Charles Martin
Macfarlanes, London
charles.martin@macfarlanes.com

Report on a session of the IBA Corporate and M&A Law Committee at the 19th Annual International Mergers and Acquisitions Conference in New York

Tuesday 14 June 2022

Moderators

Elizabeth Gonzalez-Sussman Olshan Frome Wolosky, New York

Laura Turano Paul Weiss Rifkind Wharton & Garrison, New York

Speakers

William Anderson Evercore, New York

David A Chaikof Torys, Toronto & New York

Arthur (‘Art’) Crozier  Innisfree M&A, New York

Youssef Djehane BDGS Associés, Paris

Barrett Golden Joele Frank Wilkinson Brimmer Katcher, New York

Activism

Bill Anderson gave an overview of the landscape. He noted that he has seen more interplay between activists and private equity sponsors in Europe as well as the US with activists pushing for the sale of some or all of the business to private equity sponsors.

With share prices down 30 per cent in many sectors, many companies are vulnerable to unsolicited proposals. Activists are also using environmental, social and governance (ESG) issues as a way of showing that a board may not be doing a great job. Therefore, it is essential that all companies take proactive steps in advance to make sure that they have dealt with the issues likely to be raised by activists. The US has adopted new rules mandating the use of a universal proxy card where all the directors nominated by the company and a dissident will appear on each side’s proxy cards. A discussion was had about whether these new rules will make it easier for activists to launch campaigns.

Art Crozier and Elizabeth Gonzalez-Sussman discussed how ESG issues are increasingly becoming more important elements of proxy fights in the US, with Gonzalez-Sussman noting that these issues are highlighted more in campaigns when they affect the financial performance of a company.

Youssef Djehane said that in France particular vulnerabilities include having widely spread equity (ie, not a concentrated, small shareholder base). Also, poor rotation and change at the top of the company, a too Franco-French leadership team and of course underperformance. David Chaikof suggested that companies are particularly vulnerable in Canada as it is easy to call a shareholder meeting and there are high disclosure thresholds. Institutional shareholders are prepared to engage with activists and the governance community are keen on new developments. There is no automatic deference to management.

Will activism remain strong in the US?

Anderson was of the view that activism is not going away in the US or elsewhere. Gonzalez-Sussman agreed and said that ugly tactics are not good on either side of the activism divide and that activists are increasingly keen to work behind the scenes with management to avoid drawn‑out public fights. Index funds in particular do not like nasty fights.

There was consensus behind Laura Turano’s point that preparedness is key. Barrett Golden said that it was vital that the board was able to defend itself through self-help and ability to articulate its view of the issues. She agreed that the universal proxy card will make a substantial difference and it will shift the focus to individual directors who will need to explain what they bring to the board. Increasingly corporations recognise that they need to listen to their shareholders otherwise activists will.

Gonzalez-Sussman said that one particular area of disagreement is the peer group that companies use. In other words, if you say you are best in class you need to be comparing your performance with market leaders not laggers.

Crozier added that institutional shareholders coming out publicly in support of activism is very powerful for the activists but rare. Compliance departments do not like it. The top index funds Black Rock, Vanguard and State Street usually hold 20 per cent in most situations. Shareholders who follow ISS and Glass Lewis represent about the same percentage typically and those advisory businesses recommend in favour of activists in about two-thirds of situations. Therefore, these two camps are likely to be decisive.

Escalation

Anderson pointed out that the escalation of activists’ issues often happens in the context of trying to reach a settlement to avoid a proxy fight. Gonzalez-Sussman noted that board self-refreshments without consultation with an activist investor can often backfire. Critical issues in defending these situations will be whether you have the right experience on-board, the tenure of the board and diversity.

Chaikof said that much of the Canadian market is smaller cap and a particular issue is friends and family on boards.

The future

Anderson said that special-purpose acquisitions companies (SPACs) that recently completed a business combination based on aggressive projections could see a lot of activist activity. The European tendency to attempt to restrict the flow of information by activists or their representatives on boards to their appointors will change.

Chaikof expects to see increasing home-grown activism in Canada as well as continuing activity from US funds.

Golden noted that boards in fights need to be their own spokespeople and need to prepare to act accordingly.

Gonzalez-Sussman said that activists may continue to create noise even if they know they cannot actually win a fight, if they think it will put enough pressure on management and boards to adopt the changes that an activist may want to see. Anderson agreed and pointed to the National Express situation in the United Kingdom where there was settlement even though the vote was not won. Companies know that activists are there for the long haul.

Golden feels that corporations should focus on what is the best outcome and build the strategy around that. On what terms would a settlement be acceptable? Communication should follow from that.

Anderson urged companies to understand that a settlement is not always possible. In other words, simply coming up with a reasonable proposal will not necessarily win the day with an activist who may not necessarily feel under any pressure to act reasonably.

Golden believes that the universal proxy card will change the game although which side is favoured will vary from situation to situation. This will mean that there will be increased uncertainty as to the outcome and therefore that could result in more settlements. Again, there will be more focus on individual directors.

Djehane expects to see an increasing ESG activism as French law will provide a say on climate vote. Also, EU directives currently in draft form will reinforce a company’s ESG reporting obligations, particularly in relation to their strategies to meet their obligations under the Paris Agreement.

Chaikof added that in Canada earlier reporting requirements on stake building that kick in at five per cent rather than ten per cent will make things harder for activists as will the regulation of proxy advisory firms.