IN-DEPTH: Business as usual?

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The fallout from the coronavirus pandemic has caused logistical and ethical issues for shareholder activists in the U.S., but will this lead to fewer proxy contests or simply defer campaigns until next season?

Attack or backtrack?

Sidley Austin, which mainly represents companies, suggested in early March that the current market instability may prove to be “corporate America’s most effective poison pill,” as activists wanting to launch proxy contests are left with a choice between a long-term investment that could cost a fund millions, or risk being seen as a short-term investor that “stands to lose credibility” if a proxy fight is followed by a hasty exit.

Moreover, companies have been forced into a survivalist state of mind by the crisis, ditching years of dismantling takeover defenses. So far this year, 25 companies adopted poison pills, the highest number since at least 2013, according to Activist Insight Governance. Meanwhile, some activists have withdrawn proxy contests in a year that had started out more subdued than previous years.

Xerox pulled its proxy contest and takeover effort at HP, while Jonathan Litt’s Land & Buildings withdrew its slate at American Homes 4 Rent, citing concerns over the disruptive effect of the coronavirus.

Other contests settled but many more are still ongoing. According to data compiled by Activist Insight Online, there are 43 unresolved demands for board representation in the U.S., with most of the companies facing these demands yet to announce their annual meeting dates. Starboard Value has proxy contests in play at eBay and GCP Applied Technologies, while Commvault Systems’ nomination deadline beckons.

Many of these could settle, and 87% of Activist Insight newsletter readers who responded to last week’s poll believe that companies and activists would rather settle than draw out a campaign in these uncertain times. However, some proxy contests seem likely to go the distance, including those at USA Technologies, First United, and Tegna.

Image issue

Defense law firm Wachtell, Lipton, Rosen & Katz recently argued that activists who launch campaigns during the current market volatility will be marked as “mere profiteers… opportunistically taking advantage of the COVID-19 pandemic to further line their pockets.”

The argument has been echoed by some companies, which have claimed activists running proxy contests amid such market uncertainty are acting insensitively. When Starboard Value launched its proxy contest at eBay in late March, the company lambasted the fund’s timing and suggested the contest was an “unnecessary distraction” as eBay remains concerned with its “business, employee health and safety, and the important CEO search.”

Patrick Tucker, managing director at communications agency Abernathy MacGregor, told Activist Insight Online that funds will not be dissuaded from launching a campaign in fear of their “raider” legacy. “Activists have proven to be very savvy in managing their public profile,” Tucker noted, adding that “companies cannot simply assume image concerns will slow an attack.”

Indeed, Tucker suggested that the onus will be on companies “to be ready to prove why a proxy contest in this environment is not just unseemly but deeply damaging.”

Paperwork

Public image is only one facet that activists would have to consider under the current circumstances of the markets. The other is the logistical issues that arise from mass lockdowns. With campaigns not only relying on meeting dates being honored, there is also the need for regulators to remain vigilant and election inspectors active.

Aneliya Crawford, a partner at Schulte Roth & Zabel, has said that while there are some “logistical challenges,” she believes they have little effect on dedicated activists launching campaigns.

“The volume continues to be high, people are not just abandoning contests,” Crawford told Activist Insight Online. “Different methods of communication may come forward. Contests could just as effectively go the distance.”