IN-DEPTH: Activists step up proxy fights to ignite deal talks
With optimism around a possible uptick in M&A, a small subset of investors relying on this thesis are adding to the pressure on their targets by advancing board slates at the same time as demanding a sale of the company.
Campaigns at U.S.-headquartered targets combining demands for a company sale and board representation more than doubled in 2023 as activists pressed ahead to drive transactions.
According to Diligent Market Intelligence (DMI) data, 17 such dual-purpose campaigns were advanced by activists in the period, compared to eight in all of 2022. Three such campaigns were advanced in the first quarter of this year.
With financing markets expected to stabilize in 2024, making a more favorable M&A environment, industry experts predict that a further spike in such double-edged approaches may be in store as investors move to increase the pressure on boards to accept or give more serious consideration to an offer.
“One factor behind this uptick is a desire to revitalize an otherwise sluggish M&A market, coupled with heightened expectations that interest rates will fall,” Meagan Reda, partner at Olshan’s shareholder activism practice, told DMI.
The right level of influence
The universal proxy card, introduced in September 2022, provides investors with greater opportunities to pick-and-choose their preferred slate, leading many activists to narrow their ambition to focus on minority slates. However, in M&A-driven contests, activists are more likely to seek board control, thereby shifting the dynamic toward new strategies for value-creation.
Such a playbook is considered challenging and quite rare in the activism space, while also further complicated under the UPC regime, explains Patrick Gadson, co-head of Vinson & Elkin’s shareholder activism practice. “Unless the company has so overwhelmingly underperformed and there are deeply entrenched directors and manifest conflicts, then it's pretty difficult to get control in a contest. And it's much more likely that, not only the proxy advisors, but the institutions will decide that maybe one seat or so less than control is the way to go.”
At the margins, however, UPC may prove somewhat helpful in certain control situations, as Peter Michelsen, partner and head of activism and shareholder advisory at Qatalyst, told DMI. “If you had a nine-member board, the ability to more precisely target those who may be viewed as the most likely to hold out is helpful. But because you're seeking control, it's not in any way as helpful as in the short-slate situation.”
In one such ongoing campaign to emerge this season, Arkhouse nominated as many as nine directors in an effort to convince Macy’s to engage in takeover talks one month after the iconic retail chain rejected its initial $21-per-share proposal, with concerns regarding the suitors’ ability to finance their proposed transaction. The retailer has since appointed two of Arkhouse’s director candidates to its board in a truce - with the activist asserting the April agreement would “ensure that our discussions continue to be constructive and that our proposal is treated seriously and expeditiously.”
In another contest which recently reached a conclusion, Choice Hotels International advanced eight directors to replace Wyndham Hotels & Resorts’ board, escalating its campaign to acquire the budget hotel operator just one month after seeing its $8-billion cash-and-stock bid rejected. However, the offer and board contest were later abandoned with the suitor pointing to the target’s “obvious continuing disinterest in a combination.” In the weeks prior to the withdrawal, the company had asserted that the bid would only be considered viable if concerns over insufficient valuation, unattractive consideration mix and asymmetrical regulatory risk were addressed.
Blue sky planning
As well as increasing pressure on boards to reconsider a takeover offer, activists will often push to remake the board due to more general vulnerabilities observed in the operation, performance and overall management of the company. “This double-sided demand is really created by the companies themselves. If you're facing both, it's highly likely due to the significant underperformance or under valuation of the company, which in turn, relates to whether management and the board are appropriately governing and leading,” said Reda.
With the expectation that the deal market may heat up as 2024 progresses, companies are advised to proactively prepare for any such unsolicited bids by periodically updating their strategic plan. “It's always easier for the board to respond if everyone knows what the three-to-five-year plan is and can have confidence that this is something that is not being drawn up in the heat of the moment,” noted Michelsen. “I think that groundwork is really important because it's always easier to do that under a blue sky than it is under a cloudy sky.”
And, should a determination be made that a bid is not substantive enough to endorse, boards are advised to face the prospect of a proxy fight head-on. “If you feel this is a bad deal, then you can’t second guess that because of a potential proxy fight,” said Gadson. Hasty agreements also bring their own risks, he continues. “Don't enter into a marginally at best agreement just to stop a contest if the agreement doesn't include terms that will allow the board to have the peace it needs to oversee management and have management have free bandwidth to be able to properly manage and operate the company. Because then you can get the worst of both worlds where you only kind of ended a proxy contest, you more likely just hit the pause button.”
