The coronavirus pandemic has upended nearly every corner of the world — and shareholder activism is no exception.
As companies struggled to survive in the early weeks of the crisis, activists hit the pause button, fearful of appearing opportunistic and insensitive. Stock market volatility, economic uncertainty, and a slowdown in the M&A market further deterred activists from launching campaigns. The upshot: In the first nine months of 2020, the number of U.S. companies that were publicly subjected to activist demands fell 11%, to 367, according to Activist Insight.
“Boards will be held accountable for companies that were ill-prepared to lead during the pandemic.”
But as companies have learned to adjust to the pandemic, and the stock market has recovered, there have been recent signs of an uptick in activist activity.
“The activists are coming out of the woods now that the coast is a bit clearer,” said Lawrence Elbaum, the co-head of V&E’s shareholder activism practice, ranked the country’s No. 1 activism defense team by Activist Insight and other financial data sources.
Pent-up demand is likely to lead to a resurgence in activist activity in the coming year. Activists who backtracked on plans to launch campaigns when the pandemic hit are expected to move ahead.
“Activists can’t be patient forever,” said Duncan Herrington, a managing director at Moelis & Company, where he specializes in advising companies on preparing for and responding to contested situations, including shareholder activism. “They’re sitting on a lot of committed capital. Some of them have been fundraising over the summer and their investors are going to expect them to put that money to use.”
With activists coming off the sidelines, V&E+ asked Elbaum and Herrington to name five shareholder activism trends they expect to see in the year ahead. Here’s what they had to say:
Pandemic laggards will be vulnerable to activist attacks
Activists are likely to focus on companies that underperformed their peers and those that demonstrated poor judgment in responding to the crisis. Companies that continued to reward executives generously even as their share prices plummeted are on the list of potential targets.
“Boards will be held accountable for companies that were ill-prepared to lead during the pandemic,” Elbaum said.
Companies would be wise to assess their risks and proactively engage with their shareholders now, rather than waiting for an activist to knock on their door.
“Take a look at the results from your annual meeting and the messages that are being sent to your board and management team,” Elbaum said. “Start communicating early and often about what you had in place to lead during the pandemic. What did you do to triage, stabilize and rebuild?”
Pursuing M&A goals will be back in style
Angling for companies to shed assets or merge with peers has long been a leading objective for activists. Not so this year. In fact, the percentage of U.S. campaigns launched in the first nine months of 2020 that featured an M&A goal fell to 8% as compared to 14% in the year ago period.
But as the M&A market heats up again, activists will likely return to their M&A playbook.
“For companies that are underperforming and undervalued, a very quick and easy return for an activist is to push for those companies to sell to peers that are performing well and can afford to pay a premium,” Herrington said.
Among the industries likely to be targeted are those that were facing challenges before the pandemic hit, such as energy and manufacturing. Activists are also expected to launch M&A-related campaigns in sectors that experienced severe blows as a result of the pandemic, such as out-of-home entertainment and commercial real estate.
“A lot of these companies are going to have balance sheet issues, operational issues and workforce issues,” Elbaum said. “There’s going to be a push to consolidate to unlock value.”
Activists will further prioritize ESG
Count on activists to step up demands that companies improve their environmental, social and governance practices. This trend was already in full swing in the months leading up to the pandemic. As institutional investors increasingly prioritized ESG, activists followed along in an effort to gain their support.
With environmental and social issues taking center stage in the wake of the pandemic and the Black Lives Matter movement, companies will face even more pressure from activists to focus on such issues as diversity and climate change.
“There will be a lot of focus on board composition and diversity,” Herrington said. “While in previous years tokenism would have given some companies a pass, investors are not going to be as lenient going forward. They want to see broader representation across the board.”
Poison pill litigation is coming down the pike
After stock prices tumbled in the early weeks of the pandemic, many companies adopted poison pills in an effort to thwart the efforts of activists. These shareholder rights agreements, if triggered, would make it considerably more costly for an activist to acquire a controlling stake in a company.
Several lawsuits have been filed challenging these poison pills, and more are expected to follow.
“There will be a new wave of lawsuits that wind their way through the courts on the topic of poison pills,” Elbaum said. “These might actually get to the point where we get judicial determination, and that could shape the defense playbook for activism going forward.”
Proposed regulations could ease the path for activists
Both the SEC and the FTC have proposed rules that, if implemented, could make it more difficult for companies to track their investor base.
The SEC’s proposed regulation would require that only big investors with at least $3.5 billion in U.S.-listed securities — up from the current threshold of $100 million — would have to report their holdings to the SEC on a quarterly basis. If the rule goes into effect, it would eliminate 90% of investors who are currently required to report their holdings to the SEC.
Meanwhile, the FTC recently announced a proposed amendment under the Hart-Scott-Rodino Antitrust Improvements Act that would exempt a hostile bidder from having to report investments of up to 10% of a target company’s voting securities when the acquiror does not already have a competitively significant relationship with the company.
While it remains to be seen whether these proposed rules will be executed, companies should be monitoring the outcomes closely.
“These proposed regulatory changes could potentially make it easier for an activist to target a company and run a board campaign,” Herrington said. “Companies need to keep an eye on these things, and if they’re going to happen, companies need to start planning for it.”