Preparing for Activism + Takeovers Amid COVID-19 Risks – Cooley M&A


Last week we cautioned that market volatility resulting from the COVID-19 pandemic could lead to increasing levels of shareholder activism and unsolicited takeover offers. Although the pandemic has raised countless new risks, companies remain vulnerable to activism attacks that focus on short-term objectives and opportunistic takeover bids stemming from the current dislocation in the markets.[1] In times such as these – and in order to protect long-term, stakeholder-focused business objectives – it is especially important for companies, their boards and management teams to redouble their efforts to prepare for activist or otherwise hostile overtures. Key issues and efforts companies should consider include:    

  • Increased Board Engagement. The rapidly unfolding global situation has forced companies to make dramatic responsive changes in real time. Financial and operating plans, employee and customer safety, reputational protection, cybersecurity and regulatory changes are among the many evolving areas in which companies need to make immediate or near-term decisions. And these decisions will need to be continually revisited. As the stewards responsible for the well-being of the enterprise, boards of directors are well advised to increase and maintain close contact with management and take a more active role in developing and evolving response strategy. Boards of directors can prepare for activist attacks and unsolicited takeover proposals by working with management and its outside advisors before a situation arises.
  • Enterprise Risk Assessment. Assessment of enterprise risk, whether long-standing categories or newly arising concerns relevant to the specific company, represent a central board function. Wherever this periodic exercise might normally fall on the board calendar, this effort should be prioritized now in light of the current environment. Real-time risk preparedness is a primary way to confront activists’ efforts specifically and enable the board to navigate the company through these uncertain times.
  • Refreshed Strategic Plan. The future of virtually all issuers will be materially affected by the pandemic. As with enterprise risk assessment, now is the time for companies and boards to review their strategic plan as affected by these developments, assess opportunities and challenges facing the company and review the company’s expected financial performance, capital requirements and balance sheet. Management should also be prepared to regularly review with the board current responsive updates to its operating plan and discuss the strategic, technological, market or other contingencies that are addressed and anticipated. Not only may these efforts enable your company to weather the storm in a healthier position, it will be important to consider how corporate strategy promotes the long-term success of the company and interests of stakeholders to effectively respond to activism or opportunistic takeover proposals should they arise.
  • Maintain Shareholder Relations/Communication. It is nothing new that companies should maintain strong relationships and engage regularly with their shareholders, particularly large institutional investors with developed governance policies. Now is a good time to consider a proactive communication plan to understand and address shareholder concerns, whether or not specifically related to the current disruption, and explain the company’s business strategy. A company’s clear articulation of its business strategy and how that strategy is designed to promote the long-term success of the company to its shareholders is a critical first line of defense against shareholder activists and opportunistic takeover proposals. 
  • Takeover Defense Readiness. In the current environment, all companies should consider themselves vulnerable to activist attacks and unsolicited overtures. Accordingly, boards should review and be familiar with the issuer’s overall defense readiness. In addition to the efforts outlined above, this includes relationships with appropriate advisors and service providers, timely monitoring of overall shareholder base and tracking recent material accumulation, review and understanding of related charter and bylaw provisions, and potential adoption of protective measures. Shareholder rights plan are generally one of the most effective deterrents to abusive takeover tactics (the other being a classified board of directors). Given the tremendously disruptive effect of the COVID-19 pandemic and the effect on companies’ market capitalization, companies may consider whether this is an appropriate time to either adopt a rights plan or undertake preparatory work to do so (putting a pill “on the shelf”).[2]
  • The Board Has No Legal Duty to Sell or Liquidate. The decision as to whether a company should sell itself (or even engage in discussions related to an acquisition) or liquidate remain decisions that are squarely within the board’s business judgment. Advance preparation with management and the board’s outside financial and legal advisors can enable a board to respond swiftly to activist attacks calling for a return of cash via liquidation or a quick sale and unsolicited opportunistic proposals.

[1] Activist hedge funds, which regularly advocate for capital allocation strategies that often result in cash being returned to shareholders (typically through share buyback programs) and other changes that benefit shareholders at the expense of prudent and substantiable long term strategies, have left companies vulnerable in this period of market volatility and economic uncertainty. For those of us who regularly advise board of directors, it’s clear that these pressures have put many companies in a worse position to respond to the supply and demand shocks of the current pandemic. As this pandemic and the financial crisis in 2008 show, when our system of corporate governance does not foster an environment that supports boards adopting long-term, stakeholder business strategies that can help companies manage through periods of extreme economic volatility, it is the long-term investor and the ordinary US tax payor that have to bear the negative externalities of short-termism as companies file for bankruptcy, sell in a distressed environment, or receive bailout packages from the US government. As with the financial crisis, we believe that this pandemic will again highlight the need to move towards a system of stakeholder governance.

[2] In an update released Friday, Deal Point Data reported that six companies have adopted traditional shareholder rights plans since the beginning of March. Notably, the market appears to have responded favorably to the announcement by Dave and Buster’s as its stock price was up by 61% as of 12:58 pm ET on the day of the announcement. Be warned, though: Despite evidence that companies with rights plans generally received higher change of control premiums upon sale than companies without rights plans, these plans have been opposed by proxy advisory firms and certain institutional shareholders as a matter of policy. And ISS will consider whether to recommend against reelection of directors if companies adopt a short term rights plan (i.e., one with a term of 12 months of less) on a case-by-case basis and recommend voting against directors that do not put a shareholder rights plan to a stockholder vote if adopted for a period lasting more than a year. 

Contributors

Barbara Borden

Jamie Leigh

Robert Sanchez

Ian Nussbaum



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