An active proxy season thus far, 2018 is shaping up to be a particularly busy year compared to 2017. “The velocity of year-over-year change in number of publicly reported campaigns is accelerating, and we aren’t seeing the market tap its brakes yet: the first quarter of 2018 is up dramatically from the first quarter of 2017,” according to Lawrence Elbaum and Patrick Gadson, two of the leaders of the shareholder activism practice at Vinson & Elkins in NYC.
“Shareholder activists are on pace this year to run over 300 public campaigns – that’s more than we’ve seen them run since Clinton was president,” Elbaum noted.
Evolving from previous strategies that focused on low interest rates, the main item to watch out for in this year’s active proxy season will how the top activists’ will adapt to the changing environment. While their playbook will contain some familiar items, rank changes amongst the top activists may occur as they deal with the newer variable changes in the market.
According to Gadson, “So far, the drum beat for activists has remained virtually the same—targeting public companies, usually with predictable cash flows, for their underperforming shareholder returns, capital allocation policies, board composition, and the beat goes on,” says Gadson. “What will be interesting to see is how the activists’ playbooks adapt to an interest rate increasing environment. For most of them, this will be a ‘brave new world,’ because they’ve only ever operated in an environment of low or falling interest rates,” Gadson added. “There may be a shakeout in the ranks as some activists learn the hard way that their talents are low interest rate dependent.” .
How are these issues playing out? Well, Elbaum noted that well-advised public company boards and management teams are working closely with specialized activism advisors to get out in front of these issues proactively. “We advise clients that if they ‘stay ready,’ then they don’t have to ‘get ready.’ It’s like the Boy Scouts’ motto, ‘Be Prepared.’ Companies that have prepared in advance by looking at themselves through the lens of an activist, which isn’t always a pleasant experience, generally have more success at avoiding public campaigns,” Elbaum added.
Following-up from Elbaum, Gadson stated that unprepared companies can be easier targets for activists and more vulnerable to losing board seats. “There‘s an old West Indian saying, ‘ghosts know exactly who to frighten.’ So, likewise, it is risky for companies to wait until after an activist has targeted them before they address issues that resonate with influential institutional shareholders and the proxy advisory firms,” Gadson noted. “Waiting until an activist is ‘haunting’ your company is not a wise strategy.”
Be weary of the typical issues in hand this season, but pay attention to potential emerging issues as the season moves along as well. As Gadson noted, “It almost seems cliché to mention universal proxy cards because it is an issue we hear about every proxy season, and every proxy season we don’t see much, if any, movement on the topic, but this might be the year universal proxy cards breakout from more ‘theory’ to a practical reality.”
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