Companies are always well advised to prepare for shareholder activism before it arises, and advice that has been commonly given to companies over the years remains sound in principle: assess the company’s susceptibility and vulnerabilities to an activist campaign; prepare a communications plan that sets out a protocol for the company’s response to a campaign and anticipates key communications and responses; take a fresh look at investor sentiment; and update governance documents to protect shareholder interests in the face of an activist campaign. However, failing to adhere to best practices in executing this playbook can leave companies with unexpected gaps and a false sense of security.
Effective advance preparedness for shareholder activism requires thoughtful, rigorous execution of these and related preparation measures, with a commitment to doing substantive work before an activist emerges. Vulnerability assessments should drive decisions about both company communications and actions; communications plans should resolve difficult messaging choices in advance, tailored to the lessons learned through a sophisticated vulnerability assessment; shareholder engagement should explore emerging concerns before an activist frames them; and proactive adjustments to a company’s governance framework and structural defenses should receive the quality of drafting and diligence that is needed for both timely and defensible use. Management, the Board and advisors should work through these preparation steps together and revisit them as the company’s circumstances evolve.
Make Vulnerability Assessments Meaningful
Companies have long been advised to evaluate their vulnerabilities to an activist campaign by assessing the company from an activist’s perspective. This work is commonly performed with the assistance of external advisors and frequently takes the form of a slide presentation that walks the board and management through potential lines of activist critique, or “attack vectors,” and potential company responses.
The pitfall is that a vulnerability assessment can become a mere checklist item: the external advisors create the presentation, management and the Board review it once or twice, and the assessment is placed on the shelf indefinitely.
A valuable and actionable vulnerability assessment goes further. It should be viewed as an intensive, multiphase effort that provides the foundation for other activism preparedness measures. Advisors should begin by reviewing public filings, recent trading performance and other public information to identify arguments an activist might pursue. Management and the Board should then review the assessment over multiple iterations, analyze and challenge the identified vulnerabilities, and understand the rationale underlying them. The process should continue until the advisors, management and the Board are aligned on the principal vulnerabilities and the company’s strongest responses.
The assessment should also be a living document that is updated over time, particularly following material developments such as significant earnings announcements, transactions, Board or management changes, or changes in the shareholder base. Because a company’s performance, governance profile and shareholder base can change from quarter to quarter, the assessment should evolve in step with the company itself.
When developed in this way, the vulnerability assessment becomes a tool that allows management and the Board to think through not only communications, but also actions. A well-developed assessment can prompt discussions about priorities and initiatives relating to operations, performance, finance and capital allocation, corporate governance, and executive compensation. As the company takes steps to address or preempt potentially valid activist concerns, the assessment should be updated to reflect the company’s evolving profile.
Develop a Tailored Communications Plan
The communications plan (or “break-the-glass” plan) is often treated as a distinct workstream, which may be developed as a separate document or packaged with the vulnerability assessment. The plan sets out the chain of command and protocols for the company’s response to a campaign, and it anticipates key communications and responses.
A simple communications plan might occupy relatively few pages and provide high-level guidance in the event of an activism situation. Typical short-form plans identify the response team, comprising select company leaders and external advisors, set forth high-level guidelines on how and when to respond to activists, and include basic communications materials, such as draft press releases and talking points. While helpful, such plans can fall short of providing sufficient breadth and depth of guidance, materials and preparation for a company when faced with the complexities of responding to a sophisticated, live campaign. A truly valuable and actionable communications plan goes further than the short form and can provide extensive and immediate assistance if an activist campaign escalates.
A built-out communications plan should be closely calibrated to the vulnerability assessment, leveraging the assessment’s best insights and channeling those insights into communications. The vulnerability assessment is meant to be an internal document that helps a company predict and prepare for activism—if not also to make the company better—but it is not a communications plan. In developing the communications plan, choices need to be made about which ideas to communicate and which to hold back, how to rebut activist claims, how and when to discuss plans the company has not yet articulated to the market, and how these communications should differ from post-earnings communications. These drafting decisions inform draft press releases and talking points for important conversations with investors, the media and other stakeholders.
A strong communications plan also contains materials tailored to the company. While having a short-form plan is better than having no plan at all, short-form plans tend to contain generalities and form language. Such language can have a place—for example, “shareholders should take no action at this time”—but it often falls short of what is needed to respond appropriately, even summarily, to an aggressive activist critique. Advance preparation is critical because time is of the essence in a live activism situation, and a company is better served if more difficult drafting decisions have been considered and socialized with management and the Board before the resulting communications must be deployed—potentially on a same-day basis.
This advance work matters because sophisticated materials may be challenging to draft and thoroughly consider overnight, and the quality of a company’s short- and medium-term responses to an escalating campaign often sets the tone for the strength of the company’s defense and its resilience under pressure. Considering that an activist may have been preparing its launch and public communications strategy for months, companies are well advised to ensure that their own communications preparations are comparably sophisticated.
Revisit Shareholder Engagement – Even When the Program Is Strong
Engaging with shareholders to keep tabs on shareholder sentiment is another frequently recommended element of activism preparedness, but this is an area that can present a critical pitfall: engagement may not be sufficiently planned with activism in mind, which may engender a false sense of comfort that shareholders are satisfied with the company and that they are likely to disregard activist critiques.
When speaking to investors, companies should be informed about lines of activist criticism they could face in the future that have not yet been at the forefront of commentary by analysts and other market observers. Without providing a roadmap for dissent, companies can use these conversations to explore sentiments that investors might not otherwise express and to explain the company’s views and plans on topics it expects might become issues, before they do. If an activist raises such an issue before the company does, the company may find itself on the back foot when addressing the issue with investors. Thoughtful engagement with activism in mind can help the company to control the narrative, better shape investors’ perspectives on potentially sensitive issues before activists magnify them, and set the tone and the groundwork for the company’s response.
Revisiting the shareholder engagement program is a worthwhile exercise even when the existing program is strong—as is the case at many companies, particularly large ones. The point is to periodically test whether the engagement program is in sync with other aspects of activism preparedness and to stay ahead of the narrative.
Review and Adopt Structural Defenses with Care
Preparing structural defenses and reviewing governance vulnerabilities are often what first come to mind for companies when considering activism preparedness. The standard advice is to review governing documents for potential modernizing amendments, including amendments to advance notice provisions, and to prepare a shareholder rights plan (a.k.a., a poison pill) to keep on the shelf for quick adoption if an activism situation arises. However, both bylaw provisions and poison pills may be challenged by activist investors or plaintiffs’ firms. If sufficient thought has not been given to their enforceability, they may create an undue sense of comfort while leaving the company vulnerable.
For structural defenses and governance provisions to be reliably threat-ready, the company and its advisors must be knowledgeable and disciplined in ensuring that protective measures are both appropriate and actually defensible in response to the perceived threats they are intended to address. Structural defenses need to be tailored to the nuanced legal standards applied in the company’s jurisdiction of incorporation, whether in Delaware or elsewhere. When cases challenging bylaw enforcement arise, minute drafting details matter, and the defensibility of the company’s drafting can make or break the company’s defense or other responses to an activism campaign. It is therefore important to take the time for careful drafting, sensitive to applicable law, rather than simply mirroring provisions from the bylaws of peers or well-known companies and assuming that is enough.
The same applies to other structural defenses, such as shareholder rights plans. These plans must be carefully drafted to reflect the latest developments in corporate law, including case law, and to account for any distinct treatment required by the company’s jurisdiction of incorporation or capital structure. For example, a draft shareholder rights plan prepared based on Delaware company precedent may not work for a company incorporated in another jurisdiction, and depending on the terms and date of the precedent, it may not be defensible in Delaware either. Care must also be taken to assess in advance whether adoption would create issues under the company’s other material agreements.
Too often, companies believe they are ready to adopt a shareholder rights plan on short notice to forestall a takeover or creeping control of the company’s stock, only to learn in their hour of need that these additional steps of careful drafting and diligence were not taken when there was ample time to prepare—and the defensive upside of rapid poison pill adoption is lost as the company scrambles to tie up these loose ends.
By adhering to these best practices and undertaking a well-advised, robust preparedness process, companies can develop practical and relevant strategies that put them in a better position to preempt activist threats and manage them as they materialize.