What You Need to Know about Shareholder Activism
For starters, you might want to second guess any headlines you read about shareholder activism in 2016. Some stories would have you believe that the practice is now passé. However, according to experts in the field, shareholder activism will go through big changes in 2017.
Without question, politics plays an important role in shareholder activism. Whenever government makes changes, public companies should anticipate activist investors attempting to make changes in the boardroom.
Shareholder Activism: Investment Strategy
No doubt shareholder activism is considered an investment strategy for some. In fact, the terms activist shareholder and activist investor are often used synonymously. One resource uses the following as its definition: “an individual or group that purchases large numbers of a public company’s shares and/or tries to obtain seats on the company’s board with the goal of effecting a major change in the company.”
One only has to look at recent news stories regarding Amazon’s proposed purchase of Whole Foods for an example of shareholder activism. According to an interview Whole Foods’ founder, John Mackey gave to Texas Monthly, a New York hedge fund picked up nearly 9% of Whole Foods’ shares. In their role as activist investors, the new shareholders were intent on making changes. At the very least, they wanted to disrupt leadership. Alternatively, there was a push for sale of the company.
John Mackey’s experience is a good read and a lesson for public companies dealing with shareholder activists. As Whole Foods’ CEO, Mackey felt that his business was unduly attacked by greed. He felt that timing had a great deal to do with what he viewed as a takeover mission.
One thing is certain. Shareholder activism is very much an investment strategy. Most times, the game plan is quite calculated. Shares are bought up. Often, the next step is to insist on board replacements. Naturally, the new member choices will be deliberate and in-line with proposed changes.
To a public company, activist investors can be a nightmare. First on the agenda, is often a reduction of costs. In many cases, the campaign may also include a focus on merging forces with another entity. Of course, it’s all with the intent of changing direction and increasing the bottom line.
Identifying Potential Targets
These days it appears that smaller and mid-size public companies should be most concerned about shareholder activism. More than likely, all businesses monitor share purchases. According to one resource, the first clue that a company may become the target of shareholder activism may come with the filing of SEC Form 13D. This form is mandatory whenever a particular investor plans on picking up at least five percent of the company’s shares.
Be that as it may, there activist investors also retain legal counsel to help them identify prospects. In some cases, there may be a feeling that the company is mismanaged. And, there may also be the perception that smaller businesses are less prepared to fight change. Obviously, this is one reason to work with a law firm that understands the threat of shareholder activism.
At Manfred Sternberg and Associates, we have represented a number of public companies with concerns of shareholder activism. If your business is facing prospective disruption from activist investors, we can provide you with legal advice. Contact us to schedule an appointment.