The technology sector is obsessed with disruption. And for good reason: so-called disruptive technologies have completely revolutionized industries ranging from transportation and hospitality to finance and advanced genomics. But publicly traded technology companies around the world have also become the subject of a very different type of disruption: shareholder activism.
As shareholder activism continued its blistering pace throughout 2016 and the first half of 2017, tech companies have continued to be among the prime targets. These are not limited to large, high profile targets like Yahoo! and Samsung: over the last 18 months, shareholder activists have sought to disrupt the board rooms and C-suites of nearly 200 tech companies across the globe, with market caps ranging from less than $20 million to over $200 billion. Over the last five years, tech companies represented between 15% and 20% of all activist targets, including approximately 125 situations in 2016 alone. And they continue to attract some of the largest and most prominent activist investors, including Carl Icahn (Apple, Dell, eBay), Starboard Value (Yahoo!, Insperity, Marvell), Elliott Management (Samsung, Cognizant, AthenaHealth), and ValueAct (Microsoft, Adobe, Motorola Solutions).
Shareholder activism in tech is clearly here to stay. There is good news and bad news. The bad news is that, in our experience, most companies, in the tech sector or otherwise, are woefully unprepared, leaving themselves exposed to the well-honed tactics of the activists and their specialized counsel. The good news, however, is that there are actually concrete steps that boards and management can take today to put themselves in a better position once an activist appears on the scene.
In Part I of this post, we discuss two ways to ensure your company’s structural defenses are specifically tailored and trigger-ready for addressing an activist situation. And in Part II, we will describe three advance preparation steps that we believe are essential for tech companies in the current activist environment.
#1: Improve Charter and Bylaws
Do you know what your charter and bylaws provide for contested director elections? Most public companies, including many tech companies, have hopelessly inadequate organizational documents for proxy fights. The problem is that they all have bylaws that were put in place, often at the IPO stage. Often times these bylaws were drafted by an attorney who pulled a form and filled in the blanks—but who has never seen a proxy fight. While these bylaws, paired with charter provisions, generally operate to provide tech companies with fairly strong takeover defenses, they are unfortunately porous in an activism situation. In an activism situation, every word in your bylaws matters and may take on new significance. In our practice, we find at least 10 to 15 mistakes and vulnerabilities in every set of bylaws that we review.
The reality, however, is that the bylaws of most companies have actually never been reviewed someone who fights proxy contests for a living. It is critical to retain a proxy fight specialist to review a company’s charter and bylaws—and not regular outside counsel who most likely has never been involved in a proxy contest and thus does not know what to look for.
#2: Make “Shelf” Poison Pill Operational
Most companies do not have an active shareholder rights plan (aka “poison pill”) to limit stock accumulations to a certain threshold (e.g., 10%). In the absence of a specific threat, companies are generally advised not to adopt a poison pill because proxy advisory firms (ISS and Glass Lewis) and institutional investors generally oppose poison pills.
The alternative to outright adoption is placing a poison pill “on the shelf.” This means that the poison pill documentation is fully drafted and ready for adoption. This enables the board to react quickly in the event an activist rapidly accumulates a stake. Many tech companies do not have a “shelf” poison pill at all—or they have a poison pill that is actually not fully operational. The problem is that most law firms who provide their clients with a “shelf” poison pill have no experience with adopting them. Therefore, these law firms—let alone their clients—do not even realize that their “shelf” poison pill actually does not work as drafted and do not understand the practical steps required to adopt it. It takes them often days to adopt a poison pill.
A shelf poison pill that cannot be adopted overnight is a tool than cannot serve its intended purpose when it’s needed most. If it takes a few days, the activist can continue adding shares to its already sizable stake and gain further tactical leverage over the company.
End of Part I
In Part II of this post, we’ll dive into three specific advance preparation steps that tech companies should utilize to prepare for and manage an activist situation.