south florida women corporate directors meeting

WOMEN CORPORATE DIRECTORS SOUTH FLORIDA CHAPTER Shareholder ActivismDecember 15, 2016

Ken Hallett, Partner Quarles & Brady [email protected]

Laura Holm, PartnerQuarles & Brady LLPWCD [email protected]

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• Heightened levels of activist activity

– The number of activist campaigns has increased greatly.

– Proxy advisory firm support has made activism more mainstream.

– Activists target all companies and No company is too big or successful to avoid being targeted.

• Activist capital has more than tripled since 2008

– There are more activist funds bringing more money to the table.

– There has been great success as seen by significant investor returns to some activist funds.

– The current environment is seen as an opportunity for activists to prevail.

The Activist Landscape

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• Economic

– The objective of economic activism is to make the company engage in “value-maximizing activity.”

• Governance

– The objective of governance activism is to change certain corporate governance provisions at the company (e.g., executive compensation, board structure, director elections).

• Social Issue

– The objective of social issue activism is to change certain social policies of the company (e.g., environmental issues, board diversity).

Three Basic Types of Activism

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• Economic activism demands:

– Sale of the company or division or other strategic transaction

– Spin-off’s

– Increased or special dividends or share buyback program

– Management/board change

• Economic activism often piggybacks on governance activism.

Economic Activism

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• Executive Compensation

– Say-on-pay, say-on-golden parachutes, cut-back/eliminate golden parachutes/gross-ups, claw backs, accelerated vesting of stock awards.

• Board Structure

– Separate Chair/CEO, director independence, elimination of classified boards, director tenure, board diversity policy, direct shareholder communication with independent directors.

• Director Elections

– Shareholder proxy access and majority voting.

• Takeover Defenses

– Eliminate classified boards and supermajority voting provisions, require shareholder votes on rights plans, lower threshold for shareholder-initiated special meeting and permit shareholders to act by written consent.

Governance Activism

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• Corporate social responsibility is increasingly a major concern for certain shareholders.

• Over 324 environmental and social Rule 14a-8 shareholder resolutions proposed during the 2015 proxy season, including:

– Political and lobbying activities

– Environmental issues (including climate change, energy and sustainability)

– Board diversity

• ISS updated its voting policy on social and environmental proposals with a case-by-case recommendation considering whether implementation is likely to enhance and protect shareholder value and a number of other enumerated factors.

Social Issue Activism

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• Companies with hidden value• Break ups/spin offs/divestitures• Misunderstood businesses• Distressed and/or bankrupt companies• Companies with cost reduction and operational improvement

opportunities• Equity infusions – companies that require near-term capital• Strategic transactions where the activist can be the catalyst

The Activists Playbook – Target Characteristics

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• Stake building

– Accumulate stake

• Derivatives

• Acting in concern ("wolf pack")

• Disclose Ownership

– Schedule 13D Filing

– Hart-Scott-Rodino notification

• Engagement

– Private engagement – private letters, meetings with executives and board members, contact individual directors.

– Public engagement – white papers, public letters, press releases, public statements, questions on investor calls.

Campaign Stages

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No company is immune from the possible shareholder activism

• Establish and create a core response team

– Management, lawyers, bankers, proxy solicitors, investor relations

– Determine involvement of outside/independent directors

– Conduct regular update calls

• Identify and address potential vulnerabilities

– Operational/strategic weaknesses

• Retain an investment bank to perform an audit of your vulnerability

• Track your performance relative to your peers

• Review strategic alternatives outside the context of a particular transaction

Board Preparation for Activist Shareholders

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• Know your shareholder base

– Conduct investor vulnerability study, including investor perception study

– Analyze shareholder base (review Schedule 13D/G and 13F filings)

• Build and maintain credibility with shareholders and analysts before activists surface

• Keep in touch with investors and other key parties

– Goal is to help maximize large base of supportive investors and other third parties • Institutional investors (portfolio managers and proxy voting teams)

• Customers/business partners

• Business/trade organizations

• Traditional shareholder advocates


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• Keep in touch with investors and other key parties (cont'd)

– Reach out to and organize third parties, position them to speak positively about the company

• Develop a regular cadence of communication with the Board of Directors

– Use of planned events (e.g., earnings) to reinforce progress against benchmarks and metrics• But also avoid spin, shading, etc.

– Consider increasing frequency of momentum ("positive" announcements operating milestones, key hires, new guidance, etc. )• Balance with avoiding "selective disclosure"

• Be candid and hones – both in fact and in reputation


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• Review your Structural Defenses

– Review certificate of incorporation and bylaws, corporate governance policies, key proxy deadlines

– Counter balance with ISS/institutional voting standards and preferences

– Review laws of the state of incorporation (Delaware Control Share Act – Section 203)

– "On the shelf rights plan"

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In Summary

• Stay one step ahead– Create detailed plans for various scenarios and contingencies

– Anticipate threat and be alert to early warning signals, such as analyst reports suggesting changes in business strategy and changes in shareholder base (Schedule 13D filings)

– Be ready for the first phone call

• The company’s strategy will depend on the activist’s demands

• Establish internal and external teams in advance, including advisors to address and respond to shareholder activists

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• Proxy Contest

– Short slate vs. full slate

• Consent Solicitation

– Shareholder action by written consent

• Withhold the Vote

– Majority voting

Proxy Contest

Typical Proxy Fight Timeline

File definitive proxy materials, issue press release with 1st fight letter;

Mail “stop look listen” letter Mail 2nd fight letter, issue press release

45 to 40 Days

38 to 32 Days

Day 0

14 to 7 DaysISS, Glass Lewis decisions: Both parties likely to issue press releases upon decisions

IR / PR Strategy

• Telephone campaign (if appropriate)

• Final calls / visits with major investors

• One-on-ones with major stockholders

• Brief reporters

21 to 14 Days

Stockholder meeting

ISS meetings; Glass Lewis outreach; issue press release with 4th fight letter

5 to 2 Days

31 to 24 Days Mail 3rd fight letter, issue press release

10 to 7 Days Mail 5th fight letter, issue press release

Issue open stockholder letters as press releases, as appropriate

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Proxy Fights and Vote No Campaigns

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• SEC Filings– Proxy statement– Fight letters, press releases and other written proxy materials to be filed with the SEC

• Fight Letters– "Fight letters" are sent to shareholders multiple times, accompanied by proxy cards– Commonly issued as press releases and included in SEC filings– Sometimes sent only as private letters (but sent to reporters as well)

• Press Releases– Primary method to reach all audiences and directly communicate key messages

• Presentations– Used in meetings with investors and proxy advisory firms– Help educate media and other key constituencies

• Standby Statements– Respond to attacks by stating company's platform and correcting inaccuracies

• Other Communications– Company website– Interviews with reporters (on-the-record vs. off the record)

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• Negotiated settlements are prevalent

• Common terms include:

– Board representation for the activist (no. of directors, committees and any leadership positions, how long – any ownership requirements)

– Minimum ownership requirement

– Standstill agreement (time period)

– Reimbursement of activist expenses

– Joint press release announcing the settlement

– Other legal provisions

Settlement Agreements

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• Darden Restaurant Groups, Inc. – The entire 12-member board of directors for Darden Restaurants was ousted via a

proxy fight led by Starboard Value in October 2014.

– Lessons Learned• Regularly engage in meetings with institutional shareholders to seek feedback

regarding the company’s direction. These meetings should ideally include independent directors.

• Routinely monitor and review the company’s strategy, capital allocation, and businesses in light of potential activist arguments for spinoffs, share buybacks, increased leverage, special dividends, a sale of the company or business unit, or other fundamental changes.

• Periodically schedule presentations by legal counsel and/or investment bankers to familiarize themselves with the then-current activism environment as well as the direction of the financial markets.

Shareholder Activists - Florida Case Study

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SHAREHOLDER ACTIVISM IN SUMMARY Shareholder activism is on the rise and no company is immune.

Know your investors and be a good listener.

Be proactive in evaluating your company's performance, including evaluating potential strategic transactions.

Review your structural defenses

Constantly work to maximize shareholder value.

When proxy fights cannot be avoided evaluate the costs and benefits of negotiating a settlement with proceeding to fight.

Never lose sight of your fiduciary responsibility to do what’s legal, and in best in the interests of the company and the shareholders.

© 2016 Quarles & Brady LLP - This document provides information of a general nature. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations or issues. Additional facts and information or future developments may affect the subjects addressed in this document. You should consult with a lawyer about your particular circumstances before acting on any of this information because it may not be applicable to you or your situation.

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