Who’s at the Door?

Activists knock from the inside. Waiting for that knock to act—to engage with your investors and gain an unbiased understanding of their perceptions and expectations of your company and strategy—will provide an activist with an advantage your board and management team can ill afford. Despite the acknowledgement of the ongoing concern of activism, too many companies are still at risk of being underprepared.

The recent decision by the Superior Court of Washington for King County in Blue Lion Opportunity Master Fund, L.P. vs. HomeStreet, Inc. should serve as a reminder that every public company should have a carefully drafted advance notice bylaw as part of the activism defense strategy. The court ruled in favor of HomeStreet, affirming that advance notice bylaws are common, and that the dissident failed to comply in this instance. The board’s decision to reject Blue Lion’s notice was an exercise of its business judgement, thus protecting the business judgement rule.

A new Rivel study, regarding shareholder activism of global investor relations officers (IROs) at approximately 630 companies, found that most companies are unconcerned, have not hired advisors and do not have a plan in place to respond to shareholder activism. Considering the continued rise in activism, the constant threat it poses to all companies and the fact that a majority of companies have engaged with an activist, the study results are concerning.

Key findings include:

  • IROs believe that shareholder activism is here to stay.
    • 64% believe activism will increase over the next couple of years, and 30% expect activism to remain constant.
  • Most companies have engaged with one or more activists.
    • 56% of the IROs surveyed have had direct experience with activism, a significant increase from 2014 when 45% of IROs reported having engaged with an activist.
  • Despite the prevalence of activism and expectations that it will continue to be a major force, most management teams are not particularly concerned.
    • 54% of the survey participants expressed that their senior management team is “not very” or “not at all” concerned about being targeted by activists.
  • Many companies have done little or nothing to prepare for shareholder activism.
    • Only 31% of companies have gathered structured feedback from their shareholders with a survey.
    • Only 27% have a communications plan in place to respond to activism.
    • Only 17% have preemptively engaged an investment bank for activism defense services.
    • Only 17% have preemptively engaged a communications consultant.

The poll also found sharply divided sentiments regarding the impact of shareholder activism. Thirty percent of IROs view activism as a “negative force in the equity markets,” while 23% consider it a positive force. Global buy-side investors have a more definitive view: nearly seven in ten global buy-side investors (69%) view activism as a positive force in the equity markets.

Rivel Prism Webinar – Activism 2.0

On November 1st, Dave Bobker was joined by Jim Woolery, Head of M&A and Corporate Governance, King & Spalding, and Steve Frankel, Partner, Joele Frank, for a discussion on the latest developments on shareholder activism.

Activism 2.0: The New Paradigm

Jim and Steve provided a very insightful look at the strategy of investment funds, the evolving activism landscape and proactive steps for companies to take. We discussed the importance of open dialogue with investors on a growing number of topics, and the challenges many companies face in determining which investors to contact, how to gain an audience and how to assess relative strengths and weaknesses.

You can listen to the full presentation here: Activism 2.0: The New Paradigm

If you would like to receive a copy of the presentation, or discuss how your company can effectively engage investors on any of the issues discussed on the webinar, please contact Dave Bobker at

Activists Reduce Board Diversity, Say Multiple Studies

Shareholder activists and their supporters often tout governance-related benefits that emerge at companies they target. Some of these benefits may be grossly overstated according to two separate studies from proxy advisory firm ISS and Bloomberg News.

The ISS report examined shareholder activist appointments and company appointments made in response to activism from 2011 to 2015. The study found that of 380 board seats at S&P 1500 companies, only 8.4% were female. This compares with 25% for all new appointees to S&P 1500 companies over the same period. Rates for ethnically diverse candidates were equally low at these activism-affected firms with diverse appointments at 5%, compared to a sector average of 13%.

Bloomberg examined 174 activist-related appointees at S&P 500 companies during the same timeframe and found only 7 (or 4%) were women.

In the companies included in the ISS study, the number of all-male boards grew from 13% to 17%, and the number of all-white boards rose from 52% to 56%.

This lack of diversity among activist nominees comes in stark contrast to a growing push for increased gender and ethnic diversity at US public companies. Major institutional investors, including BlackRock, State Street and Vanguard, are demanding that boards include more women and people of color, often citing research that shows diverse groups make better decisions and lead to greater profitability. These, and other major shareholders, have publicly committed to voting against the re-election of board members at companies that fail to adequately address gender and ethnic imbalances.

End of Shareholder Proposal Process as We Know It?

Part of the Financial CHOICE Act 2.0 would change the shareholder submission process significantly.

In February, Jeb Hensarling, Chair of the House Financial Services Committee, submitted a memo to the Committee’s Leadership Team outlining proposed changes from the original Financial CHOICE Act. One of the provisions sought to dramatically change the shareholder proposal and resubmission process. Few details were provided at the time. We now have clarity.

CHOICE 2.0 would require the SEC to revise the eligibility requirements for shareholder proposals to eliminate the dollar threshold and provide eligibility only when a shareholder holds at least 1% of a company’s voting shares (or a higher threshold at the SEC’s determination). The draft also seeks to increase the required eligibility holding period for shares from one year to three years.

The revised Act would also require the SEC to raise the resubmission thresholds:

  • if proposed once in the last five years, the proposal could be excluded if the vote in favor was less than 6%;
  • if proposed twice and the vote in favor on the last submission was less than 15%; and
  • if proposed three times or more and the vote in favor on the last submission was less than 30%.

In a third major provision, which would appear to target frequent submitters such as John Chevedden, the Act would prohibit an issuer from including in its proxy materials a proposal submitted by an individual acting on behalf of another shareholder(s).

Here is where we have to factor in the law of unintended consequences.

Be careful what you wish for!

This draft would dramatically reduce the number of shareholder proposals, as the higher thresholds would block the majority of proponents – corporate gadflies, faith-based investors, SRI investors, many public pension funds – since, in many cases, even 1 percent of stock could equate to billions of dollars. This would mean that only the likes of BlackRock, Vanguard, SSgA, etc. would meet the criteria. Although these larger funds traditionally have not shown a tremendous appetite for submitting (or even supporting) a vast number of these proposals, we have seen attitudes change over the past few years. Recently, we have seen public statements from investors regarding emerging trends such as CSR, diversity, cybersecurity, board evaluations and director elections. As a result, there has been a need for greater engagement, action and disclosure on these issues from companies, especially those at risk of losing support on the ballot. Would these dramatic legislative changes finally motivate larger investors to start submitting proposals and forcing the issues?  The pressure has been steadily mounting for years, so it is conceivable that this revision could be the catalyst to provoke one of these funds to take direct action, and one may prompt the whole group.

Be careful what you wish for. Dealing with the gadflies and smaller investors is a manageable process for most companies. Dealing with a larger investor, especially a top-10 holder, is an entirely different proposition.

Stay tuned as this develops over the coming months, as there are sure to be plenty of heated conversations on this topic.

Prism Webinar Recording Now Available

In December, 2016, we were joined by Keir Gumbs, Partner, Covington and Burling, and Marty Dunn, Partner, Morrison & Foerster, to discuss the latest developments at the SEC and a securities law update.

General topics included:

  • Proxy Access – evolving provisions and proponent tactics
  • 14a-8 interpretation and application
  • Impact of the election and the future of Dodd-Frank and the SEC
  • Universal ballot, executive compensation policies and other impending rule-making initiatives
  • 14a-8 interpretation and application
  • SEC disclosure effectiveness initiative

You can listen to the full presentation HERE