Shareholder activism is a growing threat, and it concerns not just board members, institutional shareholders and outside counsel, but in-house counsel, too.
Bass, Berry & Sims corporate attorney Howard Lamar advises clients specifically on these issues, and he said that, while a public company general counsel doesn’t need to know the “nuts and bolts” details of handling an activist shareholder, they do need to know some simple corporate governance and management skills in case an activist comes their company’s way.
That risk is a priority for many companies, according to a recent Bloomberg BNA analysis. The analysis said that “65 public companies cited ‘shareholder activism’ as a risk factor in SEC filings during the first six months of 2017, more than five times as many [as] during the same period three years ago.”
Lamar spoke with Corporate Counsel about what a GC should know when dealing with a potential activist investor. Here are four of his tips:
1. Communicate. It’s Critical.
Lamar said a general counsel needs to promote a company culture that allows for regular communication with all shareholders—not just the ones who threaten to gain close to 10 percent ownership in the company.
“The important things are: Does the company regularly communicate with institutional investors?” said Lamar. “Or does it sort of hole up, silo itself and not engage, so investors may or may not really know the company’s long term strategy?” Having shareholders left in the dark, Lamar said, is one of a few factors that can lead to activist investors claiming that a company is poorly run.
And sometimes letting someone other than a member of the C-Suite address an issue is the best option, Lamar said.
“Let’s say the problem an activist investor is raising is about executives being overpaid for underperformance,” Lamar said. “Let the independent chair of the compensation committee be available to speak directly to investors.”
Lamar said investors can be calmed by listening to an independent voice speaking on their behalf and by knowing that company management isn’t “controlling” every conversation.
2. Keep Your Corporate Governance in Check
According to Lamar, general counsel should think carefully about how well corporate governance is working at their company.
“Most activism drives out of one of three things: operating issues, balance sheet inefficiencies that make for a quick opportunity in economic gain and corporate governance,” he said.
The GC should push for board turnover and new committee creation and turnover, too. An “entrenched boys or girls club” on the board signals poor corporate governance, Lamar said.
3. Stay Aware of Your Company’s Performance Relative to Competitors
Lamar said a GC needs to take an objective view of why their employer might be underperforming compared to similar companies across their industry. Again, poor company performance is one of a few traits that shareholder activists look for, Lamar said.
“Was there a wrong strategic decision, an acquisition with challenges, not moving into new areas to develop and grow the business?” Lamar said. “A board and the general counsel need to think about that… if they need to shift operations.” He added that these shifts need to be communicated thoughtfully to the marketplace.
4. Don’t Wait Until It’s Too Late
Lamar said waiting until you get a phone call about a hostile investor with a 9 percent stake is too late to not have a plan. He said a general counsel needs to have identified their go-to outside counsel, financial advisor, and in case of a proxy battle over board seats, proxy solicitors. They also need strong media relations teams both for internal and external communications.