Despite a short dip at the outset of the pandemic, activism has rebounded and now continues at an ever-growing intensity. As we have previously noted, regardless of industry, size or performance, no company should consider itself immune from activism. No company is too large, too popular, too new or too successful. Even companies that are respected industry leaders and have outperformed the market and their peers have been and are being attacked. And companies that have faced one activist may be approached, in the same year or in successive years, by other activists or re-visited by the prior activist.
Although asset managers and institutional investors will often act independently of activists, the relationships between activists and asset managers and investors in recent years have encouraged frequent and aggressive activist attacks. A number of hedge funds have also sought to export American-style activism abroad, with companies throughout the world now facing classic activist attacks. In addition, the line between hedge fund activism and private equity continues to blur, with some activist funds becoming bidders themselves for all or part of a company, and a handful of private equity funds exploring activist-style investments in, and engagement with, public companies.
While traditional activism focused on short-term profit, stock price and total shareholder return (TSR) continues, a new set of activists has emerged, emphasizing climate and other environmental, employee/human capital, social and governance (EESG-ESG with emphasis on employees) considerations. The activism landscape has also evolved to include dual purpose activists who combine both TSR and EESG arguments, as well as “pincer attacks” from EESG and TSR activists acting independently or in concert against the same company.
The Exxon proxy fight successfully waged by EESG activist Engine No. 1 earlier this year underscores the importance of advance preparedness to anticipate, prevent and respond to an activist attack, including not only the more traditional governance and economic components of activist campaigns, but also the EESG themes that some activists have been deploying in their attacks.
For many years, we have been updating this memo based on recent developments, evolving trends and our experiences avoiding, defusing, resolving and prevailing in contested situations and proxy fights to provide the most cogent and current advice to our clients and friends. Summarized below is a snapshot of some of the tactics and themes deployed by activists, followed by a checklist of matters to be considered in putting a company in the best possible position to prevent, respond to or resolve an activist attack.
The Attack Devices Used by Activists
Current SEC rules do not prevent an activist from secretly accumulating a more than 5% position before being required to make public disclosure and do not prevent activists and institutional investors from privately communicating and cooperating. We have long sought to correct this loophole.
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