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Vinson & Elkins: Every Season Is Activist Season: Five Big Questions for 2023
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Vinson & Elkins: Every Season Is Activist Season: Five Big Questions for 2023

By Patrick Gadson and Lawrence Elbaum

Not long ago, companies could reliably project when shareholder activists would strike — and ready their defenses in advance. As sure as the seasons would turn, proposals would begin to appear around the holidays, voting would follow in the spring, and proxy contests would be over by the start of the summer. The timing and sequencing was as predictable as insomnia for kids on Christmas Eve.

How quaint that seems today.

Companies now face attacks throughout the year — from all angles and by both familiar and unfamiliar aggressors. Now, every season is activist season, and companies would do well to consider five key questions as they prepare for the year ahead.

Bumpitrage: As Activists Increasingly Attack Deals, How Can Companies Prepare?

It might have an amusing name. But for companies involved in M&A, bumpitrage is no joke. It’s the practice of buying shares in a takeover target, insisting that the acquirer’s offer is too low, and trying to convince the target to seek a better offer or the acquirer to pay more if they want to secure shareholder approval. And it’s a growing challenge that looms large over deals of all sizes.

Companies hoping to mitigate the risk of bumpitrage now need to prepare thoroughly for the possibility that an activist or even a long-term shareholder could strike. Those who fail to do so could be caught flat-footed, scrambling to address the shareholders’ rationale or valuation as they watch their deals fall apart.

Universal Proxy Cards: Will the SEC’s New Rules Produce Change in the Boardroom?

Proxy voting next spring will be the first full season under the SEC’s new rules requiring that management and shareholders use universal proxy cards in contested director elections. But whether the rules produce change in boardrooms remains to be seen.

Under the new rules, shareholders voting by proxy in contested director elections can use one card to vote for a combination of director nominees from competing slates, just as if they were voting in person. This will make mounting a challenge far more dynamic, potentially strengthen activists’ appetite for a fight, and require a different strategic mindset to counter.

Yet seeking a board seat is one thing, and winning one is quite another. For all but the brand-name activists, recruiting qualified directors to sign onto their causes will still be difficult, as will securing the capital to build a formidable stake. So many activists that fell short under the old rules may well suffer the same fate under the new ones.

Activist Disclosure: How Will Politan v. Masimo Play Out?

Advance-notice bylaws are nothing new. But those of Masimo Corp., the global medical technology company, are stronger than most. Masimo’s robust advance-notice bylaws require that shareholders seeking to nominate directors disclose certain information about the nominating shareholders’ investors, alongside a wide range of other revealing information. And Politan Capital Management — a large shareholder in Masimo — is contesting them in Delaware court.

For the future of shareholder activism, the stakes have rarely been higher. If Politan prevails, boards at other companies could see their advance-notice bylaws — which are generally far less strict — thrown out under similar legal scrutiny. But if Masimo holds on, boards could feel emboldened to adopt their own stringent disclosure requirements — to squash would-be activists before they can wage a proper fight.

De-SPACtivism: Can De-SPACed Companies Fight Back?

De-SPACed companies — those that have gone public through a merger with a special purpose acquisition company (SPAC) — have become especially vulnerable to activist attacks. Many of these companies have seen their value fall sharply, are still in the development stage, have unproven management teams with little public-company experience, and have boards of directors who are unfamiliar with the nature of fiduciary duties and corporate governance at public companies.

Yet they do have some strategies they can turn to — conducting a corporate governance analysis, carrying out a carefully designed public communications campaign, readying a comprehensive “break glass in case of emergency” plan, and many more. De-SPACed companies that are rigorous in their preparation — and skillful in their responses — will be best equipped to come out on top.

Sustainable Capital: To ESG or Not to ESG? That Is the Question

After years of growth and optimism, the ESG movement is encountering its first serious ideological push-back, with anti-ESG activists increasingly seeking to influence the focus of activists who in recent years have used ESG as part of the narrative for their proxy campaigns. But even as sustainability issues will take a backseat to economics in many new campaigns, look for activists to continue leveraging them when it suits their goals.

In this pro-ESG vs. anti-ESG environment, institutional investors — the electorate whose support activists need to win any proxy contest — may look to evaluate ESG-oriented proposals and campaign themes more on their ability to create more-immediate shareholder value. For this reason, activists with ESG-related ambitions will be thinking more about the economic arguments in their proposals, and crafting them to ensure that the sustainability reforms they advance stay focused on the bottom line.

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Heading into 2023, companies should make sure to keep a new reality in mind: Activists are no longer a category of shareholder. Instead, all shareholders have a full quiver at their disposal, and activism is just one arrow.

Any shareholders that can summon the energy and ambition — and the capital to match — can exercise their right to fight. Companies that realize this will be well positioned to defend themselves next year; those who don’t, won’t.

Patrick Gadson and Lawrence Elbaum, partners at the law firm Vinson & Elkins, are co-heads of the firm’s Shareholder Activism practice.



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