© Hogan & Hartson LLP. All rights reserved. NACD Capital Area Chapter Washington, DC September 9,...

© Hogan & Hartson LLP. All rights reserved.

NACDCapital Area Chapter

Washington, DCSeptember 9, 2008

Activist Hedge Funds in the Board Room: What Public Company Directors Need to Know

Stuart G. SteinPartner

Hogan & Hartson


What is an “activist” shareholder?

•Large shareholders that make their views known to the Board

•Institutional Investors; Hedge Funds; Investment Funds

•Opportunists !!!


Why are activists more prevalent today than ever before?

– In 2005, approximately 8,000 hedge funds held assets of about $1.3 trillion worldwide–up from $186 billion in 1995.

– Liberalization of Proxy Rules in 1993 created safe harbor for “exempt solicitations,” though not from 13D

– SOX in 2001 and Corporate Governance

– Activism + ISS / RiskMetrics acquiescence = an irresistible force


Who are the activists? What are they looking for?

Targeting – from an activist’s website:

–Characteristics of the companies targeted include:(i) recent operational stumble(s);(ii) poor corporate governance;(iii) a decline in analyst coverage; and(iv) limited earnings visibility.


Targeting

• “A stock that is trading well below industry comparables.”

• “Many of these small-cap companies remain under the radar of larger investment funds that seek liquid, more passive opportunities.”

• “The resulting paucity of talent and capital investing in this universe of companies creates tremendous inefficiencies and the opportunity for extraordinary returns.”


What does an activist typically want?

• Board seat?

• Change in governance?

• Oppose management initiatives (e.g., stock options)?

* * *• Stock re-purchases…

• Explore strategic alternatives … to “maximize shareholder value” = SALE

• Return On Investment


Tactics

• Form 13D – public discussion of management’s inadequacies

• Call for changes in financial, business or operating strategy

• Call for changes in management

• Call for a share repurchase program

• Push for sale of the company (or a portion) – “explore strategic alternatives”

• Board Nominees (full slate / short slate)

• Campaign for a vote against a pending merger or other corporate proposal before shareholders

• Multiple and combination demands


Prepare …

• Strategic long term planning for business and transactional opportunities

–Have an “answer” to a potential activist before you have an activist

–Be able to communicate the answer to shareholders

–Stay close to analysts and institutional shareholders


Prepare …

• Get your ‘team” organized

–Key management members

– IR / PR

–Legal Advisors

–Financial Advisors


Prepare …

• Review governance profile

–Charter / bylaws [director elections, repellants; poison pill; ability to call special meetings, stockholder vote requirements, election of directors (staggered, majority vote) …]

–Board composition


Prepare …

• Pay attention to stockholders!

–Who are they?

–Changes?

– Issues?

–Are you a target?

–Proxy analysts services

• Communicate with stockholders!


An activist attacks

• No script!!!

• Each situation is different.

• Different stockholder profile

• Different ‘story” to tell


An activist attacks

• No panic.

• Put into action the team which should already be assembled.

• Do not feel the need to immediately comment.

• Indeed, companies should always have a no comment policy on market rumors.

• Only communicate through a designated spokesperson.

• Make sure all Company officials and Board know not to comment.


An activist attacks

• Information about the activist:KNOW YOUR ACTIVIST !!!

• Review activist goals with advisors.

• Call special Board meeting to update Board.


An activist attacks

• In designing response, consider regulatory regime.

• Federal / State Regulator

• Change of control


An activist attacks

• Cost!

• Fortitude / Thick skin

• Stockholder communications!!!


Analysis of Corporation Defensive Provisions

• Shareholder rights plan (“poison pill”)

• Staggered board of directors

• State Law / Shareholder Protection laws and Control Share Acquisition Provisions

• Blank check preferred shares

• Supermajority vote for a merger, consolidation or sale of substantially all of the corporation’s property


Analysis of Corporation Defensive Provisions, cont’d

• Limitation on shareholders ability to call a special meeting of shareholders

• Advance notice required for shareholder board nominations and proposals

• Shareholder action by written consent

• Election of Directors Limited to Annual Meeting

• Limitation on removal of directors by shareholders

• Election of Directors Limited to Annual Meeting


Analysis of Corporation Defensive Provisions, cont’d

• Exclusive right of Board to fill Board vacancies (whether resulting from an increase in the number of directors or otherwise)

• Right of Board to fix size of Board (subject to limits)

• Supermajority shareholder vote is required to amend sections of the Bylaws/Articles

• Vote for Director Election (Plurality / Majority)


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© Hogan & Hartson LLP. All rights reserved. NACD Capital Area Chapter Washington, DC September 9,...

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