As noted by Kingsdale Advisors in a recently published report, corporate directors and their legal advisors continue to pay insufficient attention to shareholder activism in M&A. The authors of the 2017 special report caution that not only have shareholder activists been emboldened by post-financial crisis legislative changes that afford shareholders greater say, but that these investors also enjoy access to ever more sophisticated playbooks. Further, they stress that activism in M&A is no longer the exclusive domain of entrepreneurial hedge funds; traditionally passive investors, including large asset managers and even pension funds, are increasingly willing to ensure that their voices are heard. Finally, while smaller underperforming companies are naturally more vulnerable, larger companies would be ill-advised to rest easy as activists are expanding their reach. In short, and as made clear by a number of recent examples (such as Carl Icahn's opposition to the buyout of Dell shareholders by Dell's founder and Silver Lake Partners in 2013), the opportunities and challenges associated with activism in M&A can no longer be ignored.
Trends in shareholder activism
So what are the trends of shareholder activism in M&A in 2017, and what can boards do to better protect themselves? Most significantly, the growth in the role of activism in M&A is unlikely to abate, particularly in relation to private equity. As suggested by Gregg Feinstein, managing director at Houlihan Lokey, "the age of activism is in the early innings". We can also expect to see greater variety in the objectives pursued by activist investors. Citing Activist Insight Online, the authors of the Kingsdale report note that between 2010 and 2016, almost half of Canadian M&A activist demands related to deal prevention. What remains unclear is the extent to which shareholder activists will be able to maintain the carefully crafted image of activism as a force for good, and avoid the return of the "corporate raider" stigma of the 1980s.
Safeguarding against activist investors
To safeguard against activist investors, precautions must be taken well before a board's or activist's proposed transaction is announced. Shareholder assessments must be performed on a regular basis, in which potential activists are identified and sorted by risk, and contingency plans need to be developed. The degree of risk presented by a proposed transaction—in terms of how likely it is to invite interference by activists—must factor into the deal's structure. Boards must also be sure to avoid antagonizing investors through costly deal protections measures which, as pointed out by the authors of the Kingsdale report, may transfer risk from the buyer to the shareholder meeting. Also, whenever possible, potential activists should be tied down through lock-up agreements.
Ultimately, however, the phenomenon of shareholder activism in M&A will have to be addressed on a more fundamental level. Boards will need to do more than simply pay lip service to the changing expectations and objectives of traditional and activist investors, and must instead reconsider their relationships with their shareholders. By engaging investors in ongoing dialogue and by thoughtfully framing transactions (such as through the strategic use of the media), boards can minimize the risk of their plans being thwarted.
The author would like to thank Felix Moser-Boehm, Summer Student, for his assistance in preparing this legal update.
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