On March 30, 2019, Paul Shim and Jim Langston joined Patrick Ramsey, Global Head of M&A at BofA Securities, and Amy Lissauer, Global Head of Activism and Raid Defense at BofA Securities, on a conference call panel titled “The Impact of COVID-19 on Shareholder Activism and Hostile M&A.”
The panelists shared their views on the state of activism and hostile attacks in the current environment, how the activism playbook may evolve, when and how the next wave of activism and hostile attacks is likely to emerge, and what companies can do today to prepare for the storm.
Dial-in Details to the Call Below:
U.S. toll-free: 888 203 1112
International: +1 719 457 0820
The replay will be available from Monday, March 30, 2020, at 4:00 p.m. through Wednesday, April 29, 2020, at 2:00 p.m. Eastern.
Key takeaways included:
- Activism has not disappeared, it has evolved.
- Economic disruption and market volatility has created risks, as well as opportunities.
- Some activists have experienced significant investment losses and are fighting for survival. Others remain well-capitalized and are offering financial lifelines (i.e., PIPE and other investments) to companies.
- Activists who can do so are out in the market fundraising. They are building war chests and at some point in the cycle will seek to deploy this capital.
- We are also seeing activists start to build new stakes and add on to existing stakes. We expect the stake building to accelerate once the economy starts to stabilize – particularly if that happens before the market has fully priced in the recovery – and activists are better able to identify targets and develop an investment thesis. For the moment, institutional investors and other shareholders are unlikely to be receptive to traditional activism, but that mindset will not last forever.
- The activists who launch most of the campaigns and loom largest in c-suites and boardrooms across corporate America – e.g., Elliott, Starboard, Icahn, etc. – are not going anywhere anytime soon. Activism will remain a source of risk for companies, and preparedness will continue to be critical.
- The first quarter of 2020 ended earlier this week so in forty-five days most activist funds will file Schedule 13Fs disclosing their positions as of quarter end. We will soon have a better sense of which activists have been building stakes and in which companies.
- Changes to the activism “playbook” that were in process at the time of the COVID-19 disruption will accelerate.
- Activists will not just focus on companies in distress—activists will be able to invest in large-cap, safe haven companies at attractive entry points and at some point will start to agitate for management, governance or operational changes.
- Although ESG has faded from the headlines, it is alive and well. Once the skies clear, ESG-themed campaigns will likely accelerate. Companies that have shown decisive leadership, taken the steps necessary to navigate the storm (while acting equitably) and focused on worker health and safety and the well-being of other stakeholders, will have a compelling story to tell. At the right time, companies should be engaging with shareholders on these topics.
- Activists will also look to play matchmaker and push vulnerable companies to merge, building stakes on both the buy- and sell-side.
- Financial sponsors’ efforts to build public equities / constructivist funds will likely accelerate. With dry powder still at record levels, the market decline resulting in more attractive valuations and the credit markets currently closed for LBOs, financial sponsors will seek to put capital to work through minority investments. We do not expect the large-cap financial sponsors to go full-bore activist, but bear hugs – typically private – and “constructivist” investments are likely to increase. White-knight investments – either by the financial sponsor alone or alongside an activist – will also be an option.
- Are companies out of the woods if the shareholder proposal and director nomination windows for their upcoming annual shareholder meetings have closed? Not entirely.
- While the shareholder proposal and director nomination windows have closed at many companies, companies should view this more as “breathing room” as activists can continue to run withhold campaigns and agitate for change outside the annual meeting mechanics.
- The ability of shareholders to call special meetings and act by written consent – which is available at more companies than ever before – increases the threat to some companies and is another tool activists can use to enhance their leverage.
- Companies thinking about delaying annual shareholder meetings should be mindful of bylaw and state corporate law provisions that might reopen the shareholder proposal or director nomination windows, or require resetting of the record date. Where possible—and consistent with safety of participants—companies should consider adjourning meetings rather than delaying outright. See our prior memos for a discussion of the key considerations in adjourning and postponing annual meetings or switching to a virtual meeting.
- When might we see a return to unsolicited bids?
- It would be extremely risky to launch a hostile bid at the present time, in the midst of so much uncertainty regarding the depth and duration of the crisis. Many companies simply will not be able to survive.
- But companies should expect to see a return of hostile deal-making once market conditions stabilize. Strong companies will take advantage of price arbitrage once there is sufficient visibility to have conviction on value.
- Usual regulatory protections might not be as useful as a defense mechanism coming out of a downturn, as significantly weakened market participants may lead to more permissive antitrust agency reviews of consolidating transactions.
- What can companies do? Preparedness is critical.
- Companies should review their defense profiles in consultation with outside legal and financial advisors, and ensure boards are aware of potential vulnerabilities now (rather than waiting until a threat has emerged). Companies should also continue to monitor changes in their shareholder bases – stock watch firms are a must – and prioritize clear communication with shareholders and other stakeholders.
- Every public company should have a shareholder rights plan on the shelf.
- Companies whose stock prices remain depressed or feel particularly vulnerable should consider proactive implementation of rights plans. See our prior memo for considerations for boards in deciding whether to take a rights plan off the shelf.
- Companies adopting rights plans should clearly communicate to shareholders and proxy advisors the reasons for taking defensive measures now – ie, it is a measured and decisive response to a unique and time-limited dislocation. If the duration, trigger or other key terms of the rights plan will be outside what proxy advisory firms and institutional investors view as mainstream, the company should have a compelling reason for the departure that is included in the relevant communication materials.