Preparing for Activists Requires Company to Take Look Inward

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By Michael Greene

June 19 — The most effective way to prepare for activist investors is for management to look at the company in the same way an activist would, Francis J. Aquila, a partner at Sullivan & Cromwell, said June 19.

“Companies that think like activists are going to be very prepared to respond to activists,” he added during the Practising Law Institute's webcast “Responding to the Activist Playbook.” Aquila further explained that thinking like an activist involves identifying potential red flags, such as excess cash on the balance sheet, and being able to explain why they exist.

Companies do have to respond to activists, he noted, adding that companies are more likely to be successful when they are well-prepared and able to provide specific bases for refuting activist proposals.

Activist Preparation Checklist

During the panel, Aquila and his co-panelists discussed what companies can do before an activist emerges.

Melissa Sawyer, a partner at Sullivan & Cromwell, said the key point is that executives should be proactive in anticipating potential activism.

During the webcast, Sawyer went through a four-step activist preparation checklist that included:

• having a team of both internal and external advisors ready to go at a moments notice;

• identifying vulnerability;

• remaining in a state of preparation; and

• monitoring shareholders


Continuing Dialogue

While going through the checklist, Sawyer highlighted the importance for companies to regularly communicate with their largest shareholders outside the proxy season.

She noted that investor relations advisors are increasingly finding that they are more successful if they had a steady dialogue with institutional investors before the proxy season.

If a company cannot identify the go-to person to start making calls to institutional investors if an activist goes public, that suggests the company is not as ready as it should be, she said.

Legacy Approach Not Working

The panelists also advised that the “legacy approach” of treating activists like hostile acquirers does not work anymore.

“You have to dig into the merits of what an activist is proposing,” Sawyer said, adding that companies need to make their case to other shareholders if they want to win their battle.

Five years ago it may have been common to disregard shareholders who were vocal about the company's performance if they held less than 1 percent of stock, but that is not the case anymore. Even small activist investors can have a tremendous influence on the largest companies because institutional investors will support activist campaigns.

In the old days there was a sense that corporate activists were raiders that only benefited themselves, said Aquila. Today activists are saying “yes, I make a lot of money, but I also make a lot of money for other shareholders as well,” and that is resonating with institutional shareholders in a period where there is relatively low growth in the economy.

To contact the reporter on this story: Michael Greene in Washington at

To contact the editor responsible for this story: Ryan Tuck at

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