Companies Advised to Consider Poison Pill, Bylaw Provisions as Activism Continues to Rise

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By Che Odom  

June 4 — Current trends suggest that shareholder activism will increase, so it is in a company's interest to develop effective ways of responding, including the use of the maligned poison pill and exclusive-forum bylaw provisions.

That advice comes from Keir D. Gumbs, a partner at Covington & Burling LLP in Washington, DC, who spoke June 4 during an InsideCounsel webinar, “2014 Proxy Season Wrap Up,” which was sponsored by Bloomberg BNA.

“You should regularly look at your structural defenses,” Gumbs, who advises clients on corporate governance, securities regulation and transactional matters, said. “Think about things that you can do that may not be what ISS or some of the larger governance-related institution investors would like but would nonetheless be in the best interests of your shareholders.”

Gumbs presented the webinar with Lillian Brown, a partner at Wilmer Cutler Pickering Hale and Dorr LLP, who focuses her practice on federal securities law compliance and corporate governance matters. They discussed shareholder proposals, judicial decisions involving shareholders litigation and tips for the 2015 proxy season.

Activism is Successful

Activist shareholders were very busy and successful in 2013, Brown said. Of the 367 known activist campaigns last year, 90 involved proxy contests, she said. Sixty percent of the activist campaigns in 2013 resulted in settlements or victories for the activists, compared to 36 percent in 2003, she said.

Bill Ackman of Pershing Square Capital Management Inc. is among the busiest hedge-fund managers, Brown said. This week, Bloomberg reported that Ackman called for a special shareholder meeting to remove most of Allergan Inc.'s board to push forward a proposed acquisition by Valeant Pharmaceuticals International Inc.

Activist funds, such as Pershing, outperformed other hedge funds in 2013, though not the S&P 500, according to data provided by Brown. Activist hedge funds averaged returns of approximately 16 percent, compared to 8 percent for other hedge funds, she said.

Given that success, more funds may be tempted to try an activist strategy, she said.

Activists of All Shades

Hedge funds, of course, are not the only activists out there, Brown said. Activists also include institutional investors, such as pension funds, labor unions and environmental groups, and individual “gadflies,” such as John Chevedden, who filed nearly 60 proposals in proxy statements last year.

“You really are looking at very different types of investors when you use the term activist investor,” Brown said, adding activists are motivated by a variety of reasons, such as financial, environment or social issues.

Walden Asset Management, Carl Icahn of Icahn Enterprises, the California State Teachers Retirement System and the AFL-CIO are among the most well-known activists, she said.

Consider Poison Pill

Structural defenses may draw the ire of Institutional Shareholder Services Inc., Glass, Lewis & Co. and activists, but companies must consider using them because they can be an effective means of protecting against unwanted takeover bids, Gumbs said.

According to Gumbs, such defenses include:

  •  advance-notice bylaw provisions, which are a “critical way” of enforcing proper procedures and controlling the agenda leading up to the annual shareholders meeting;
  •  exclusive-forum bylaw provisions, which help a company control where litigation with shareholders will take place;
  •  a classified board, preventing complete turnover of all directors and ensuring some continuity; and
  •  a shareholder rights plan (also known as a poison pill).
  • The number of companies with a poison pill are in the minority, “but I think that number is misleading because they may have one on the shelf that they are ready to adopt in the event there is a real threat,” Gumbs said.

    Engage ‘Early and Often.'

    Prevention, in the form of year-round shareholder engagement, can serve as an effective defense against activist campaigns, Brown said.

    Directors and officers should identify their significant shareholders and engage them to learn about their concerns, she said.

    “Engage on it constructively rather than wait for proxy season to find out and try to defend it,” she said.

    Some strategies to consider, according to Brown, are:

  •  holding quarterly meetings with major shareholders;
  •  using social media to reach investors; and
  •  using the proxy statement as a communications tool to explain governance and other policies.
  • Thoughtful, proactive engagement should be done “early and often” and continuously, with the goal of creating relationships in which shareholders reach out to the company, she said.

    To contact the reporter on this story: Che Odom in Washington at codom@bna.com

    To contact the editor responsible for this story: Jesse Travis at jtravis@bna.com

    The InsideCounsel webinar is archived and available at http://www.insidecounsel.com/webseminars/2014-proxy-season-wrap-up.