Company response strategiesPreparation
What are the fiduciary duties of directors in the context of an activist proposal? Is there a different standard for considering an activist proposal compared to other board decisions?
Directors must apply the same standard of care to an activist proposal as to any other proposal or matter. They have to act and resolve in the best interest of the company and must treat all shareholders equally under equal circumstances. Also, board members (formally or informally) representing a shareholder on the board of directors must appropriately deal with their conflicts of interests when facing their shareholder’s activist campaign.
What advice do you give companies to prepare for shareholder activism? Is shareholder activism and engagement a matter of heightened concern in the boardroom?
As shareholder activism has gained traction in Switzerland, larger listed companies are investing more time and resources in activist engagement in order to deal with activists’ concerns appropriately. Accordingly, the preparation and implementation of preventive as well as defending measures against activists’ attacks have become part of a corporation’s routine. This increased attention may be regarded as an impact resulting from shareholder activism.
Preventive measures minimise the risk of a campaign. In particular, the board may identify and reduce existing exposures of the company to activist shareholders. As a first step, the board will examine the company’s exposure and analyse issues that are likely to be addressed by an activist investor. Key features of an exposed company are, inter alia:
- undervaluation (which can be addressed by value-adding sale possibilities of separable divisions or non-core assets);
- board instability (especially decreasing support by the shareholder base);
- large cash reserves combined with a comparably low dividend payout ratio; and
- M&A transactions involving the company.
Additionally, the executive management should continuously monitor and assess the company’s shareholder base to identify potential shareholder activists. At this stage, the board may also consider appointing a (stand-by) task force comprising specialists in public relations, finance and law. However, even if the board manages to implement effective preventive measures, a complete elimination of the risk of becoming a target of activists is - in light of the various activists’ interests - not possible.
Once an activist investor emerges and expresses its concerns to the company’s board, which usually occurs in a private setting at first, the board should be in a position to revert to a set of prepared tools. First, a board is well advised to listen open-mindedly and attempt to engage politely in a constructive dialogue with the activist investor addressing and considering the activist’s legitimate concerns. Following a close examination of the issues raised, the dialogue should continue and a dismissive or confrontational stance should be avoided. Consistency in the board’s engagement is important to preserve credibility.
Where no satisfactory solutions can be reached during the private conversations, the board may revert to its defence tools that include:
- responding clearly and comprehensively to the activist (ignoring the issues addressed is usually not an option):
- using committed and consistent board communication (direct and public engagement with the shareholders, especially by issuing a White Paper illustrating the company’s position); and
- engaging in dedicated dialogue with the company’s major shareholders and significant proxy advisory firms (in order to secure their support).
The company may be able to identify an investor who would go public in support of the board. An approach that has proven effective in past activist campaigns is to slightly relent towards the position of the activist with a moderate alternative proposal in order to steal the activist’s thunder.
As a long-term defence measure, some target boards consider gaining a friendly long-term anchor shareholder who is supportive of the current board’s strategy.Defences
What defences are available to companies to avoid being the target of shareholder activism or respond to shareholder activism?
The potential target company may implement a set of defensive measures, particularly defensive provisions in the articles of association concerning, inter alia, transfer restrictions, voting rights restrictions (3 and 5 per cent are the most common thresholds), super voting shares (ie, shares with a nominal value reduced by up to 10 times by keeping the one-share, one-vote principle, normally assigned to an anchor shareholder) and super majorities relating to specific resolutions or to a quorum at the shareholders’ meeting. Such structural defences may be an efficient tool to hinder short-term interested shareholders. In addition, Swiss regulation already provides for certain effective impediments an activist must overcome including, especially, the disclosure requirements (see question 7) and the mandatory tender obligation (at 33.3 per cent) pursuant to the FMIA as well as the lack of access to the company’s share register. It is a difficult balancing act for the activist to engage in conversations with other shareholders and to avoid triggering disclosure obligations or even a mandatory bid obligation due to an acting in concert. Target boards will sometimes use this legal risk to destabilise the activist shareholder and shareholders showing sympathy with his or her actions.
A structural feature that makes a corporation more likely to be the target of shareholder activism is, in particular, the implementation of an opting-out clause (or an opting-up clause, respectively) regarding mandatory bid obligations. The release of an investor building up a majority stake from the duty to launch a public tender offer means an elimination of a main legal impediment that activists face in Switzerland.
Although not picked up by the recently published draft revision of Swiss corporate law, criticism with respect to the instruments of super voting rights and opting out has been voiced in relation to the ongoing battle for control over Swiss listed company Sika.Reports on proxy votes
Do companies receive daily or periodic reports of proxy votes during the voting period?
In general, the company itself is not entitled to request to receive and review proxy forms returned to the independent proxy or proxy advisory firms (see question 2) prior to the shareholders’ meeting. However, proxy advisers tend to get in contact with the company (if the company has not itself reached out to the proxy advisers) to discuss their voting recommendation prior to releasing them. This dialogue with proxy advisers gives the company a rough indication of how votes might be cast at the shareholders’ meeting.Private settlements
Is it common for companies in your jurisdiction to enter into a private settlement with activists? If so, what types of arrangements are typically agreed?
The entering into settlements with activists is rare in Switzerland. One example was the settlement of the board of directors of gategroup Holding AG with RBR Capital Advisors during a proxy fight where the parties agreed on the composition of the board of directors.