The sudden stock market collapse has had broad and immediate implications across the economy and the capital markets. One area that many companies are focused on is the potential for increased shareholder activism, or even unsolicited proposals, due to severely depressed share prices.
Although the number of shareholder activist filings (13-Ds) are down year-over-year since the COVID-19 outbreak, we are seeing a pattern where activists who have had a prolonged ownership or those with strong investment conviction are using dramatically discounted stock price to establish positions in companies. Add to this the fact that there were a record 147 activist investors who launched new campaigns in 2019, companies would be wise to be wary of activist investors or hostile bidders taking advantage of COVID-pressured stock price to accumulate their shares.
To be vigilant, we recommend utilizing third party stock surveillance service providers to closely track share movements. For additional corporate and activist defense protection — to further prevent activists or hostile bidders from opportunistically taking advantage of the sudden market disruption — some boards will contemplate either adopting or putting “on the shelf” a short-term, tactical poison pill.
Boards that are considering a shareholder rights plan as an option must be aware of some of the following best practices concerning these short-term tactical pills to avoid facing significant shareholder opposition, especially during the proxy season:
- Articulate the rationale for adopting the rights plan concerning COVID-related risks
- Correlate the company’s governance structure and track record of accountability to shareholders in pill adoption communication
- Do not exceed market practice thresholds (we recommend 10 percent for “sunny day” tactical pills)
- Do not exceed period of one year
- Do not include provisions that shareholders and ISS frown upon (e.g., wolf-pack/acting-in-concert provision)
- Consider adding shareholder-friendly provisions (e.g., qualifying offer clause)
The most important considerations for boards contemplating shareholder rights plans is to understand how their top shareholders view poison pills and how best to communicate the strategic rationale for adopting the pill. Many institutional investors do not necessarily view one-year tactical pills as an anti-shareholder device. However, investors like Dimensional Fund Advisors have a dim view of shareholder rights plans of all kinds, including one-year tactical pills or NOL pills. Dimensional Fund Advisors, for example, will not only vote against all board members for adopting a pill, it will vote against these board members at other outside boards they sit on.
Think before you act. If you have additional questions about activist defenses, please contact ICR’s Governance Solution Group for a complimentary consultation.
