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ALFA INTERNATIONAL 2018 INTERNATIONAL CLIENT SEMINAR

March 1-4, 2018 – Fairmont Scottsdale Princess – Scottsdale, AZ

Shareholder Activists – Barbarians or Benefactors?

Brett Cowell Moderator

COWELL CLARKE Adelaide, South Australia, Australia

bcowell@cowellclarke.com.au

The author acknowledges with thanks the contributions to this paper from Robert L R Munden, EVP, General Counsel and Secretary, Harte Hanks.

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Shareholder Activists – Barbarians or Benefactors?

Brett Cowell

Chairman of Partners Cowell Clarke, Adelaide, Australia

Introduction

Much has been written about shareholder activism in the popular, business and legal

media. The title of this paper plays on the Burrough and Helyar book “Barbarians at the

Gate”, the book about the 1989 leveraged buy-out fight for RJR Nabisco in which

Kohlberg Kravis Roberts was involved. One perspective is that shareholder activists are

the new barbarians that are only interested in short-term, quick financial gains. The

opposing view is that some companies are run badly and not in shareholder best

interests and activists shake up complacent boards of directors and drive value for

shareholders.

In light of increasing and aggressive shareholder activists, some of whom run activist

funds with billions of dollars under management, how should boards prepare and how

should they respond in the event that an activist comes knocking? Do directors lock the

gates and man the ramparts or do they engage with activists to discuss whether the

company’s performance can be improved and the activists’ demands can or should be

met.

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Shareholder activism will not go away. On the contrary, investments in shareholder

activist hedge funds are growing in number and investment power. Some would say that

those funds have become an investment class. At the least, they are a class of funds

that have a very particular investment strategy. There are bad stories and there are

good stories, “bad” or “good” often depending upon one’s perspective. Are there

positive elements of the shareholder activist wave from which companies can take

encouragement?

What is shareholder activism?

As long as there have been companies with shareholders, there have been examples of

shareholders disagreeing with their boards or management and urging boards and

management to take action in some form or other.

In more recent times, we have seen the rise of activism which does not specifically have

financial results for the company in focus. Examples of this form of activism include

environmentalists urging companies to get out of fossil fuel production, to adopt

particular employment or business approaches based on ethical, philosophical or

corporate social responsibility grounds and a movement promoting so called ethical

investments. These shareholder movements can fall under the more general banner of

shareholder activism.

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However, in this paper, I will be considering actions taken by shareholders which are

directed to “conduct of business” financial considerations and business strategies.

Some recent, high profile shareholder activist actions provide examples.

BHP Billiton – action by Elliott Management Corporation;

Proctor & Gamble – action by Nelson Peltz of Trian Partners;

Cracker Barrel Old Country Store, Inc – sustained action by Biglari Holdings;

ILG Inc – pressure from FrontFour Capital Group for ILG to merge;

RentaCenter – Engaged Capital LLC action to appoint dissident directors.

Hedge funds have grown substantially in recent years. According to media and other

public information, as at mid-2017, Elliott Management had more than USD32 billion

assets under management, Third Point had built a stake of more than USD3.5 billion in

Nestlé, the world’s largest food company and BlackRock, the world’s largest fund

manager, had well more than USD1 trillion in funds under management. BlackRock’s

chairman and chief executive, Larry Fink, was quoted in the media in November 2017

as saying that the company will dramatically lift its engagement with companies that it

believes are “on the wrong path” and that “we are now actively engaged with more

companies than ever before. … An active manager, if they really hate a company, they

can sell the shares or become public activists. You have 2 choices: sell the shares if

you don’t like it, or really force public change. … We can’t sell the shares, which means

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we have to be more active than an active manager … so, what we have become is

highly active.”1 In the past, BlackRock was more of a passive investor, although it did

support a number of activist campaigns. There may be a range of reasons for Fink

moving BlackRock to a much more active investor role. It may be that he and his team

see companies that are under-performing and are suitable for investment with a view to

inducing corporate action to unlock value for shareholders. It may be that as such an

enormous player in the market, he sees an obligation to exercise the fund’s investment

muscle for the benefit of his investors and shareholders in companies in which

BlackRock invests. Some may say that he sees successful activists making a lot of

money and attracting increasingly large amounts of funds under management and that

he sees the opportunity to actively get into that space.

Barbarians or benefactors?

Are shareholder activists the equivalent of a rampaging enemy seeking to storm the

corporate castle to further the evil purposes (a short term “making money fast” focus) of

themselves and their investors? Or are they the benefactors, finding under-performing

companies with long suffering shareholders and driving changes which benefit those

shareholders and incidentally, themselves? The answers to these questions will depend

upon the circumstances of the targeted company and the aims and intentions of the

activist.

1 Quoted by the Australian Financial Review 1 November 2017.

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A range of surveys and studies of the results of activist engagement have produced

significantly different conclusions. Some commentators have concluded on the basis of

surveys and research, that there is no consistent evidence that shareholder activism is

detrimental to company performance or share price over a period of years after an

activism event.2 An FTI Consulting 2015 survey of approximately 100 institutional

investors within the range of $1.7 trillion of assets under management showed that 84%

of those surveyed viewed activists as adding value to companies, being catalysts for

change, aligning the interests of the board with shareholders and forcing boards to

sharpen their focus. However, the opposite view is also held by many, namely that

activists are motivated by short-term gains that do not align with all shareholders,

particularly those taking longer term investment views and that activists promote public

media campaigns so as to achieve free marketing to attract investors to their funds and

to demonstrate to investors that they are doing something. To a degree, I suspect that

much depends upon one’s viewpoint, whether that be as a director of a target company,

a long-term or short-term shareholder or an investor in an activist hedge fund.

In December 2013, the then Securities and Exchange Commission (SEC) Chairman

Mary Jo White described the upswing in activism as “a very good thing” for companies.

The involvement of activists in the market has significantly accelerated since then. In his

March 2017 Harvard Business Review article The Case for Activist Investors, Walter

Frick referred to “research showing that activists apparently make companies more

profitable and productive, on average – not just in the next quarter but 3 years after the

2 See for example, The Long-term Effects of Hedge Fund Activism, Bebchuk, Brave and Jiang, Harvard Law School John M. Olin Center Discussion Paper No 802.

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fact. And although their intervention may be followed by a decrease in R&D spending,

the companies appear to become more innovative in the years following. One study

found that activists often target firms that are lagging in IT and then help them catch up

to their competitors.”

What do activists target?

Particularly in recent years, activists are targeting not only poorly performing companies

but also highly performing companies. However, case studies show clearly that there

are 3 areas of company performance that especially attract the attention of activists.

Those areas may be summarized as follows:

1. Poor price performance. This may be measured in a variety of ways.

Commonly, this trigger for the activists will be seen where a company fails to

improve its share trading price or total shareholder returns over a period or where

a company is consistently trading at market prices or share price multiples which

under-perform in comparison to its peer companies in the market. It may also be

seen where a company has a pattern of trading at a price that is lower than the

sum value of its assets.

2. Ineffective or inefficient capital allocation or capital deployment. This

contention has been seen in a wide variety of guises. On numerous occasions,

activists have argued that target companies have not achieved satisfactory

returns on assets/capital invested/equity and should either sell assets or should

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not proceed with proposed acquisitions and instead, should return capital to

shareholders via special dividends or share buy-backs.

3. Poor corporate governance. Activists frequently cite as reasons for

substandard corporate performance, poor corporate governance practices. The

structure of the board of directors is the most common target, with activists

frequently contending that a company board includes entrenched and non-

independent directors and directors who have participated in and overseen

corporate decisions which led to poor capital allocation and/or poor price

performance. One of the most consistent strategies adopted by activists is to

seek seats on the board of the target company. Activists may also contend that

the board is overseeing excessive or otherwise inappropriate CEO or other

senior management remuneration structures or tolerating senior management

under-performance.

Activist campaign snapshots

Shareholder activists approach target companies in a range of different styles and

target companies similarly have a range of responses from outright rejection to

constructive discussion and the implementation of some (or less frequently, all) of the

activist proposals. We could pick a huge number of examples of how activists approach

companies and how companies respond but the following few case summaries are

instructive.

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The Elliott Management action aimed at BHP, the world’s largest mining company,

which commenced (at least in public) in 2017, picked all 3 areas. Elliott contended that

BHP should collapse its dual Australian-British listed structure into a British company3,

should sell or spin off its US petroleum assets into a New York established company

and should return in the order of AUD44 billion in capital to its shareholders. Elliott

argued that BHP has under-performed compared to industry competitors in recent

years, while acknowledging that it had taken some steps in streamlining its portfolio.

Elliott people were reportedly in discussions with senior BHP personnel about the Elliott

plan for 8 months before Elliott went public in April 2017. One assumes that BHP would

not agree to implement the Elliott plan and Elliott, presumably becoming frustrated with

BHP’s unwillingness to adopt that well-worn adage “be reasonable – do it my way”,

sought to dramatically increase the stakes by going public.

Cracker Barrel presents an alternative picture of shareholder activism. In December

2013, Sardar Biglari of Biglari Holdings wrote to Cracker Barrel’s chairman saying that

the company should be sold. In April 2014, Biglari said that it believed that Cracker

Barrel’s strategy was not working. There were 4 successive proxy fights and a range of

other maneuvers. Biglari had acquired a 19.7% stake in Cracker Barrel but Cracker

Barrel continued to resist Biglari’s demands. In the process however, Cracker Barrel did

renew its board and management structure. While Biglari was not successful in getting

board seats or having the board sell the company, Biglari remained a shareholder and

3 A demand I suggest that, apart from the high execution cost, is virtually impossible for BHP to execute in a political sense given that BHP is arguably Australia’s greatest corporate icon. This proposal was not news to the BHP Board, which has reportedly over the years considered collapsing the dual listed structure but has not yet found the business case to do so.

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had a big win. Cracker Barrel has been a market segment leader in total shareholder

returns and it is estimated that with Cracker Barrel’s dividends and special dividends,

Biglari collected an estimated USD37 million over the 2016/17 year alone.

Daniel Loeb’s hedge fund, Third Point, made a USD3.5 billion investment in June 2017

in Nestlé, the world’s largest food company. Third Point’s June 2017 letter to Nestlé said

that “Third Point intends to play a constructive role to encourage management to pursue

change with a greater sense of urgency…We have offered our views in productive

conversations with management, which we expect will continue.” That “greater sense of

urgency” included demands that Nestlé: sell its approximately 23% stake in French

cosmetics company L’Oreal; set specific operating margin targets, which Nestlé had not

previously done; review its more than 2,000 brands for possible value-delivering sales

and consider “accretive, bolt-on acquisitions”; and increase share buy-backs. Since

then, Nestlé introduced a USD21 billion stock repurchase plan, introduced operating

margin targets, has sold its US confectionary business and embarked on a purchase of

niche brand, Blue Bottle. As at November 2017, there was no indication that Nestlé

would sell its L’Oreal stake. Other than the sale of L’Oreal, it appears that Nestlé has

implemented the Third Point proposals at least to a significant degree. At a Nestlé

investor seminar in London in October 2017, Third Point was quoted as saying that

Nestlé was showing “a new approach of greater investor responsiveness”.

One of Australia’s largest publically listed department store retailers, Myer Holdings

Limited (Myer) has been under attack from veteran rag trader and corporate raider,

Solomon Lew, via his listed Premier Investments Ltd. Premier is Myer’s largest

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shareholder, with 10.8% of Myer’s shares and is also a major competitor of and supplier

to Myer. Again, the same issues arose, namely Myer’s poor performance and Lew’s

demand for board seats. In 8 months to late November 2017, due to Myer’s share price

decrease, Premier lost about AUD40 million of its AUD101 million investment. Lew said

the Myer board had lost its way and its turn around strategy was not working. Myer said

that putting Lew and his nominees on the board would create massive conflicts of

interest, would be completely disruptive to the operations of the board and company

and would amount to Lew taking over Myer without paying Myer shareholders a control

premium. Relevantly, 4 major proxy advisor firms agreed with Myer and recommended

shareholders vote at the company’s annual general meeting to re-elect the 3 current

independent directors including the recently appointed chairman, rather than Lew’s

replacement slate. At the AGM on 24 November 2017, shareholders convincingly re-

elected the sitting directors and rejected Lew’s nominees. However, at the date of this

paper, given Lew’s tenacious track record, one would not expect that the war is over. A

shareholder class action may be his next strategy.

Symbiotic activism – pairing with shareholders

In recent years, many activist funds have paired up with a target company’s institutional

or other large shareholders in “symbiotic activism”. Shareholders may be dissatisfied

with the performance by their company and its board and may want change, but do not

have the appetite, expertise or funding to mount an activist push. Activists may do the

hard work to speak with shareholders, especially key shareholders who are dissatisfied

with the target company’s performance. If a relationship of support can be established,

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the activist gains the support of large shareholders for its demands. While the

shareholders do not necessarily agree with all of the changes proposed by the activist,

they get a party that has funding capability and deal execution experience to drive

change in the company. In this scenario, shareholders want to see some action rather

than no action on the part of companies and their boards. The Californian Teachers

Pension Fund has regularly supported activist campaigns, as did BlackRock in its more

passive investment days.

In addition to getting shareholders onside, activists also frequently communicate with

the large proxy advisors, seeking their support in the proxy fights which frequently form

part of activist campaigns.

The recent Ardent Leisure Limited activist campaign in Australia was instructive for both

target company boards and shareholder activists. Experienced Australian corporate

players Gary Weiss and Kevin Seymour combined to campaign to have themselves and

2 other independent directors elected to the Ardent Leisure board at a shareholders’

meeting scheduled for 4 September 2017. The election of the 4 new directors would

have taken the total board numbers to 10. Weiss and Seymour represented Ardent

Leisure’s single largest shareholder, holding 9.86% of Ardent Leisure’s issued capital.

Weiss and Seymour published their plan for Ardent Leisure but the Ardent Leisure

board did not release that presentation to its shareholders and nor did it issue its

response or rebuttal to the Weiss/Seymour plans. Weiss and Seymour reportedly met

with Ardent Leisure’s chairman, George Vernardos. The Weiss/Seymour contentions

ticked all of the typical activist attack boxes:

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Ardent Leisure had poor corporate governance, leading to poor corporate

performance compared to its peers;

the company had poor capital management in that it was paying too much to

grow its business via the acquisition of Main Event venues in the US, thereby

diverting capital investment from Australia and lowering franked dividends to

investors; and

the company was paying its CEO two times the amount paid to his predecessor

and had other senior management issues.

The Ardent Leisure board took the view that Weiss and Seymour were seeking to exert

undue influence over the company’s affairs and were trying to destabilise the company.

During the course of the campaign, Weiss and Seymour showed some flexibility in their

board representation demand in that they scaled back their requirement for 4 directors

to the 2 directors, Weiss and an experienced American executive, Brad Richmond. It

appears that they worked very hard to engage with key shareholders. Via their very

substantial investment in Ardent Leisure shares, they showed that they had skin in the

game. In contrast, the Ardent Leisure board continued to reject Weiss and Seymour. It

appears that the board considered that its shareholders would not support the election

of Weiss and Richmond. That errant view was supported by 2 of the 3 leading proxy

advisory firms, both of which advised shareholders not to support the election of Weiss

and Richmond. On Sunday, 3 September 2017, the day before the shareholders’

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meeting was due to be held, the company cancelled the meeting. Presumably, the

proxy votes had been tallied, showing that Weiss and Richmond would be elected to the

board. Vernardos invited Weiss and Richmond to join the board and advised that they

“can bring assistance and additional insight to the board”.

It appears that the Ardent Leisure board and its 2 proxy advisors had completely

misread the mood of the shareholders, specifically in terms of board representation but

more generally in terms of the performance of the company.

In dealing with other shareholders, activists are careful to navigate regulatory issues,

especially regarding public disclosures and required tenders. For example, in the US,

when a shareholder secures more than 5% of a public company’s voting shares (or is

coordinating with such a shareholder), the shareholder may need to make a public filing

if its intent is (or may be perceived to be) to seek fundamental changes in a company.

Passive investors benefit from more lenient disclosure timing and requirements than

truly active investors and linking up formally with activists can present them with risks or

costs to their preferred disclosure approach. In addition, failure to properly disclose

coordination can bring independent sanctions from the SEC and give the company

ammunition in its fight against the activists.4

Many countries have laws which oblige a shareholder that gains control of a specified

threshold percentage of voting shares in a company to formally notify the company that

it is a substantial shareholder or (at a higher percentage threshold) to make a formal

4 Nevertheless, there is some perception that much informal coordination amongst activists and their fellow-travelers takes place, which stands to reason given the shared motivations, target company characteristics and relatively small bar that represents the activist community in the US.

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take-over offer for the company. Those laws may also say that in a range of

circumstances, where shareholders are related parties, are associates or agree to vote

or otherwise act together in relation to the affairs of a company, their respective

shareholdings may be aggregated for the purpose of determining whether a substantial

shareholder notice must be given or the takeover threshold has been exceeded, thereby

triggering the obligation to launch a formal takeover bid.5 An activist may not want to tip

its hand by having to give a substantial shareholder notice earlier than intended and

very infrequently will an activist want to be obliged to make a formal takeover bid for its

target company.

Activist friendly laws

Australia has some activist friendly laws. In particular, shareholders holding at least 5%

of the company’s voting shares can requisition a meeting of shareholders, at which,

amongst other things, they can put resolutions to the meeting for the removal and

appointment of directors.6 Those shareholders can require that a company circulate to

all of its shareholders a statement prepared by the requisitioning shareholders, subject

to some limitations such as no defamatory content. Member countries of the European

Union have similar laws.7

5 See for example the Australian Securities and Investments Commission (ASIC) Regulatory Guide 128, in which ASIC gives guidance about when it will treat co-operating shareholders in listed entities as associates for the substantial shareholder and the takeover provisions. Refer also to EU Takeovers Directive 2004/25 EC and corresponding laws of Member States. 6 Australia does not have any director classification provisions. A majority of votes by shareholders can remove any one or all of a company’s directors at any time regardless of director rotation provisions. This applies to all Australian public companies and to the great majority of private companies. 7 In Spain for example, the threshold is a holding of 3% of a company’s voting shares.

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Australian listed companies are also subject to a shareholder “say on pay” process

except that in Australia, if a listed company incurs a 25% or more remuneration report

disapproval vote8 at 2 consecutive annual general meetings, at the second meeting

virtually the whole board of directors9 will face a “spill” resolution to be removed from

office. If that resolution passes by simple majority, those directors are out of office and

within 90 days the company must hold another meeting at which there will be an

election for directors. The dumped directors can decide to stand for re-election but in

the context of 2 years’ remuneration report disapproval and the passing of the spill

resolution, other nominees may stand an improved chance of election. Realistically,

while the disapproval resolutions only need to be passed by a 25% vote, the spill

resolution needs to be passed by a greater than 50% vote and that is more difficult for

dissidents to achieve. While this “2 strikes” process was designed to make boards

responsive to shareholders in relation to board and senior management remuneration

policies, there are many instances where the process has been used by activists and

other minorities to pressure boards in areas other than remuneration.10

8 That is, 25% or more of the votes are cast against adoption of the remuneration report. 9 Other than the managing director (if one is in office) and any directors appointed to the board since the remuneration report was approved by the board before being put to the AGM. 10 Under the USA “say on pay” shareholder process (Dodd-Frank section 951 and regulations), shareholder resolutions are non-binding and critics say, do not have any real teeth. Proxy advisory firms impose some accountability through their voting policies with say on pay votes below a certain threshold (70% for ISS) resulting in recommendations to vote against some or all directors unless “the board adequately responds.” In both Australia and the USA, regulatory requirements for listed entities regarding remuneration reports are such that reports put to shareholders are highly detailed and complex to the point that retail shareholders often have difficulty in fully comprehending them.

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Risk and reward

Shareholder activism is by no means a straight forward and riskless exercise. Bill

Ackman’s Pershing Square combined with Valeant Pharmaceuticals International in

February 2014 to try to take over Allergan. While the takeover bid was unsuccessful

(Allergan escaped by signing a merger agreement in November 2014 with rival,

Actavis), the Allergan stock price significantly increased, giving Pershing Square a very

handsome return. However, Pershing Square’s buy into Valeant has done the opposite,

with Valeant’s stock price cratering. Pershing Square sold out of Valeant in March 2017,

incurring a loss of more than USD3 billion. On a positive note for activist engagement

with its investee company, it is reported that in May 2014, Pershing Square gave liquor

manufacturer, Beam, some private research advising that it was a good time for the

company to sell itself. A few weeks later, Beam sold itself to Japan’s Suntory. The

transaction closed in May 2015 and on its 12% holding in Beam, Pershing Square

netted in excess of USD1 billion.

Takeaways for company directors and their advisors

1. If boards know that the key spurs for activist attention are poor company price

performance, ineffective or inefficient capital allocation or deployment and poor

corporate governance and if a company is checking one or more of those boxes,

it sounds trite and perhaps almost insulting but boards, with their advisors, must

seriously, deeply examine what is going on and be prepared to implement tough

and even radical options, and quickly.

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2. Boards must understand their shareholders register – who is on the register and

why. Changes in the register – especially who is coming onto it - and the timing

of those changes may be important to alert boards to impending issues. Are

major shareholders in particular in the company for financial or strategic reasons,

are they long-term or short-term holders and are they active or passive? If they

are passive, with the right/wrong encouragement or motivation, might they

become active in agitating for change?

3. Boards must maintain a real dialogue (that is, two way) with their shareholders. It

is particularly important that boards especially maintain a dialogue with and stay

close to their major shareholders. Boards should talk openly about their capital

allocation strategies and growth strategies and if relevant, how they will deal with

performance deficits and over what period. They should clearly explain their

director selection process and their director and senior management

remuneration policies. When they conduct meetings with shareholders, analysts

and proxy advisors, they should listen more than they speak. One challenge can

be to stop the CEO and CFO talking too much and listening too little. Depending

on the size of the company and the makeup of its board and share register, the

chairman may need to be substantially involved in the dialogue process.

4. Obviously, it is not always smooth sailing for companies and there may be

periods where companies need to carefully manage the flow of information to

shareholders. It will help companies if they have good, trusting relationships with

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their shareholders so that shareholders do not feel undue pressure to veer

towards thinking their independent action is needed to protect their interests.

5. Boards must constantly review their capital allocation and capital deployment

policies. It is a feature of many activist approaches that companies are said to

have allocated their capital in an ineffective manner that is generating returns on

capital below market peers and that companies should re-deploy capital,

frequently via asset sales and the return of capital to shareholders by way of

share buy-backs or increased dividends.

Companies will sometimes acquire or hold assets, including cash, that generate

less than optimal present returns in order to give the company greater optionality

in terms of sources of revenue, market share protection, future growth potential,

debt management or for other reasons. Directors must constantly be asking “Do

we have the right assets? Are we generating at least market level returns on our

assets and should we be generating better returns? We have some comfort in

our balance sheet but what is our dividend policy and could shareholders better

employ the company’s capital than we are doing?” Board deliberations around

these questions should, subject to commercial confidentiality, be the topic of

dialogue with shareholders. As in many areas of life, if you think you have done

plenty of communication, you probably haven’t.

6. The composition of the board and the board selection process should be

constantly reviewed and explained to shareholders. If a company is not

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performing and an activist makes an approach, it will frequently involve the

composition of the board. Companies need to exercise great rigor and due

diligence in selection of board members. It may be for example that if there has

been a transaction or a group of transactions in which the company has been

involved, which have led to company performance impairments (eg less-than-

successful acquisitions) and which may be anticipated as a spur for activist

action, directors who approved or were associated with that transaction or those

transactions in particular may become the focal point for an activist attack.

Most boards take the view that for them to work effectively, there needs to be

individual rigour and an avoidance of group-think mentality but at the same time,

the members need to be able to operate in a collegiate fashion. Boards often

have concern that the introduction of directors proposed by activists will bring

disharmony and disruption to the board and its processes and will be damaging

to the business of the company. That may well be so. But rather than have an

automatic (some may say, knee-jerk) reaction to deny activist board

representation demands, boards should carefully assess the real and objective

benefits and detriments that may result from the addition to the board of an

activist’s proposed director/s.

7. Boards must constantly review senior management team performance and

remuneration structures. Large pay but poor performance is an easy activist

campaign point and allegations of compensation mis-alignment or excess will be

made regardless of the directors’ views. Boards must be in a position to explain

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their compensation policies and to answer well, questions that shareholders may

ask.

8. Boards should carefully consider and prepare a playbook if there is any chance

at all that they may be approached by an activist. Anecdotally, many companies

are surprised when they receive the first activist communication. With their

advisors, boards should consider ahead of time how an activist would think about

the company and how the company would respond.

9. Boards should be prepared to genuinely consider the actions recommended by

activists, including changes in board members. Battling activists is costly both

financially and in board and management time (money and time each better

spent on improving the business), so boards should evaluate whether

settlements (or concessions) are the best approach. However, just as reflexive

opposition to activist demands is ill-advised, settlements themselves should be

evaluated with their long-term costs in mind. Adding one or more activist

representatives to the board will almost certainly result in increased time

demands for the board and management for induction and responding to

requests for information, not to mention addressing ongoing activist demands.

10. Engagement with and use of media and increasingly, social media, is an area

calling for experience. Activist campaigns are often waged in large part in public

with a growing reliance on social media. It is crucial that boards have expertise in

this area available to them.

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Many of the above takeaways apply to the everyday business of a company and not just

when a company is facing an approach by an activist. Strong attention to these matters

(amongst others) will not entirely insulate a company from an activist approach but will

put a company in a stronger position to address that approach.

Are shareholder activists the barbarians at the gates or the benefactors of

shareholders? From a survey of activist campaigns over recent years, one would have

to conclude “it depends”. Research indicates that activists’ objectives have been

successfully or partially successfully achieved or that company compromises with

activists have been worked out in more than half of all activist campaigns, with benefits

to the company and its shareholders. Activists have frequently done a great deal of

research and analysis before they approach a target company. Cracker Barrel is an

example of a company that steadfastly resisted the activist campaign and in the

process, generated very substantial benefits for its shareholders, which included the

activist. On the other hand, the RJR Nabisco story (if now quite old) is a prime example

where the dramatic shaking up of the company by the raider resulted in great benefits to

RJR Nabisco’s shareholders.

Many directors who have been engaged by activists will confirm that a serious activist

campaign can be highly stressful and very expensive and diverts Board and senior

management time from business operations. Activists are very well funded and this is

their business model – they “do activism” for a living. The failure by boards to engage

with activists can be a mistake. Apart from the cost to the company and the risk of an

activist being completely successful in an “overturning” strategy, a company

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stonewalling an activist risks missing out on learning or doing something positive about

the company. There is also a risk of an adverse perception in the market that the

company simply did not engage. That may be in stark contrast to the activist, who quite

possibly has already been engaging with the company’s shareholders and potentially,

proxy advisors to convince them of the merits of the activist’s position. The company

manning the ramparts rather than engaging, even if the outcome is a “no thanks” to the

activist, may not only galvanize the activist to go aggressively public but may also get

both shareholders and proxy advisors offside.