PRESENTATION TO NIRI SAN FRANCISCO CHAPTER WWW.ALSTON.COM Steps to Take to Make Your Company Less Vulnerable to Shareholder Activists Tuesday November 13, 2012
SPEAKER: Keith E. Gottfried, Partner Alston+Bird LLP The Atlantic Building 950 F Street, N.W. Washington, DC 20004-1404 202.239.3679 Keith.Gottfried@Alston.com Keith E. Gottfried, Partner, Alston+Bird LLP, concentrates his practice primarily on shareholder activism, proxy contest defense, takeover defense, mergers and acquisitions, corporate governance, SEC reporting, NYSE and Nasdaq compliance and general corporate matters. Keith has significant experience defending clients against unsolicited takeover bids, proxy contests, consent solicitations and other activist campaigns initiated by activist stockholders. Keith is well known in the area of shareholder activism and has written, and/or been quoted in, numerous articles discussing the challenges presented by shareholder activism and what steps companies should take to prepare themselves. He is also a frequent panelist or presenter at conferences and seminars focused on shareholder activism and/or corporate governance. Keith received a Bachelor of Science degree in Economics from the University of Pennsylvania s Wharton School, an M.B.A. from Boston University Graduate School of Management and a Juris Doctor degree from Boston University School of Law. Page 2
DISCLAIMER WWW.ALSTON.COM This presentation is intended to provide a general introductory overview of the issues discussed and is not intended to provide a complete analysis of such issues. This presentation is for educational and informational purposes only and is not intended, and should not be construed as, legal advice. Readers should not act upon the information contained in it without professional counsel. Nor is this presentation intended to establish an attorney-client relationship. This presentation may be considered attorney advertising in some jurisdictions. The hiring of an attorney is an important decision that should not be based solely upon advertisements. Page 3
Shareholder Activism Highlights 2012 Proxy Season 82 proxy fights year to date. 25 have gone to a shareholder meeting/vote WWW.ALSTON.COM 2012 has been the quietest year for proxy fights since 2005 when there were only 56 proxy fights. Proxy fights continued to trend downward from 2009 and number of proxy fights is down considerably from its high of 133 in 2009. Source: SharkRepellent FactSet Page 4
Shareholder Activism Highlights 2012 Proxy Season High profile proxy fights included Yahoo / Third Point; Vulcan Materials / Martin Marietta; and Illumina / Roche Holdings. At least 7 proxy fights in 2012 where the dissident made an offer to acquire the company. Page 5
Shareholder Activism Highlights 2012 Proxy Season Approximately 60% (or 49 fights) were either settled or withdrawn 27 proxy contests settled year to date; unusual settlements included InfuSystems Holdings where the company settled a proxy fight for all 7 board seats by giving the dissident 5 board seats. Increased use of exempt solicitation campaigns; according to FactSet SharkRepellent, the 45 exempt solicitations announced so far in 2012 is the most in any year since FactSet began tracking such campaigns in 2006. Page 6
Shareholder Activism Landscape 140 120 100 80 60 40 20 0 Proxy Fights Trend Analysis (2001 Present) 126 133 100 108 100 93 63 68 75 82 56 42 # Fights Source: SharkRepellent FactSet Page 7
Shareholder Activism Landscape 2012 Proxy Fights # Proxy Fights (Out of a Total of 82 in 2012) Management 17% Withdrawn 27% Settled 33% Dissident 8% Split 5% Pending 10% Management Dissident Split Pending Settled Withdrawn Source: SharkRepellent FactSet Page 8
Shareholder Activism Landscape (Winner Trends from Proxy Fights That Went The Distance ) 60 50 40 30 20 10 0 2 1 2 15 13 11 23 23 24 1 3 8 7 13 14 5 10 22 2 9 27 2 15 36 9 1 22 12 20 24 3 4 8 7 14 14 Split Dissident Management Source: SharkRepellent FactSet Page 9
Shareholder Activism Landscape 50 40 Exempt Solicitation Campaigns 45 30 20 15 25 19 24 22 27 10 0 2006 2007 2008 2009 2010 2011 2012 Source: SharkRepellent FactSet Page 10
Why Less Shareholder Activism in 2012? Rich stock market valuations Not as many attractive targets Fewer sitting ducks companies are better defended Companies more willing to talk with activists Shareholder activism / proxy contests are expensive Shareholder activism / proxy contests are risky Shareholder activism / proxy contests are not easy More takeover activism Page 11
Goals of the Activist Investor Gain effective control of Board (without paying a control premium to stockholders) Influence Board or management to enhance or unlock shareholder value (i.e., increased stock price) Better operational execution Better deployment of capital (e.g., dividends, stock repurchases, sales of non-core assets) Sale or restructuring of the company Page 12
Goals of the Activist Investor Avoid a protracted battle Avoid negative publicity Keep expenses to a minimum Settle with the company (and get reimbursed for their expenses) Move on to the next target sooner rather than later #1 Goal: Above-market returns on its investment Page 13
The Activist Investor s Game Plan Knows and is familiar with the company Knows the company s vulnerabilities Has been an investor for a while Believes that the company is undervalued Believes it can be successful in obtaining substantial influence and effective control over the Board of Directors Will not easily go away Page 14
The Activist Investor s Game Plan Has probably spoken to others (institutional investors) who may share its views Is willing to commit time and financial resources to the cause Has a track record of having done this before Is well represented by counsel Knows the proxy contest game better than the company Page 15
Tools of the Activist Investor Schedule 13D and amendments thereto Advance notices of nomination and stockholder proposals Bylaw amendment proposals Shareholder demands for corporate records White papers Press releases Letters to Board Letters to shareholders ( fight letters ) Page 16
Companies Are Often Caught Off-Guard, Unprepared, and Vulnerable Many companies are sitting ducks Lack of appreciation of how attractive a target the company has become for an activist shareholder Lack of appreciation of who is likely to target the company Failure to recognize that they are vulnerable Failure to commission a vulnerability assessment Lack of early warning systems Page 17
Companies Are Often Caught Off-Guard, Unprepared, and Vulnerable Lack of appreciation of how the company s charter and bylaws make the company vulnerable Lack of attention to issues of concern to major institutional holders Failure to understand its shareholder base Failure to sufficiently engage with the shareholder base Page 18
Companies Are Often Caught Off-Guard, Unprepared, and Vulnerable Failure to appreciate how experienced the activist investor is that is knocking at the door Failure to take the activist investor seriously Failure to thoughtfully engage with the activist investor Failure to listen to the will of shareholders (e.g., act on advisory or precatory votes) Page 19
Companies Are Often Caught Off-Guard, Unprepared, and Vulnerable Failure to demonstrate a commitment to adopting best practices in corporate governance Failure to be sensitive to board composition issues (e.g., qualifications, compensation, independence, industry experience, etc.) Failure to be able to justify why the company should not be attempting to sell itself and why the shareholders would benefit from the company remaining independent Failure to publicly demonstrate concern, and articulate a strategy, for increasing shareholder value Page 20
Companies Are Often Caught Off-Guard, Unprepared, and Vulnerable Failure to recognize that time is not the company s friend Failure to have a rapid response team ready Failure to run preparedness drills Failure to listen to its advisors Failure to appreciate pure mechanics Failure to count votes Page 21
Page 22 WWW.ALSTON.COM Companies Are Often Caught Off-Guard, Unprepared, and Vulnerable Failure to publicize the company s successes Lack of attention to issues that are easy building blocks for an activist s messaging platform Failure to develop pre-emptive messaging Failure to have a plan to win the hearts and minds of shareholders Failure to have a plan to win over the proxy advisory firms
Page 23 WWW.ALSTON.COM Steps Companies Can Take to Make Themselves Less Vulnerable Appreciate how the company s charter and bylaws make the company vulnerable Pay attention to issues of concern to institutional holders Understand the makeup of your shareholder base (retail vs. institutional) Engage with your shareholder base Don t underestimate the skill and experience of the activist investor Take the activist investor seriously Thoughtfully (and carefully) engage with the activist investor Listen to the will of shareholders (e.g., act on advisory or precatory votes)
Steps Companies Can Take to Make Themselves Less Vulnerable Demonstrate a commitment to adopting best practices in corporate governance Be sensitive to board composition issues (e.g., qualifications, compensation, independence, industry experience, etc.) Be able to justify why the company should not be attempting to sell itself and why the company should remain independent Page 24
Steps Companies Can Take to Make Themselves Less Vulnerable Publicly demonstrate concern, and articulate a strategy, for increasing shareholder value Be the first (or before the activist does) to write a white paper on the Company Own the best ideas for enhancing shareholder value Know all the obvious paths to unlocking shareholder value and be prepared to explain why any of those paths may not appropriate to consider pursuing Page 25
Steps Companies Can Take to Make Themselves Less Vulnerable Recognize that time is not the company s friend Have a rapid response team of experienced proxy fight advisors ready Run preparedness drills Listen to your advisors Appreciate the importance of mechanics Count votes (run voting models based on various assumptions) Page 26
Steps Companies Can Take to Make Themselves Less Vulnerable Publicize the company s successes Pay attention to issues that are easy building blocks for an activist s messaging platform Develop pre-emptive messaging Have a plan to win the hearts and minds of shareholders Have a plan to win over the proxy advisory firms Page 27
Thank You! Page 28