Shareholder activists are making their presence felt in new ways. As more types of funds make their voices heard in corporate boardrooms, companies of all sizes are being forced to prepare for the possibility of an activist approach.
Mergermarket on behalf of Toppan Merrill spoke with four experts on how shareholder activism will impact dealmaking in 2019.
Toppan Merrill question: The percentage of activist campaigns being launched without 13D filings has been rising. What do you think is driving this trend, and how exactly is it affecting campaigns, if at all? Leading industry experts weigh in...
Aneliya Crawford, Schulte Roth & Zabel says: I think it may be a combination of two things. The one that seems a little more obvious is the fact that some targets in recent times have been larger, and accumulating a 5% stake that would force you to make a 13D filing in such a large company is really a gigantic investment. It's not something that can easily be done. It used to be the case that the companies that were targeted were more in the small- and mid-cap space because those were the places where you would see serious misalignments in the value of the company, either because it was underperforming, didn't necessarily have the highest-caliber leadership or it was not closely followed by analysts causing the market to not have a true sense of its value. The really large companies were deemed safe. But now, we have seen many very large campaigns. I represented Trian Fund Management in the Proctor & Gamble campaign, which is the largest in history.
So I think that shows that many activists have greater resources and capabilities now. They have access to very high-caliber nominees. They are not concerned about accumulating positions in companies that are staple, household names. If they see an opportunity to close a valuation gap, they will not hesitate to go after the company. When the company is of this size, you really are under the 13D radar, by definition, just because of the size of the position.
The second thing that may not be so appreciated by observers is that the thinking has shifted in terms of what qualifies a shareholder to be represented on the board. It used to be the case that when we were negotiating a settlement agreement on behalf of a client, for example, there were all these discussions: “Should there be one director added to the board? Should there be two or maybe three?” The defense counsel on the other side would almost always say, "Well, your client only owns 3% or 4% of the company's stock. Why should they get three seats on the board, which would effectively be 30% of the board? If you own 4%, you should get 4% of the board."
That is no longer in fashion, and I’m very glad that is the case. I think people have realized that the number of directors who should be designated has nothing to do with your level of ownership in the company. If you have good, qualified people who can help on the board, these are not people who are there to serve the agenda of the activist. These are independent, in many instances highly qualified experts in the specific issues that the board needs to tackle. They are there to serve in their fiduciary duty all shareholders, and therefore how much stock the activist owns has absolutely nothing to do with how many directors they should be able to change on the board, pursuant to an agreement with the company.