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"On Demand CLE Credit: Activist Profiles & Playbooks"

Originally Aired: Tuesday, February 6, 2024


2023 once again saw near record levels of shareholder activism and there's no reason to expect that 2024 won't bring more of the same. Activists' strategies and tactics - and companies' responses to them - continue to evolve. That makes it even more important for companies to understand who the activists are and what makes them tick.

  • Juan Bonifacino, Managing Director, Spotlight Advisors LLC
  • Anne Chapman, Managing Director, Joele Frank
  • Sydney Isaacs, Managing Director, H/Advisors Abernathy
  • Geoffrey Weinberg, Managing Director, Morrow Sodali

    Topics Include:

    1. Lessons From 2023's Activist Campaigns
    2. What to Expect From Activists This Proxy Season and How to Prepare
    3. Experience Under Universal Proxy in 2023 and Implications for 2024
    4. Evolution of Activist Strategies and Tactics

    On-Demand CLE Course Instructions

    In order to qualify for on-demand CLE credit, you must follow the instructions outlined on this page.

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    Program Transcript:

John Jenkins, Managing Editor, TheCorporateCounsel.net and DealLawyers.com: Welcome to today's webcast, "Activist Profiles & Playbooks." 2023 once again saw new record levels of shareholder activism and there's no reason to expect that 2024 won't bring more of the same. Activists' strategies and tactics - and companies' responses to them - continue to evolve. That makes it even more important for companies to understand who the activists are and what makes them tick.

We've assembled a panel of experts to provide their insights on these topics and other topics related to the current activist environment. Joining us are Juan Bonifacino, Managing Director of Spotlight Advisors; Anne Chapman, Managing Director of Joele Frank; Sydney Isaacs, Managing Director of H/Advisors Abernathy; and Geoffrey Weinberg, Managing Director of Morrow Sodali.

I'm going to turn things over to Sydney to kick off today's program with an overview of the lessons learned from 2023's activist campaigns. Sydney?

Lessons From 2023's Activist Campaigns

Sydney Isaacs, Managing Director, H/Advisors Abernathy: Thanks, John. A lot of the themes we saw in 2023 were familiar, but with a unique twist on some of them.

No. 1 is that M&A is still a prominent theme, probably because it's the fastest way to get a pop in valuation. That said, it's harder in the current market - as you all know, capital markets are slower, interest rates, inflation and there's a lot of antitrust scrutiny from the FTC. While we saw a lot of focus on M&A, it was a lot more about divestitures and breakups in addition to the normal, traditional M&A strategies.

The futile life of an M&A person is that we help companies come together and it's all about scale and synergy, and then we help break them all apart by citing "sum of the parts" discounts and the need for clarity and fair evaluation. To be fair, that conglomerate structure can hide poor performance. In 2023, we're seeing a two-step process from the activists that first pushes for more transparency through reporting so they can find those weaknesses, and then push for the sale of that weak division.

As some of the M&A headwinds clear, we're starting to see some signs of M&A picking up just even in the last month or so. There's a lot of pent-up interest. As you know, the last year or so has been tough for M&A. A lot of these companies have announced reviews of strategic alternatives, which is effectively, go sell yourself campaigns that the activists push.

One note of caution that we've seen in 2023 - when you announce the review of strategic alternatives, you need to give everybody an answer as to what did you find when you explored this. We have seen some cases where the company came back and said, "Didn't find much. We think we're on the right track," which is a fair answer in terms of doing the actual analysis, but it's a hard answer to communicate, especially when you're under pressure by somebody who wants you to find something. I've seen some companies regret announcing strategic alternatives when they complete the process and don't have a great answer for the market on the flip side of it.

The second theme we saw last year was pushing for CEO ousters. There was a lot of CEO change from campaigns last year, even if the activists didn't call for that directly publicly. They may have called for it privately, most likely when you see those CEO departures. It's possibly tied to the extent there's joint CEO chairman roles to the universal proxy.

That leads me to a third theme we saw last year, which is higher quality candidates. When I first started working on activist stuff many years ago, it was these wild cowboys, and the asset class was not entirely respected. It was kind of those crazy activists trying to push for problems. Now, there's a lot more respect and they're able to get candidates that are quite qualified. Not just people from their own funds, for example, but industry experts. You're seeing that proxy advisors really support more of those candidates as a result as the quality goes up. This one also dovetails with universal proxy in that it puts a lot more pressure on candidate quality. You're seeing the companies have to up their quality, but also the activists doing the same thing.

The fourth theme was multiple activists targeting the same company. You'll say, "We've always seen wolf packs," and this is a little different. Like I said, the themes in 2023 were somewhat familiar, but with a twist. For this one, you used to see one of the big guys file a 13D and everyone piles in because they think, "Wow, there's a decent chance that there's going to be some sort of stock support, whether it's something real or artificial." This is a little different than just piling in; this is multiple activists that are bringing their own defined points of views. They're not just in it for the ride, but sometimes have conflicting perspectives.

This one can cut both ways for a company. In some ways, it's double trouble. It could also end up in a three-way fight or even more complicated than that where there's divergent views and they can play good cop, bad cop off of each other and effectively force the company to push for the lesser of two evils. You find a white knight-type situation, but you might end up with a result that is still suboptimal but it's maybe better than the worst case. There's a lot of examples we can talk about of that, where there were multiple fights going on at the same time last year, which is highly entertaining if you care about this type of stuff.

Lastly, I would just mention still a whole lot of activists that are copycats or nascent or new entrants. This is a theme that is in line with what I mentioned about the respect of the asset class more broadly. I saw somewhere about 70% of campaigns last year were from emerging or infrequent activists.

This one also cuts both ways. Sometimes it's easier to catch them in a mistake - a missed filing deadline or some of the technical stuff where it can play to your advantage. At the same time, we like to look at prior fights and their typical MO. It's harder to do that when they don't have that track record. Sometimes, clients say, "This guy? Never heard of them. This shouldn't be as tough." This isn't Elliott, Icahn or one of these big names, but they can be tougher to fight even though in terms of the media, they often don't get as much attention because they're not one of the big, hefty names. Anyway, it can be tough either way.

Those are the themes that were most prominent in the stuff we worked on in 2023. I'll turn it over to Geoff to talk about what we all really care about - what does it mean for 2024?

What to Expect From Activists This Proxy Season and How to Prepare

Geoffrey Weinberg, Managing Director, Morrow Sodali: So, I'm a little biased. I run our retail shareholder advisory practice, so it's something I also focus on. I'll start by separating the two buckets: the retail and your traditional activism.

One thing we saw last year that I think is going to continue to grow is a lot of these small- and mid-cap companies that are 80% off their COVID highs and are substantially retail, we're going to continue to see campaigns there. That's the easiest target. I occasionally will represent dissidents, as well. Just as an advisor, when you're looking at the math on it, a company with a 40% non-routine quorum is often a much easier target than that same company that has an 80% quorum. Not only are they hitting those original TSR misses and things that are traditional activist red-flags, but they're also an easier voting target. If I own 4% of the stock for a 50% non-routine quorum, I really own 8% in voting power and now need to find less allies within the shareholder base to support my campaign. These companies often tend to have less voting power, if any, from the index funds who traditionally support management.

The advantages from management also changed a little bit with the UPC. If you're the company, you have the power of the pocketbook where you can just send bright white mailings that look fancy and only list your nominees, and it's the last vote that matters so they're going to get hit. With UPC, the cards are the same. That takes away that advantage.

Finally, it's a different retail universe. These are a lot of folks who don't know who ISS and Glass Lewis are. They don't care about your big plan that you put out. They don't need a plan. They think ISS and Glass Lewis are these, we joke, "advertisers on the side of a bus" that the company bought and paid for. They don't know who it is. It's not that traditional, "Let me get my team together, here's our great plan and here's why the activist is wrong." It's more hand-to-hand combat and charisma.

That's what to expect in retail. How to prepare for that is different. One is, understand your shareholder base. We talk to clients all the time who don't realize what their quorum is because their routine quorum is different than their non-routine quorum and they think, "We got there, we hit 70%," but their non-routine quorum was 50%. Understand that is a vulnerability and what your shareholder base looks like.

The other thing is not being engaged. We'll talk about that within institutional activism, but folks don't engage enough with the retail shareholders and understand, "Here are my 10 largest retail that serve the same purpose as BlackRock and Vanguard at your mid-cap company." Sometimes there's, "What's our sentiment analysis? What do people actually care about? Who has the most pull-on Twitter or Reddit? Who's running these? What are the conversations like?" It's a whole other world that we're still barely touching on that we're trying to build up for our clients, so that stands out to me.

On traditional activism, settlements were way up last year with folks scared of UPC on both sides and the uncertainty around it. I think this year will be a little different with issuers at least trying to fight more at first. We'll see if that changes but with the UPC maybe not being as scary as folks thought, maybe folks are more reluctant to give out board seats as willy-nilly. For the dissidents, you may have gotten one or two seats last year in a settlement, but how's your investment performing? Has it increased? You've got that nominal win on a board but if you're still in the red you now have to show your LPs what you are doing to make change. Are we actually going to get real change? You may see dissidents less willing to settle and take it further.

In terms of how to prepare for that, I often think I'm like a stock watch salesman. Basically, a service where we go through from an activism lens and understand who actually owns your stock outside of 13Fs. Folks are smart. Form 13Fs only are due every 45 days after the quarter ends. They're a little bit stale. There are ways to get around truly disclosing shares.

One of the easiest things to do is have a year-round stock surveillance group monitoring the external data and understanding who's building position, who's shrinking and what your base truly looks like.

Another thing is to pay attention to your boring annual meeting voting results. It's the easiest thing to do. I can't tell you how many times we see a hedge fund vote in a certain pattern that's really them raising their hand and asking management to talk to them, but folks don't realize it because, either they don't monitor their annual meeting voting or they don't have advisors telling them what it means, "Oh, they're voting against the chair of the Nom and Gov Committee." Well, why is the hedge fund doing that? ISS and Glass Lewis may have recommended for, what's the incentive for them, or they voted against Say-on-Pay and they did this. You don't see those results unless you have someone looking at it and are paying attention to it throughout the year. Otherwise, you only see it in N-PX results that are only for the mutual funds. It's an easy thing that often gets missed.

Finally, engage in the off-season. Institutions don't like to be called upon only when they're needed. An existing relationship can go a long way. It's hard for an activist to say that the company's CFO or the company's lead director is unqualified, a bad person or doesn't know what they're doing when the analyst at BlackRock or of a hedge fund has met with that person in September of the year and then this is February. That person was qualified, knew the material and understood the space and the things that affected the company. That goes a long way. It really hits the activists over the head and allows them to lose credibility.

Anne Chapman, Managing Director, Joele Frank: As you think about the retail base and how communication is shifting, how are you thinking about nontraditional ways of communicating or even engaging throughout the year? That, perhaps, is an untapped opportunity.

Weinberg: There are a few ways. One is people think about a NOBO list - a non-objecting beneficial owner list - as only a voting list. When Jane Smith opens up her Fidelity account, without realizing it, she is checking a box where she consents to share her name, address and number of shares she owns with the company if the company requested it. There's a danger to ordering a NOBO list. It's really a niche danger, but for the sake of this webcast, it's helpful to say that current common thinking is if you have a NOBO list and an activist gives you a Section 220 books & records request, you have to hand over the NOBO list whereas if you don't have one, you don't have to hand it over.

Having said that, assume that you're fine to order your NOBO list. They're expensive, but they're not cost-prohibitive depending on how many shares they have. You also could order them to be more limited at certain times, but you should be able to order a NOBO list in September. At that point, it probably would be stale for next year's meeting. Look at it and try to understand who is in the shareholder base. You'll be shocked at how many times we see a name that has 4 million shares, a 3% position and it's a random guy in California and he's never heard from the company, he has no idea and he hasn't voted in three years. Do that base-level analysis, go through your NOBO list, understand who it is and build that in, and do research on it.

The other thing is that it depends on the company. If you are, like, a sexy brand and you have a big Twitter following that is a lot of investors, you can put out certain things about it. We do this for voting all the time where it's, "Check your inbox for things from ProxyVote.com if you hold at brokers x, y and z," or putting out FAQs. We've been doing that a lot on tender offers. "If you hold at Morgan Stanley, here's for the reach-out to. If you hold at Fidelity, here's where to go."

Companies are getting more creative in terms of the things they're trying to do on the capital market side, but a lot of it depends on having their shareholders actually do it. I've been a part of rights offerings, exchange offers and all these different things that involve retail shareholders having to do complicated back office corporate action items. It becomes, "How do we simplify this not because retail is not capable of understanding it, but because back offices at Goldman don't understand it. All this stuff is super complicated, so how do we simplify it and then show them where to go to reach that?"

Experience Under Universal Proxy in 2023 and Implications for 2024

Chapman: That makes sense and segues into how I've been thinking about universal proxies. As Sydney and Jeff mentioned, it wasn't a big deal last year, much to the disappointment of some. What struck me as interesting last year was the number of settlements - 83% settled before the public nomination versus roughly 67% the year before. It's hard to say exactly why that number went up, but you do wonder if part of the influence was not wanting to put your directors up head-to-head essentially with a dissident candidate.

The other thing that was somewhat interesting was to watch the by-law amendments swell. Of course, we knew by-laws would be amended to make sure they were tightened up with the newer requirements, but it was interesting to see what some shareholders would call an overreach. If you made a by-law amendment that required things that made universal proxy much more onerous on a dissident, there was a feeling of, "Don't get too cute." We saw a lot of pushback when those by-law amendments seemed to be overreaching. I don't know that we'll see a whole lot more of those by-law amendments because it did feel as though people caught the wave and took a look at their incorporating documents last year, but we'll keep an eye on that.

For me, the most impactful change in light of the universal proxy was this idea of focusing on board members as individuals. It's not a generic slate of them versus us. It became a popularity contest. The proxy ballot will look completely different. You just have a list of names that you then have to determine based on qualifications who you want to represent you. This is an opportunity for companies to take advantage of the old "be your own activist" instead of just focusing on those strategic alternatives.

As you think about activism, it looks like, "Let's tear down what we say about the board. Are we transparent enough to highlight what we know are the qualifications? How are we describing them? How are we describing them individually and as a collective whole?" Those two things are important. Each director needs to have some disclosure that highlights the skills they bring, tie those to the strategy and offer some proof points. It's not enough to just say, "This director's great at M&A and strategic alternatives." You have to then explain where they get this to back it up and then look at how that fits for the board as a whole. There is when the bios feed into the skills matrix. How are you describing the skills that you think are necessary right now for board members? What do those skills mean to you as a company? For every company, the meaning of the skill can be different. Tie that skill to the impact on strategy.

That's where we're headed. I'm not sure most companies are there yet. It's a developing best practice but think about it as telling your story. How do I as a shareholder know that this board is great? How do I know these directors are active and involved? How do I as a retail holder, who probably doesn't even focus on who's on your board, get a sense of how they operate? I've heard some institutional shareholders say this even can go down to a committee level. Instead of the boilerplate describing the responsibilities of your committees, talk a little bit about how they functioned over the past year. I don't think we need to encourage agendas and follow-up items, but can you give me a sense of what the directors were focused on? A couple of the initiatives that came out of their focus areas? Anything to personalize the function while still staying within disclosure rules.

Weinberg: The one thing I would share is the funny game of the honesty within the board and with the management team of, what skills do our directors actually have when the list starts off at a certain level? Then you're slowly challenging each one because ISS, Glass Lewis or the dissident's going to challenge it. It's picking out, what does that M&A experience look like? What does that media and IP experience look like? Going down that list.

Chapman: This is an area of extreme sensitivity. As you notice, we've worked with clients where this is awkward to propose. Sometimes a third-party advisor can do this more easily because you can say, "Here are the arguments and the pushback we think you are going to get." I suspect that for many companies, this is a multiyear evolution. If nom/gov committees are thinking about this right, this can feed into their own refreshment plans.

What I also see is what the nom/gov committee is using internally to think about how they assess their board. How they look for the next person in the door often is not disclosed. Thinking about how you can utilize good work and disclose it in a way that feels appropriate is great. The worst thing, and this happens with every criticism, is you get an activist in and all of a sudden, you're now disclosing all the good work you do. It looks reactive. You must have just started to do this because the activists showed up when you may have been doing it for a while and just not talking about it.

This is a great time to continue to focus on how you talk about your board, your directors, the process for refreshment and thinking about what's next. This is information shareholders have wanted for years. It's just the next evolution and the pressure that universal proxy now puts on us.

Jenkins: Geoff had talked about offseason engagement and how it's tougher for an activist to convince an analyst that this director is not acceptable when they've had interaction with them. You know who your vulnerable people are, people that the activists are likely to target. There's always sensitivity about which directors to put in front of shareholders and making sure they're able to handle themselves in that situation, but are companies using offseason engagement to get some of the potentially vulnerable folks out in front of the key institutions so that they can make a case for themselves and put them in a better position to defend those folks against activist targets?

Chapman: There is some of that. It's obviously easier when your vulnerable director is vulnerable not just because they might not appear as skilled as the next person, but when there is a direct criticism. "We've had issues with overboarding, diversity, etc. Let's get out the chair of the nom/gov committee to talk about the refreshment process, things that are directly relevant." Similar thing with compensation issues. I'm not sure yet that there is a huge groundswell of, "This person on paper doesn't look well qualified, let's drop them out in front of investors so they can just see how good they are."

Weinberg: I agree with that completely. It's sometimes too awkward to bring that audit committee member out who has 14 years of tenure. It's a weird thing to do sometimes. You're sometimes blessed when they go for a control slate and the lead director makes the most sense and all that, but those targeted directors also get their shine on a short slate.

When you're meeting with BlackRock, Vanguard or State Street, you often bring them to the room with you. They have to explain why they're valuable. You want other directors to also be able to talk about them honestly and show that dynamic within the boardroom that everybody's not best friends and there is contention, but they know each other because they meet multiple times of the year. There's that balance within those meetings of showing some tension, but also that everyone gets along and is constructive.

Chapman: There's another technique that we've worked on with a couple clients. It goes to the fact that every director can't meet with every shareholder, but thinking about how else you present your directors. Do they have LinkedIn and they post occasionally? What does your website presence look like? How do you describe your directors?

I recently saw a well-crafted video where the CEO interviewed a number of directors and they had a conversation. It felt authentic and organic. It may well have been just really well organized. Are investors watching these videos religiously? Nope, probably not. When you need to personalize directors, when someone has a question, it's great if that material is already out in the public domain. It acts to personalize people that you otherwise might not be able to meet.

Isaacs: It's a good point that if it's already out there, then it doesn't look nearly as defensive. You made the same point regarding bylaws. That's a big takeaway - when it's peacetime, you can do a lot of these things. When you start making changes to advance notice bylaws and director questionnaires during a fight, it looks disingenuous. We're seeing more pushback to some of that appearance of not being impartial to the two sides. It is a reason to clean up your bylaws in peace time.

Chapman: You make a great point. Sometimes you need to react. If the activist is there, you've got to take every defense you have. To your point, if companies can get out ahead of it, thinking about universal proxy and directors, and how we present them, should be part of what you're doing to prep for activism anyway.

Weinberg: That is the benefit of the stock watch. If you buy yourself an extra month of warning on these, you're able to then make changes that you're probably already going to make. If you think an activist is going to come out and file a 13D, you're in a rush to get these things out. The last thing you want to do is that change that you were about to do anyway comes out three days after the activist filed a 13D on you and it looks purely reactive as a way to placate proxy advisors.

Isaacs: You can win the fight and still lose a lot of support. You might get the votes that you need to win the fight, but if you've done it by changing your advance notice bylaws, making overly challenging director questionnaires and other things that people think are "too cute,� you can get to your win on your proxy but there could be Round 2. The vote is not the end of this. Yes, you might get to the annual meeting and get the result you want, but you have got to think about what happens the next day. There's more scrutiny of, what are the tactics that companies are using to get there, and will that come back to haunt you in the future?

Juan Bonifacino, Managing Director, Spotlight Advisors LLC: I was just reflecting on the universal proxy and the impact of it. It reminds me of the implementation of Say-on-Pay early on. When you think about the changes that have happened in the proxy landscape over the years, universal proxy looks more like that rollout, and less like some of the more recent changes like proxy access and pay ratio. When you talk to the investors and the proxy advisors, they really see it as a useful tool where they now have a scalpel, and they can target individual directors more precisely to create less invasive change to the board than what you could do under the traditional rules.

If you think back to when Say-on-Pay was first adopted universally across the U.S., it took a couple of years before people started saying, "This actually is changing things." In the first-year people were saying, "It's an up-or-down vote, it's precatory, it doesn't provide any details. Is this really going to change anything?" But directors started reacting: "We failed Say-on-Pay this year, we probably need to do something about this and get out ahead of it and address this." In the end, Say-on-Pay has really shaped the way companies and investors interact.

We're still in the early innings of universal proxy. All of these calamitous predictions that people were coming up with didn't end up coming to pass. But over time, I think people are going to start saying, "We used to talk about the board as a whole with some long tenures or short tenures, but a mix of tenures works well." And now people are starting to face the reality that individual directors are more exposed: "I have two directors that have 14 years tenures, one of them has a potential compensation arrangement where they may not be independent this year." They may be more likely to be targeted by an activist than they have been historically, which comes to your point, John.

Directors are thinking, how do we present this and protect ourselves and get ahead of those criticisms more precisely now that directors can be individually targeted more easily? Anne talked about this with individualizing the directors and personalizing the communication. That's a long-term trend that has accelerated almost like a step function due to universal proxy. People really do need to say, "Who is on this board? What are they providing that's both valuable and differentiated" in a way that maybe wasn't as prominent and at the forefront in the past.

Universal proxy, for me, is a bit of a "stay tuned" development. We'll see what it looks like in the next couple of years, but it's creating a little bit of a sea change.

Weinberg:Juan, that's a great point. One thing that always comes to mind with that is it's also self-correcting. We see it all the time where a director gets an "against" vote. During an annual meeting, uncontested, they get 2 million shares and they want to know who that was. Not that folks are overly sensitive bunch, but it's human nature to want to understand, "Why did I get less votes than my peers?"

We're now seeing that wave come in that also is its own prevention for an activist campaign, years down the road where like, "We got a negative Say-on-Pay, that's going to funnel down to the comp committee and that person's going to get it, so they're paying more attention than they ever would." "We have a classified board and now the nom/gov committee is getting hit. We don't like that because it looks bad." "Why am I getting only 72% support and my peers got 95%?"

It's interesting watching it from my perspective on annual meetings. It's hitting it before it hits contested meetings. The more this goes, and the more public battles happen and individuals get called out, life's going to be a bit easier for corporate counsels because it will be out there already.

Evolution of Activist Strategies and Tactics

Bonifacino: In terms of the evolution of activist strategies and tactics, it's helpful to think about activism as a form of value investing. Like other active managers, they're looking for two things: one, a stock that's undervalued by the market and two, a catalyst: an event that's going to get the rest of the market to look at that and say, "That needs to be valued differently. I'm going to invest in it" which will create a price change." If you don't have both, it ends up not being a good investment. You're only right if everybody else realizes you're right.

The difference between an active manager and an activist is the activist can act as their own catalyst. Instead of a traditional catalyst that might be, "The company had strong earnings. It shows that now there is going to be better margins going forward, there's better growth or their strategy seems to be working," an activist can come in and say, "If only the company would close that division and replace the CEO," or, "If only they would just talk to that natural strategic acquirer and get that premium. I'm going to go in and nudge them in that direction." It might be a gentle nudge, or it might be a shove, but the different activist tactics are being used to get to that catalyst.

Ultimately, the activist campaign is a means to that end. Board representation is a powerful way to achieve that goal, but the goal they're looking for is the reevaluation of the stock so that they can make money and generate output for their portfolio managers. That's important to remember when you talk to investors and activists. You might have a portfolio manager that loves the company, but if the activist catalyst makes sense, that might end up resonating. They say, "Maybe the activist is right," and they end up getting support from your investors that may not necessarily have been as evident in friendly conversations with your investors and IR.

When you think about the different strategies that activists use, we often talk about it as a spectrum where on one end it's a cordial, friendly, "I'm just helping you out as an unpaid consultant giving you some great ideas." On the other end, you've got someone who's coming in there with elbows out and being forcefully, nominating directors and going for a control slate. Many funds will gravitate toward one side or the other stylistically, but also many will start at one end and go to the other if it doesn't work: start with some honey and then keep adding vinegar until they get their way.

It is both a tactical spectrum but also sometimes comes down to personality. They're trying to create this event and reach this catalyst, so they might start off with a private letter or discussion and then ratchet it up and put a letter out publicly. They're going to see if other investors can come in and make that case - "I'm going to suggest a director." "I think you need changes at the board level." "This person's really great." "I think you need changes to management." At the more hostile end of the spectrum, they start nominating directors to replace incumbents and making the case to all shareholders in a traditional proxy contest.

Those tend to be the highest profile campaigns. They're not as common as the rest though, where in the early innings there are a lot of settlements and boards trying to avoid a contest. If you look at how the institutional investors view activism, they often see contests, that corner of the financial ecosystem, as beneficial to capital markets, because each side is having to present their case publicly of why they think their path is the right path. It generates information discovery for the market about big-picture strategic questions that companies have. The dissident is saying, "You really need to be doing this." And the company responds, "This is why we're doing what we're doing." That process informs the market generally, and if it ends up going to a vote, shareholders can vote on which side they think is most persuasive.

That leads to another point, which is the professionalization of the activist world. If you look back 10-20 years ago, you saw a lot more of these strident 10-page letters talking about how the company is a big trash fire and everyone needs to go. Activists were viewed as these corporate raiders and stigmatized in the market. The letters have gotten a bit more bloodless nowadays, and also more pragmatic. Institutions have raised their expectations about what it takes to get the support, and activist funds have reacted and responded by making more thorough economic and governance cases - "This is why the company needs to be doing this. This is why if you don't act now, they're not going to do it under the incumbent board and the incumbent plan." That means fight decks are getting thicker. It means that there's a lot more numeracy in the letters and communications to shareholders. The level of detail in the assessment and the communications by the companies and activists creates this mechanism of, "What is the right answer here," with each side making their case.

If you think about the strategies and tactics that are coming out, activists are becoming more sophisticated in how they make their case. That also ties into some of the discussions we had here about the director candidates, activists are nominating. We are seeing strong director candidates coming onto dissident slates - people with industry experience, with operating experience, senior management that maybe we wouldn't have seen in the past, when joining a dissident slate was not a wonderful career move for a lot of people. Those people tend to be more persuasive to the voters and proxy advisors. You're starting to see these industry experts that have done what the dissident is saying needs to be done at this company.

Part of that may be the universe of activists is broadening. That gets back to this point on an 'active fund' versus an 'activist.' Those aren't really different categories anymore. Most activist campaigns last year were run by occasional activists, people that have a day job in regular portfolio management, but there's one or two positions where they feel like they need to be more vociferous and tell the market "something needs to change here." They carry more credibility with other investors because if you're a shareholder for four years, you've invested a lot of capital in this and you care about this so much that you went to your fund's general counsel and convinced them that "in this one case I have to go out there and put out a letter." The investors start thinking, "This person is not just someone who's going to be a fly-by-night investor, come in here and six months later they're out. They got into this stock for similar reasons that we did and I think they may have a good case."

When I was at ISS, we used to look at the universe of campaigns that go to a vote. The professional activists were often looking for a quick settlement, and they want the event. They have a playbook about moving in, settling and targeting the next company. These first-time activists though, which we had a record number of last year, and these occasional activists, they often end up going all the way because they feel passionate about these long-term investments, where problems devolved into irreconcilable differences that need to end up decided by shareholders.

So as you think about the different investment theses that activists are employing, they're going to be similar to those pursued by other active managers. In times of high M&A, they're going to be looking at M&A theses and finding companies that might be targeted. In times where cash is plentiful on the balance sheets but buybacks and valuations are low, they're looking at companies that fit that profile and say, "Maybe I can be a catalyst to push this."

I saw an article in Bloomberg toward the end of last year during earning season that mentioned that companies that were missing their earnings were getting punished much more severely than in the past. That was a really insightful article, because it says something about where we are in the market right now. Stock performance overall has been good and stocks have been performing well, but not everybody has. A lot of it has been concentrated in top-performing companies, and the gap between those top performers and the broader market has widened. That's an environment where activism can thrive, especially operational activism: the activists that say, "You need to be improving margins, you need to be changing your capital structure."

Interest rates have risen across the board, which increases the performance hurdle rates. You now have to generate more cash to overcome your cost of capital. If you don't, an activist can then say, "Why aren't you performing as well as this top performer of the industry? Here's why I think that is, here's what needs to be change." Those types of arguments can be fairly persuasive to investors when an activist builds that into a big fight deck and packet and materials. What should this company be doing differently? Clearly, we see what is possible with these large, well-valued companies and the fact that the target company isn't there yet, there's a sense of urgency that the activists can build. With interest rates higher than where they've been historically, it's created a higher opportunity cost that an activist can point to and say there needs to be some change here. I expect that's going to be one of the engines that's driving activism as we head into this proxy season.

Weinberg: You mentioned it before that institutions find it beneficial, that it's a helpful catalyst that they can do sometimes, that push and pull and like that more visible hand of the market. I think it's interesting when you think back to kind of Kroger and McDonald's with Icahn, ISS and Glass Lewis, the institutions spoke in unison and said, "We don't want this." It's similar to me, the idea of written consent thresholds or special meeting thresholds. BlackRock, Vanguard and State Street don't want it to be 5%, because they don't want ankle biters coming in and bothering them and management teams every day. They say, "Look, the company has to focus." If you look at McDonald's, I think it was 1% is what Icahn got - granted, that campaign was run in its own unique way - but it's basically the institutions and the proxy advisors saying, "This is not the venue." It was that visible push from the marketplace saying like, "Get this out of here. This is not the type of helpful activism we want."

Bonifacino: Activism is probably viewed as potentially beneficial in aggregate, but there are definitely activist campaigns and funds that these investors don't want run. They are distracting, they're expensive, they can cause real harm to a company, especially when they start going all the way where management is dedicating a lot of its time to get-out-the-vote efforts. Sometimes, there are situations where that does end up resulting in a revaluation of a stock. We start seeing some of the subtleties here about what types of campaigns these investors are going to support and which types that they're going to maybe say, "That's not what I want to see, I'm not going to support those."

Weinberg: Do you think that with UPC, the compelling case for change has been lost? Do you view it as that same focus or more like a softer version with ISS doing a bit of hedging sometimes and saying, "We support the company, but for those that like this, you may like the dissident here," or something like that? Do you still feel that compelling case for change to be as strong as a first step as it used to be?

Bonifacino: Yes, they are keeping the framework, which requires a compelling case for change before supporting an activist. They feel it's the right policy because it's not just picking one director over another. It is highly disruptive thing replace a director. If you're planning on replacing a director, there needs to be enough reason to do that so it's worth doing despite those frictions and those costs.

Now that investors have this scalpel though, they can now target their directors much more precisely than in the past. ISS and Glass Lewis are providing their clients with more information about who these candidates are in their discussions with them. Which candidate to support is a hard question for voting teams because every board looks great on paper, but the challenge is understanding from the outside how the board works together: is this a board where we have the right people in place to combine to get to the right an answer as a group. There's value in providing that information to the voting decision teams. Increasingly, the proxy advisors are going to be focusing on providing as much information as they can to their clients on what that looks like, how they view this and how they make that decision.

Chapman: Juan, do you think it's a higher bar for dissidents and companies to start in that scenario of talking about why this director and it goes to the quality of nominees? We've said that dissidents are getting higher quality nominees, but how do you make the case that, given the strategy we're pushing, this is the person? What are the pitfalls you think there might be?

Bonifacino: It may be harder for dissidents to get larger slates elected because each candidate needs to be differentiated. Before, an activist could put up a slate of four or five people and because someone's voting on your card, that ends up depriving the management slate from getting votes. Now people are saying, "Why did you nominate three instead of two? What does this third person add?" In terms of whether that's a higher bar, it requires a more nuanced argument that the dissident needs to make to say, "This solution to this problem I've identified needs these three people and this is why" in a way that maybe wasn't as central historically. It was getting there, if you look over the last 10 years, but again, universal proxy accelerates that trend.

On the flip side, management is responding, "They've targeted these three people. If we are missing these three people, this is why that's a major problem." That gets to your point that hopefully you've been talking about it beforehand with shareholders, so it doesn't look like it's reactive - "This is the person we had on that video we shared with you. This is the person that has this unique biography that if they're not in this boardroom anymore, that's going to be a real gap."

Isaacs: It used to be, the activist says, "We've got this great idea for a catalyst. We're going to take over the board or get a minority position on the board to try to push that." Who was going to make that case to the board was less critical than the catalyst itself. Now it's more about, these are the right candidates to push for that catalyst because of UPC.

Weinberg:It is amazing we went 50 minutes in 2024 without saying the words unintended consequences. I'll throw that in there.

Isaacs: Or ESG.

Weinberg: It used to be that was the reason why you'd support the board, the unintended consequences. If you wanted to give two seats instead of five, you may give five by accident. That defense doesn't hold anymore. It goes both ways to your point, replacing a majority of the board and the institutional knowledge that comes with that is very real. It's a unique challenge on the dissident side to make the case that, "You have five or six great director candidates, and here's why each of them are individually better." Think about that at that level of who you're targeting and, why is this person better than B? It's a real challenge. You saw it last year where the number of director seats sought by activists was actually down.

Jenkins: One of the things that people have been talking about in activism for several years now was proposed changes to the SEC's beneficial ownership reporting rules. The SEC adopted those late last year. They were underwhelming in many respects compared to what was proposed. I know that a lot of folks in the activist community felt that they dodged a bit of a bullet. Do you anticipate that anything in there is going to move the needle in terms of how activists approach investors? In particular, some of the things that the SEC said in their guidance about group formation. Is there anything you think that you're going to see play out in how activists approach engagements and reach out to investors pre-13D filing, for example?

Weinberg: I do think you'll see more calls between lawyers before conversations start to clarify that they're not forming a group. That will be the first one. Outside of that, I don't think too much is going to change. From everything I've heard from the activist bar, it doesn't sound like it's scaring too many folks.

Chapman: My initial reaction from the aspect of a former proxy voter was just that in the U.S., it might make conservative firms even more conservative about how and when they talked.

Jenkins: We've covered a lot of ground here. I'll turn it over to the panelists for closing remarks.

Isaacs: For all of us, we would say preparedness and trying to do some of this before you get into a fight, whether it's getting to know your shareholders or perception audit, changing your bylaws, doing the break glass plan, looking at your vulnerabilities to see what you can address proactively, talking with your directors about skills and matrixes and the implications of the UPC for them personally. Do that before you're in the situation where you need to call one of us. It'll be easier and cheaper for you to do it now than later.

Bonifacino: Just to echo that, I've seen campaigns won and lost depending on whether a company was being viewed as being reactive to a dissident versus one that has been talking about challenges for a while prior to the dissident being there. One of the questions investors ask is, "does the board need this dissident in there to push them in this direction they need to go? If the board can say, "This is something we've been grappling with for a while. We talked about it with you in September. We think about these things proactively. We don't need someone to come in here and prompt it." It's those little things about where you're mentioning these and addressing these proactively in the market and in discussions with individual shareholders that can make the difference when a voting team asks themselves, "does there need to be change here?"

Weinberg: I echo what both Sydney and Juan said. I'd also say the more information, the better. Understand your base and how it applies. So many times, we find management teams or board members that have gone through previous fights and try to apply that to this fight and understand it. It's different when you actually have to know how your shareholder base looks like because that is, at the end of the day, the math. The more intel you have on that, the better.

Chapman: My expectation to companies is to highlight the things that are differentiated about you. Let's not highlight those pluses that everybody has. Don't waste time saying you're great in all the areas everybody else is great at or that you're required to be. Let's talk about what makes you differentiated, what you could use as a plus in a fight.

Jenkins: That sounds like a good point to close on. I want to say thank you again to our panelists for a great program. This concludes today's webcast.