Much has been written about how companies can prepare for, and hopefully avoid, a confrontation with an activist shareholder. While many boards are heeding the call for greater shareholder engagement and oversight of management, each year witnesses a significant number of activist campaigns and proxy contests. So what is a board to do when its fears are realized and an activist comes knocking? One of a board’s first considerations should be whether to establish a special committee to lead the response.
In most public companies, the board plays a supervisory role, providing oversight to the management team who are responsible for day-to-day operations. Accordingly, the board is not expected to delve into the daily workings of the company’s operations but instead sets the strategic goals of the company and monitors management’s performance against the strategy. However, when an activist shareholder appears and challenges the company’s strategy or management’s performance, the board is well-advised to take a greater hands-on role in responding. Failure to do so in a timely and informed way can result in potentially disruptive change, not to mention tremendous cost, both in dollars and lost management time. As a result, expedience may dictate that a board form a special committee to spearhead the response strategy, but there may be sound legal reasons to do so as well.
When an activist arrives on the scene, time is of the essence. Corralling board members on short notice for what could be frequent meetings presents many challenges, particularly if an in-person meeting is warranted. In addition, board members who are part of the management team may well be conflicted if their performance is being challenged as part of the activist’s campaign. In these circumstances, the establishment of a special committee of independent directors assists as a procedural safeguard to ensure any decision is made by individuals whose judgment will be free of conflicts. A decision made in this way will carry significant weight with a court in determining whether a board has exercised appropriate business judgment. Shareholders and proxy advisory firms may also accord greater weight to decisions made in this fashion.
This is the first in a series of recurring blogs on special committees focused specifically on contested transactions, including proxy contests and hostile bids. For more information on special committees, please refer to 20 Questions Directors Should Ask About Special Committees, a publication co-authored by Fasken Partners William K. Orr and Aaron J. Atkinson for CPA Canada.