Treasurer Support for Activist Defense

By Joseph Neu

Treasurers should aid their firms by helping to ensure activist defense strategies are both supported by a credible capital structure and well-communicated.  

It’s proxy season. And, among other things, this means that activist funds are actively lobbying other shareholders to back their transaction proposals. Increasingly, activists are also looking to garner votes in support of efforts to change the make-up of Boards, and in the process, gain Board backing for their transaction proposals. Both tactics point to how activist funds leverage their positions to maximize influence; agitating for change attracts the interest of other shareholders. By being aware of these tactics, treasurers can be better prepared to support effective actions by management and the Board (boosting treasury’s profile) in response.

Everyone is an activist

A leading activist defense advisor addressing our recent Treasurers’ Group of Thirty (T30) meeting, sponsored by Chatham Financial, noted how active fund managers are putting more of their money to work with activists funds because they have shown their ability to boost returns. Joining with them can help beat the benchmark that passive managers (which have outperformed active managers of late and thus make up the growing portion of firms’ shareholder base) only seek to meet. The added capital of both direct investors in activist funds, representing an estimated $200bn war chest, and active investors biasing their portfolios toward activist targets, will allow activist funds to pursue more and larger campaigns. It will also make the activists’ tactics broader and more sophisticated.

There are essentially two main tactics. The first is to seek shareholder backing on potential transactions (for example, breakups and return of capital). The second involves plans to change Board composition. Both are aided by opening access to the proxy process, which is a further simmering trend.

This second tactic of calling for Board change ultimately may prove more effective. All shareholders want to ensure that the Board is looking out for their interests: “Who on the Board thinks like me?” This includes passive fund managers that also want their portfolio to return more and an assortment of “shareholder rights,” say on pay,” “social investing” and other advocates. Calling for a shake-up of a Board with long-tenured directors also sends the message that senior management should be challenged to perform better and not dictate actions to captive directors. Supporting “good governance” is an easy yes vote (see chart below), whereas a specific proposal for, say, a spin may be effectively countered.

The question then becomes, do those aligning with activist funds share the same interests, such as the long-term value of the firm (see sidebar)? According to David Katz, a partner with Wachtell, Lipton, Rosen & Katz, posting in February to the Harvard Law School Forum on Corporate Governance and Financial Regulation blog “these funds welcome the support of academics and theorists who argue that disruption is good for the market,” but he cites a study by the Institute for Governance of Private and Public Organizations which concluded that the outcomes are often not what the activists that activist funds coopt necessarily have in mind.

Promoting engagement

This is why proactive engagement with shareholders, by the Board as well as senior management, appears to be the best countermeasure. Firms need to point out the divergent interests that activist funds seek to align, plus introduce Board members to their constituents (i.e., shareholders) to make the case directly that they are looking out for these interests. And, as with all activist defense measures, they need to do so with “speed, sophistication and credibility.”

Treasurers should thus work directly to help ensure that (1) management has plans to counter anticipated activist proposals; (2) they understand how these plans can be supported by the capital structure; (3) they understand how these plans are likely to be received by various capital providers/classes of investors and (4) this info flows to the Board (studies show that Boards miss the major portion of this insight).

Once plans are cleared for execution, treasurers, especially those with an investor relations role, can help (5) ensure that these are credibly communicated to investors, especially by the Board directly, boosting treasury’s strategic profile in the process. The Shareholder-Director Exchange (SDX)—created by the law firm Cadwalader, Wickersham & Taft, the advisory firms, Teneo and Tapestry Networks and supported by investor groups like BlackRock, CalSTRS and State Street—has created a series of guidelines, the SDX Protocols, for direct shareholder-director communication. The outreach might also include fixed-income investors, since many return-of-capital plans, for example, are supported with leverage (see US MNCs’ synthetic repatriation of offshore cash) and spin proposals often divorce current debt-service-cash-generating businesses from future high-potential ones.