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. The most common types of demands are changing as well, partly in response to the hot M&A market. There were 81 demands for strategic alternatives in 2018 North America campaigns, compared to 64 such demands in 2017, Activistmonitor data show.
Mergermarket on behalf of Toppan Merrill spoke with four experts on how shareholder activism will impact dealmaking in 2019.
Toppan Merrill question: More activist campaigns are being waged with explicit calls for a sale of the company. What do you think is driving this trend? Are activists simply trying to take advantage of the hot M&A market? Leading industry experts weigh in...
Professor Minor Myers, Brooklyn Law School says: It’s a natural development, but one worth following carefully because of the inherent risks for the target. And it suggests a further blurring of the line between activism and private equity.
One reason it’s a natural development is that activist pressure to sell a company may encounter less resistance from incumbents thanks to change-in-control provisions in employment agreements. Implementing a set of operational changes from an activist may sound like nothing but a headache for managers. Pressure to sell the company – and trigger their golden parachute payments – may receive a much warmer reception.
More deeply, I suspect that as time goes on, we’ll see increasing specialization among activists. It may be that activism at high-tech firms calls for a very different skill set than does activism in natural resource extraction. Likewise, some activists may begin to specialize in governance changes, while others focus on operational or capital structure changes. And similarly, it may be that a segment of activist managers come to specialize in identifying firms that would generate value by selling the company in a particular way (or, relatedly, by challenging an existing sale already negotiated by the company).
The worry is that there could be latent conflicts of interest that could work to the disadvantage of public equity holders. For example, an activist may threaten an incumbent board with a years-long conflict, possibly leading to professional grief and perhaps personal embarrassment. Maybe that night before bed, the incumbents read the New Yorker’s account of Jonathan Bush’s experience. All that could be avoided, the activist may say, with a quick sale to us – so quick that no rival has a chance to mount a serious competing bid. The point of corporate law is to guard against these types of conflicts and deter transactions that exploit them, but no system can do it perfectly.