target; and (v) increasing their interest and voting power
above their equity investment through the use of options,
derivatives and other financial devices. Sophisticated activist
hedge funds have the experience, and resources, to launch a
multi-fronted attack. The strategy of these activist hedge funds
may also involve the use of reinforcements in the form of public
relations companies, private investigators, litigators and
"wolf packs" supporting the lead activist.
Sometimes the best offence is a good defence. Mr. Lipton points
out that preparation, including a company's regular review of
its business portfolio, strategy, governance and execution
compensation issues, is imperative.
Preparation will necessarily involve a focus on maintaining and
strengthening shareholder relations, preparing the board for an
activist attack and monitoring market activity and attack
indicators. The importance of advance investor engagement should be
underscored as a pre-emptive defence against future attacks. Guy
White outlines the strategic opportunities that can come from
shareholder engagement in the activist context in his recent post
titled Shareholder engagement: A strategic
Companies will want to have a well-stocked arsenal in the event
of an attack by an activist hedge fund. Mr. Lipton discusses the
importance of having a team in place that possesses the knowledge
and experience to deal with an activist attack. This team should
include key officers, lawyers, investment bankers and proxy
solicitation and public relations firms and this team should
consider conducting periodic "fire drills" in order to
maintain a state of preparedness.
 Mr. Lipton is a founding partner of Wachtell, Lipton,
Rosen & Katz. Mr. Lipton's article is based on a memorandum
by himself and Sabastian V. Niles posted on the Harvard Law School
Forum on Corporate Governance and Financial Regulation.
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After several months of consultation and deliberations, the Organisation for Economic Co-operation and Development rendered public a revised draft Guidance on Due Diligence for Responsible Business Conduct.
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