Shareholder activism in the age of COVID-19

January 2021  |  FEATURE  |  BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

January 2021 Issue

For shareholders contemplating or already conducting an activist campaign, COVID-19 has created practical obstacles and shifts in timing and strategy, as well as new opportunities. Many governments and industry bodies have acknowledged the difficulties companies face in fulfilling their statutory and regulatory obligations to hold annual general meetings (AGMs) amid the upheaval. As a result, some rules have been relaxed, allowing meetings and votes to be held electronically or by other means.

Activism, which had experienced considerable growth in recent years, dropped sharply in the first half of 2020. Many activists were preoccupied with their own survival, and with attracting fresh capital rather than launching new campaigns. It also became difficult for activists to gain shareholder support for public campaigns while boards and senior management were focused on keeping the lights on.

However, this does not mean companies can relax. As soon as the market turned more bullish, shareholder activism rebounded. Companies that have struggled to keep afloat during the crisis should evaluate whether their response plans have been adequate, and whether they can position themselves for growth beyond the pandemic. Activist investors will be watching closely, ready to pounce.

“Management should be constantly monitoring its shareholder base, their objectives and investment strategies,” says Will Osler, a partner at Bennett Jones LLP. “It is important for a company to be able to respond to shareholders in a meaningful manner, address concerns and misinformation and ensure an open and transparent dialogue. Management should continue to treat its public disclosure as an opportunity to engage with shareholders and clearly communicate results, strategy, objectives and opportunities to enhance shareholder confidence.”

Certainly, regular communication with shareholders is key to maintaining shareholder confidence during such a fraught time. Though each case of activism is different, activists tend to follow typical playbooks, depending on the nature of the campaign. Understanding these playbooks can help a company respond.

“Companies should monitor their stock and listen to investors and financial analysts,” suggests Kate Cooper, a partner at Freshfields Bruckhaus Deringer LLP. “They should develop a consistent strategic message which is delivered to the market in a timely fashion.

“We have consistently seen that private and public communication with investors is vital to ensure a better understanding and resolution of activist and other shareholder issues. It is often the case that companies that are vulnerable are those which have recognised issues internally but have not yet communicated their plan to remedy those issues,” she adds.

Many companies face an uncertain future, with their economic viability in doubt. Activism will inevitably increase, particularly as companies move through reporting season. “Likely issues will be failure to adapt to structural industry change accelerated by COVID-19, managerial and board compensation when performance has been poor or the company has received government wage subsidy support, criticism for broken deals and cost, and consequences of cyber risks,” says David Raudkivi, a partner at Russell McVeagh.

In the coming months, activists are likely to focus on improving governance to ensure that companies are on track to weather the storm of the pandemic. “Corporate governance, board diversity and corporate culture have garnered an increased and profound importance in 2020,” suggests Mr Osler. “Activists are leveraging these factors to pressure management. Companies need to ensure their corporate governance standards are frequently evaluated and strictly followed to prevent activists from exploiting weaknesses or inconsistencies.”

Further areas of interest could include human capital management practices, executive compensation, dividends and stock buybacks, shareholder rights, and board structure and effectiveness.

The length and severity of the COVID-19 crisis will also impact activist efforts. Though a surge in activity followed the 2008 global financial crisis, it is not clear whether or in what ways this might be repeated, as there are clear differences between the two crises. Furthermore, the forces that were driving activism prior to the COVID-19 outbreak might be less of a factor in the post-pandemic environment.

“There are activists with positions in companies who are staying under the radar at present, because they are below the mandatory disclosure thresholds or have built their positions synthetically, but they will emerge as the smoke clears from the pandemic, and boards will need to be well armed to respond,” warns Ms Cooper.

The crisis may delay annual financial reporting by public companies and shifts in annual meeting dates. Such delays provide activists with additional time and opportunities to build their cases and present them to shareholders, many of whom may be nervous about the future and more receptive to a strong plan of action.

“COVID-19 is likely to accelerate structural change for many industries,” notes Mr Raudkivi. “Any period of greater volatility and risk requires boards and management to be proactive and nimble in adapting to the new business environment.”

Boards should be proactive when it comes to anticipating activist campaigns, and prepare accordingly before they emerge.

© Financier Worldwide

BY

Richard Summerfield