Shareholder activism is a way that shareholders can exercise their rights and potentially influence a company’s actions. These actions may include dialogue with company management or formal proposals, which could be voted on by all shareholders at a company’s annual general meeting. The changes sought by activists can span from governance concerns to profit distribution, changes in the business model or strategy to the overall financial performance of the company. Shareholder activists typically purchase a minority stake in a company and subsequently, employ a variety of tactics, from media pressure to litigation threats to force a conversation and bring about change.
According to Lazard, globally the number of shareholder activism campaigns has shown a steady increase since 2009, with the number of campaigns hitting a record high of 248 in 2018. In the meantime, capital deployed in 2018 is 30% higher than the 2015-2017 average. While a majority of these campaigns are launched in the US and European markets, more and more campaigns are being observed in Asia. In Taiwan, there have also been more activist campaigns observed in the past 2-3 years. Many companies began considering outside risks more seriously after the amendment of Taiwan Corporate Law Section 173 in Nov 2018, which stipulates that shareholders who own more than 50% of a company, for more than three months, are able to call an extraordinary general meeting (EGM), coupled with last year’s international voting platform changes to allow cumulative voting by foreign shareholders.
In many cases, companies do not always consider themselves a target of activist shareholder until they become one. Hence, it is crucial for IROs and management to be prepared for the possibility of an activist approaching by following some best practices. Whether or not companies believe they are a target of an activist, they should have an SOP response as part of their normal investor relations efforts. The threat of activist investors targeting your company can be intimidating, unless you understand how to engage, respond and communicate. Here we provide some tips to help you prepare.
Understand what might trigger your company as a target
IROs should perform a full evaluation of your company’s strengths and weaknesses from an investor’s perspective and continue to do this on a consistent basis. It is a good exercise to identify and prepare for questions from all shareholders. Having a good sense of how shareholders may think the company is underperforming or business decisions that may concern them, is key to preemptively address issues that could potentially invite activist investors. Most importantly, solid corporate governance structures and policies as well as a diversified and well-functioning board are a strong defense against outside attacks.
Consistent shareholder outreach
Consistent shareholder outreach is critical to defending against activist investors, which should be the core of any investor relation program. Proactively maintaining an open and consistent dialogue with major shareholders becomes even more important should an activist investor begin to challenge the management or initiate a campaign. Maintaining the trust of your major shareholders is critical especially when activists may begin to correspond with them as well. Make sure that the company’s strategy and future plans are well understood by your major shareholders.
We also suggest that IROs maintain dialogue with their passive shareholders. These, often, index-shareholders hold a large percentage of many companies and will be key decision makers in a situation where it comes to soliciting votes at an AGM. In most cases, companies have seldom communicated with their more passive investor base.
Develop best practice corporate governance
In addition to maintaining dialogue with the company’s major shareholders, we also recommend engaging corporate governance/proxy advisors that understand and keep in touch with your active and passive investors. Stay informed about institutional investors’ specific voting guidelines as well as their voting history relative to governance recommendations from proxy advisory firms. Maintaining relationships consistently throughout the year is important through annual governance roadshows, conference calls or letters to shareholders. Review your company’s annual proxy analysis and vote recommendations from firms such as ISS and Glass Lewis to determine governance risks that may have been identified that might need to be addressed. Moreover, understand your company’s corporate governance score or ratings from third party rating agencies such as Sustainalytics or MSCI, and how your firm compares with peers. All of these efforts may help you to stand on more solid ground when you need support from institutional shareholders in a contested situation.
Tracking shares buying/selling activities
As an IRO, it is also critical to implement a monitoring system that keeps track of the trading activities of your company’s shares. Do not wait until once or twice a year when you receive your updated shareholder list. Activist investors will general accumulate shares over time, and it is not uncommon for “wolf packs” to emerge after an activist enters the stock. Monitor closely if any particular broker branch shows up consistently as one of your top 10 net buyers in a given period of time. Be mindful of which securities branches could be buying within the same proximity and perhaps working together. This is important to gauge or monitor how much an activist investor may have bought into the company.
Create a response/defense team
Another important step in preparing for an activist engagement is to outline a response plan that can be executed if the situation requires an immediate response from the company. When developing a plan, it is also important to identify which members of the company should be involved in the response team as the situation evolves. We recommend the response team should comprise senior management who are aware of shareholders’ concerns and perspectives. In most cases, the response team would comprise C-suite management, investor relations, legal, and PR communication.
Moreover, external advisors or professionals may be needed depending on the situation. We recommend evaluating available services that may be needed in advance so that trusted resources can be engaged in a timely manner. These external advisors may include IR/communication consultants, proxy advisors or solicitors, legal counsels or proxy lawyers, transfer agents, or investment banking/financial advisors. These external advisors may have worked on many different activist situations in the past and are able to provide valuable insights and solutions to tackle varied situations. Shareholder activism can be viewed as a crisis situation, hence reaching out for professional assistance to effectively deal with it is important.
Communication during an activism campaign
After a response team is created, the company should have a basic framework in place to evaluate the issues raised by the activists and formulate a game plan. In some cases, the company may face a very public campaign with activist materials disseminated through various media channels. When the campaign is known publicly, it’s important to note that not just the investors will be impacted. The company’s customers and other stakeholders could also be affected by an activist campaign. We recommend that the best practice for companies dealing with activist investors is to be as open as possible. When you try to cover up certain issues or avoid responding, activists may lead the conversation. It is recommended that companies review current disclosures to ensure the company is providing adequate information about its performance and ongoing initiatives to the market. You may need to reassure the market that the company is being proactive about the situation as well as communicate plans to unlock the value of the company and resolve the issues raised.
It is important to note that any activist campaign may further drag on and turn into an ugly dog fight. By preparing in advance for shareholder engagement, companies are more likely to display a calm and organized front which may elicit confidence from your shareholders, rather than coming across as unprepared or defensive.
QIC has worked with many listed companies in Taiwan on addressing shareholder activism. Our team consists of experienced professionals who previously worked at well-known equities houses and buyside funds. Our deep understanding of investor voting behaviors, corporate governance and the proxy landscape, can help you formulate the right strategies in handling an activist situation. If you are interested and looking for guidance in developing a defense strategy, please reach out to us.
Contact: yvonnehuang@qtumic.com