Governance, stewardship and activism (2024)

A session report from the IBA’s 21st Annual International Mergers & Acquisitions Conference 2024

Wednesday 5 June 2024, 1600-1715

Chairs
Heleen Kersten Stibbe, Amsterdam
Laura C Turano Paul Weiss Rifkind Wharton & Garrison, New York

Speakers
Jillian Colbert Alsheimer Perella Weinberg Partners, New York
Elizabeth Gonzalez-Sussman Olshan Frome Wolosky, New York
Vincent A Mercier Davies Ward Philips & Vineberg, Toronto
William D Regner Debevoise & Plimpton, New York
Cyril Shroff Cyril Amarchand Mangaldas, Mumbai 

Reporter
Harry Coghill Macfarlanes, London

Introduction

Heleen Kersten introduced the panellists and Laura C Turano introduced the topic of ‘governance, stewardship and activism’, explaining that the panel would examine the issues from the perspective of different jurisdictions and then focus on defence preparedness.

Topic one: jurisdictional perspectives

Shroff started off by talking about India. He explained that many Indian companies are family owned, although there are institutional shareholders. He also explained that the judiciary is not powerful, but rather regulators, proxy advisers and the media are powerful in terms of holding Indian companies to account. New regulations are often introduced, expanding the depth and breadth of regulatory coverage, including in relation to disclosure and related parties. Regulation has expanded to cover high-value debt, as well as equity. Shareholder approval is now required for every director appointment every five years (notwithstanding what any shareholders agreement may say).

Gonzalez-Sussman spoke about activism in the US. She cited the Disney proxy fight as a prominent example, but explained that most activism in the US is focused on smaller companies that do not garner as much scrutiny as Disney. While two or more activists may target the same company, it is rare to have two activists nominate separate director slates. Where more than one activist targets a company, the company has to consider the competing interests of the different activists, which can complicate matters. Many US public companies have started to amend their bylaws as a result of recent US rules to try to prevent activists from running a proxy fight and there was recent litigation where a company tried to invalidate activist nominees. Gonzalez-Sussman claimed that these company ‘tactics’ are not well-received by institutional investors and proxy advisers.

Alsheimer did not consider the changes to company bylaws to be ‘tactics’, but rather a response to the aggressive approach of activists. If a large or brand name company suffers any sort of misstep, it needs to be prepared for activists to show an interest. There has been an increase in the number of settlements in proxy fights, a shift from activists gaining seats by means of winning a true proxy fight.

Regner commented that environmental, social and governance (ESG) matters are not on the activist agenda as much as we may think. The US is still behind Europe in regards to its focus on ESG issues and, although there is some disclosure-based activism, the main focus of ESG activism is really on the ‘G’ in ESG (ie, winning board seats).

Mercier commented that activism has had a resurgence in Canada, after having been subdued during the Covid-19 pandemic. Board activism represents approximately 40 per cent of activity in Canada. There is also a significant amount of merger and acquisition (M&A) activism. ESG is topical, but it is not really activism in the purest sense and is really pursued through proposals (of which there has been an increased number).

Kersten commented that a trend in Europe is companies facing conflicting demands from activists. For example, European activists may be focused on environmental matters, but US activists do not want to see a focus on environmental matters at the expense of financial performance.

Mercier commented that Canada falls between the US and Europe. For example, Canada has had universal proxy cards since 2014 and was already used to them at the point when they were causing nervousness in the US. Philosophically, Canadian courts and agencies believe in shareholder democracy in a few key areas (eg, in hostile takeovers).

Alsheimer noted that the number of campaigns in the US has been pretty consistent over the last five years, but that there has been an exponential increase in shareholders (not just hedge funds, but also private equity, credit funds and institutional shareholders) being activists in private, behind the scenes.

Kersten queried whether activists were using ESG to gain support from other shareholders. Gonzalez-Sussman agreed that many activists are doing much of their work behind the scenes as long-term investors. She also commented that activism is largely occurring at undervalued companies, with the goal of changing what the board is doing. Activists only go public when private engagement fails to achieve the change they think is needed. When they do go public, they also want other shareholders to agree with them on what changes are needed. The importance of ESG as an issue depends on how much it contributes to financial underperformance. Gonzalez-Sussman does not believe that the strategy of using ESG just to gain more votes from other shareholders never really worked, to the extent that it was ever used.

Regner and Alsheimer challenged Gonzalez-Sussman’s description of activists as long-term investors, saying that a three-year investment horizon makes it more difficult for boards to make long-term and other investment decisions. Gonzalez-Sussman defended that time horizon as being sufficient to see the stock price respond to management and strategy improvements. Gonzalez-Sussman also noted that activists can only be successful if they secure the support of long-term shareholders.

Mercier, in an effort to mediate the (good-natured) debate, noted that activists can facilitate significant and beneficial changes to companies. He also noted that the strategy used to be for companies not to engage with activists, but that these days most activist situations result in settlement after a certain period of engagement.

Topic two: defence preparedness

Kersten introduced the topic and asked Alsheimer to start by explaining what she advises companies to do in terms of being prepared for an activist situation. Alsheimer said that companies should: (1) have an advisory team ready, including monitoring the shareholder base, (2) have a list of pre-vetted director candidates, and (3) have a clear view of the financial strategy/value of the company.

Shroff outlined some of the topics that activists in India focus on, which are varied. Whenever undertaking any sort of corporate action, the main preparatory action is to engage with proxy advisers, who are vocal, to prepare for regulatory scrutiny and to ensure that the firm is ready for media attention.

Mercier stated that he is seeing a trend involving activists teaming up with hedge funds. The key to preparedness is to go to shareholders when there is underperformance and explain both the reasons for it and the plan to fix it. There is a need to understand weaknesses in a company, via a regular assessment of its vulnerabilities, and to communicate the plan to address such weaknesses to institutional shareholders. Alsheimer commented that she would advise companies to engage with shareholders as often as possible and, ideally, at least once a year.

Gonzalez-Sussman agreed that investor days are an important tool to communicate with shareholders, including the reasons for any underperformance. Gonzalez-Sussman’s activist clients would often be willing to enter into a non-disclosure agreement (NDA) in order to help investee companies work out the best way to communicate with their shareholders.

Turano picked up on the topic of advance notice bylaws, which were discussed earlier by the panel. She agrees that companies and their advisers complicating these provisions is not necessarily the right approach, not least because a Delaware judge may well not think it appropriate to be as creative as possible in efforts to disenfranchise shareholders. It is also not a route to win friends and influence people. Gonzalez-Sussman agreed that such an approach does not really benefit anyone. Alsheimer commented that only a handful of companies and their advisers have taken it too far, in response to aggressive tactics over the years by activists.

Mercier said the comments made by the panel are not just relevant to advance notice bylaws, but to advance preparedness generally: campaigns are not won with such steps, but rather on more fundamental issues. Companies lose the moral high ground when they adopt such aggressive tactics, even though they are doing so on the basis of advice.

Regner spoke about preparedness on the part of activists, noting that they do not have an unlimited number of tools on which they can draw, with a contested proxy fight vote being their ultimate threat. It is important to remember that activists are asset managers who benefit from success. They consider whether being associated with a public campaign is likely to be beneficial to their brand.

Gonzalez-Sussman disagreed, saying that the ultimate key to an activist’s success is good investment performance. They, therefore, need to unlock meaningful value in their work. So, they need to believe there is a share performance upside in their proposals. Sometimes, boards do not want to hear it and that can be a reason why activists go public, particularly if they are concerned that the message is getting lost in its communication to the broader shareholder base or the board is not acting quickly enough. In other words, Gonzalez-Sussman’s view is that activists do not go public just to get public relations credit.

Conclusions

Turano invited each of the panellists to summarise their key takeaways.

Regner stated that the key lesson for companies is to be transparent with shareholders. Shroff reiterated that the governance and activism conversation is evolving extremely quickly in India. Alsheimer argued that companies are good stewards of their own businesses. Boards and management teams are trying to maximise value and act in the best long-term interests of shareholders. Activists should, therefore, engage privately with companies on a longer-term basis. Mercier observed that it is now less attractive to be a public company director (partly because of increased levels of activism) and that private equity ownership is now a more attractive environment to be a company director. Gonzalez-Sussman agreed with previous comments that engagement is critical and that the lack of it can make things escalate quite quickly. She stressed the importance of demonstrating that companies are taking action, which will lead to much more engagement behind the scenes. She reminded the panel that all sides want to achieve the same goal (ie, to maximise value), but acknowledged that there is a difference in approach.

Kersten concluded the session by remarking that a lot of the themes emerging around these topics are global (other than perhaps a different approach being taken in regard to ESG activism in Europe and the US).