In a report entitled “M&A Activism: A Special Report” (the Report), the editor-in-chief of Activist Insight describes the types of companies most at risk of being targeted by shareholder demands, providing steps that can be taken to increase the resilience of M&A transactions.
The Report identifies a number of trends and findings, as summarized below:
- Deal Prevention: M&A demands from shareholders have increased in recent years in both Canada and the United States, most commonly by activists seeking to prevent deals, to pursue appraisal rights, and to make their own takeover bids. Notably, 45% of Canadian shareholder activism between 2010 and the end of 2016 were intended to prevent deals, compared to 21% in the United States.
- Target Profiles: The Report provides insight into the types of companies most at risk of being targeted by shareholder demands. Basic materials as well as services and technology companies are most frequently targeted by demands for M&A transactions in both the United States and Canada. Demands are often directed at companies with a market capitalization below $2 billion.
- Defense Tactics: Steps can be taken to ensure the resilience of M&A transactions proposed by companies. Having a well-defined business strategy and keeping on message with that strategy is a strong defense to any activist attack. Communicating and pursuing voting lock-up agreements with influential shareholders early and frequently are also recommended tactics.
- Proxy Advisories: The Report emphasizes the important role played by proxy voting agencies in determining ultimate levels of shareholder support or opposition. Proxy voting agencies will often ignore fairness opinions commissioned by sellers where detailed financial analysis is not included in the opinion. Longstanding shareholders may oppose M&A transactions where they believe a stock that they own is not being sold at an optimal price or at the wrong time.
- Deal Structure: According to the Report, deal structure is important in predicting a transaction’s ultimate success. Activists scrutinize the deal process and boards are held to a high optical standard, meaning a deal cannot appear to be quick or unexpected to shareholders. Consideration should be given to the potential risks and consequences of: (i) dead votes, where shareholders of record sell before voting or before a revised bid is made; (ii) mergers requiring shareholder votes, particularly if the consideration is entirely or partially stock-based; and (iii) deal protections, such as no-shop clauses and termination fees, which can aggravate investors due to the transfer of risk from the buyer to the shareholders’ meeting.
It is important that companies pay attention to their susceptibility to opportunistic M&A demands and to consider strategies to protect themselves adequately. A full copy of the Report can be obtained here.
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The author would like to thank Brandon Burke, summer student, for his assistance in preparing this legal update.
 Josh Black, Activist Insight, “M&A Activism: A Special Report” (2017) Harvard Law School Forum on Corporate Governance and Financial Regulation.