Activism via Board Control Often Requires Long Range View
|July 23rd, 2012||
|Contributed by: Derek D. Bork, Thompson Hine LLP|
|When we first work with an investor who is seeking to become an activist, we often hear the same initial message: “We need board control. We need it ASAP. How can we achieve it now?” Although a path to obtain board control in a short period of time is sometimes left open by a company’s governance structure, this is not always the case. We have helped activists gain board control in as little as 56 days to as many as 590 days. In the cases where a quick strike is not possible, we counsel in favor of a longer term approach—one that involves obtaining minority board representation in the short-run with a strategy for achieving board influence over a longer time horizon.|
Despite the unpopularity of takeover defenses in recent years, many companies have maintained formidable defenses that make obtaining control of a company’s board, if not impossible, time consuming and difficult. This can often be seen with small cap companies and other public companies that, for one reason or another, have avoided the typical pressures to make governance reforms from institutional investors and proxy advisory firms such as ISS. Even some new public companies—those that are free of these pressures—are loading-up on board takeover defenses.
We recently encountered two small cap companies where shareholders were not permitted to call shareholder meetings and could not act by written consent. Both of these companies had staggered boards with three classes of directors elected over a three-year period. At each company, shareholders could increase the size of the board, but only the board could fill any newly created board seats. In each case, shareholders could remove any or all of the directors, but considerable obstacles were attached to this option. Each company had restrictive advance notice requirements for director nominations and shareholder proposals, and one company had a poison pill to boot. Absent extraordinary actions, at companies with defenses like these, there is no easy or quick path to board control.
A variety of other factors, of course, have a significant impact on whether an activist can gain control of a company’s board. This includes the stature and record of the company’s board and management, the company’s historical financial performance, the strength of the company’s strategic plan and the company’s standing with its shareholders and other constituencies. Important factors on the activist’s side include its credibility in the marketplace, its proposed board slate, its plans for the company and the effectiveness of its outreach to shareholders. All of these factors—in addition to the structural impediments in place at a particular company—need to be weighed when planning a campaign.
In cases where the structural impediments are high, the advice to pursue a longer path is not always well received by an investor, and some abandon their activist plans at the outset. Granted, sometimes an investor’s investment strategy for a particular stock is not long-term in nature, and, faced with potential delay and uncertainty in achieving the investor’s goals through activism, the investor might be wise to sell the stock and move on. However, an investor considering an activist strategy usually does so because the investor already has a longer term investment horizon in mind for the stock. In addition, the goals that investors typically desire to achieve through activism necessarily require time to carry out and produce results. Also, particularly when it comes to a large position in a small cap company, the investor may not have a highly liquid position and may be stuck in the stock for the long term. Put bluntly, the investor is already likely to be in the stock for the long term anyway.