In an article published by Corporate Counsel, Bass, Berry & Sims attorney Howard Lamar outlined four tips for general counsel to deal with an activist investor. Public companies are seeing shareholder activism as a growing risk, and it is important for company leadership to know some simple corporate governance and management skills in the event that an activist begins pressuring the company.
First, communication is critical, and general counsel should promote a company culture that encourages regular communication with all shareholders. If shareholders are left in the dark, they will start to claim that a company is poorly run. “Does the company regularly communicate with institutional investors?” Howard suggested as an important question for general counsel to consider. “Or does it sort of hole up, silo itself and not engage, so investors may or may not really know the company’s long term strategy?”
Second, general counsel must ensure that corporate governance is kept in check. This includes careful consideration about how well corporate governance is working at their company. “Most activism drives out of one of three things: operating issues, balance sheet inefficiencies that make for a quick opportunity in economic gain, and corporate governance,” Howard noted.
Third, general counsel should remain aware of company performance relative to competitors. Because shareholder activists seek out poor company performance, it is important to objectively examine why the company might be underperforming compared to its competitors. “Was there a wrong strategic decision, an acquisition with challenges, not moving into new areas to develop and grow the business?”
Fourth, general counsel should never wait until it’s too late. That is, general counsel should already have a plan in place before they are notified about a hostile investor. Howard explains that this plan should include identifying their go-to outside counsel, financial advisor, and in case of a proxy battle over board seats, proxy solicitors.