Boy Scouts know it and today’s boards and executive officers know it too: be prepared. In a recent article by Martin Lipton, Mr. Lipton makes it clear that advance preparation may be the key to successfully dealing with an attack from an activist hedge fund.
Dealing with hedge fund activism appears to be the new normal for companies, even the successful ones, and all companies should consider preparing an activist defense strategy. Trevor Zeyl discusses the increase in hedge fund activism in his recent post and outlines certain trends, including “wolf packs”, that have contributed to hedge fund activist success.
The Activist Hedge Fund Strategy
Through comprehensive research and analysis, activist hedge funds aim to prove that their strategy will boost shareholder value at a target. Mr. Lipton sets out a number of common tactics used by activist hedge funds, including: (i) aggressive criticism of a target’s plans and the announcement of alternative, so-called superior plans; (ii) proposing non-binding resolutions for specific actions or the initiation of a strategic review process; (iii) conducting a proxy fight for board representation; (iv) publically calling for a sale or using various approaches to force the sale of the target; and (v) increasing their interest and voting power above their equity investment through the use of options, derivatives and other financial devices. Sophisticated activist hedge funds have the experience, and resources, to launch a multi-fronted attack. The strategy of these activist hedge funds may also involve the use of reinforcements in the form of public relations companies, private investigators, litigators and “wolf packs” supporting the lead activist.
Sometimes the best offence is a good defence. Mr. Lipton points out that preparation, including a company’s regular review of its business portfolio, strategy, governance and execution compensation issues, is imperative.
Preparation will necessarily involve a focus on maintaining and strengthening shareholder relations, preparing the board for an activist attack and monitoring market activity and attack indicators. The importance of advance investor engagement should be underscored as a pre-emptive defence against future attacks. Guy White outlines the strategic opportunities that can come from shareholder engagement in the activist context in his recent post titled Shareholder engagement: A strategic opportunity.
Companies will want to have a well-stocked arsenal in the event of an attack by an activist hedge fund. Mr. Lipton discusses the importance of having a team in place that possesses the knowledge and experience to deal with an activist attack. This team should include key officers, lawyers, investment bankers and proxy solicitation and public relations firms and this team should consider conducting periodic “fire drills” in order to maintain a state of preparedness.
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 Mr. Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz. Mr. Lipton’s article is based on a memorandum by himself and Sabastian V. Niles posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation.