The Lion’s Share

Activist investors frequentlymake headlines in the New York financial press, but for anyone outside of Wall Street’s high-stakes investors club, coming to a clear understanding of what an activist investor is and figuring out why understanding activist investors is important can be daunting.

A lexicon of entertaining—but potentially confusing— jargon accompanies shareholder activism: terms like “wolf pack” (shorthand for a group of activists who work in concert) and “proxy season” (the time of year when companies hold annual shareholder meetings— typically, April—during which shareholders or their proxies vote to make changes to a company board and activists usually make their moves). The term “activism” itself is easily misunderstood. When investor Carl Icahn bought TWA in the late 1980s and sold off many of the airline’s assets, he wasn’t called an activist, but a “corporate raider.” Now, more than 30 years later, Icahn’s aggressive investment strategies have been re-branded as “activism” and are widely understood as the blueprint for a new generation of investors seeking to hold sway over the business practices of the companies they invest in.

Eleazer Klein, New York-based co-chair of Schulte Roth & Zabel’s global shareholder activism practice, represents and advises activist investors on their projects. For Klein, the work and goals of shareholder activists are summed up easily.

“Activists identify underperforming companies that typically are not just underperforming people’s expectations for them, but are also underperforming the market and their peers. Activists hope to identify what it is about these underperforming companies that causes them to not deliver the expected returns and get them performing for the benefit of all shareholders,” Klein says.

  “The question really is: Is the company performing or not?”

The ways in which activist shareholders may try to influence a company’s direction vary greatly, but the critical opinion of shareholder activists held by their opponents has often been that activists are not focused on companies’ long-term growth and profitability, as management is, but, instead are focused on short-term returns on their investments.

Klein disagrees with this view of shareholder activism and says that the definitions of short-term or long-term investments are murky, at best: “Does short-term mean someone who is in there for less than 10 or 20 years? Many activists hold their positions for a number of years to build their campaigns and see results from them.”

In Klein’s view, activists move at a slower and more deliberate pace, and it is actually the companies under activist attack that tend to make rash decisions—including the decision to engage in public name-calling rather than negotiation.

Klein notes: “While it’s very convenient to try to cast activists in a negative light because you need to push back against them and are trying to find anything you can to disparage them, the question really is: Is the company performing or not?”

Barry H. Genkin, who leads Blank Rome’s governance and shareholder activism practice and is a former special counsel at the SEC, tends to agree with the criticism that activists buy up shares and wage proxy battles more for short-term gain, but sees in this an opportunity for company leadership to address activism by putting its best foot forward: “It’s important for management to have a well-thought-out, long-term idea of what its business plan is and how that’s going to increase shareholder value” says Genkin.

As a specialist in advising companies during activist campaigns, Genkin recommends that publicly traded companies plan ahead for activist attacks by having a “vulnerability analysis” performed. The vulnerabilities to activists that companies have fall into two basic categories: legal vulnerabilities, which have to do with how a company’s governance rules may tip the scales by making it easier for an activist to make changes to company management or policies, and what are best termed business-side vulnerabilities, like inadequate strategic planning, poor investor communications, and inadequate shareholder relationships.

“One thing that enlightened companies do, to my mind, is communicate with shareholders,” says Genkin. “Some companies refuse to meet with activist shareholders, and sometimes the activist shareholder may have an idea worthy of consideration. Creating the environment for an open channel of communication is critical. If an activist believes that he is not getting his voice heard, the activist will become more vocal and the situation may spin out of control. If management basically says, ‘Look, go pound sand, we know who you are,’ we know how that story ends, and it is not pretty.”

What role does outside counsel play in all of this wrangling?

“Obviously, we play a legal role in making sure that the process follows any applicable legal requirements,” says Klein. “But we also play the role of advisors because we represent so many people and have a good sense of what the markets are expecting and what shareholders expect.” Put another way, outside counsel are not only legal experts in these situations, but strategic advisors—both gurus and handymen—who are ready to take the most challenging and complex problem, explain it, and even fix it.

“Typically, activist situations are either bet-the-farm situations or close to it, so it’s critical to bring in outside counsel who handle situations like this for a living and can hit the ground running, since most targeted companies are in denial, and by the time they mobilize, they are already playing catch up,” Genkin says. “General counsel can play an absolutely critical role in this too by providing necessary background information quickly and being the conduit or liaison between outside counsel and management or the board of directors of the company.”

Perhaps what is clear in all of this is that whether you’re the activist or the activist-embattled company, you’re gonna need a lawyer. 

Best Lawyers / Nathaniel Barr

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