Notes:
- The Activist Threat:Â Activists may launch proxy contests to force a sale or change strategy. The Board must have a plan to respond.
- Engagement vs. Resistance:
- Engagement:Â The most effective defense is often proactive engagement to address the activist’s concerns (e.g., unlocking value, fixing governance) before they launch a formal campaign.
- Resistance:Â If engagement fails, the Board may need to resist.
- The “Poison Pill” (Shareholder Rights Plan):
- A mechanism that allows existing shareholders (except the activist) to buy additional shares at a discount if a person crosses a “trigger” ownership threshold (usually 15%).
- Effect:Â This dilutes the activist’s stake, making a hostile takeover prohibitively expensive. It is a strong deterrent but can be seen as entrenching management.
- Staggered Boards (Classified Boards):
- Directors serve staggered three-year terms so that only a fraction of the board can be replaced in any given year.
- Effect:Â Makes it much harder for an activist to gain control of the board in a single proxy fight.
- Trend:Â Many institutional investors (ISS, Glass Lewis) oppose staggered boards and recommend de-staggering. Some companies have eliminated them in response to activist pressure.
- Supermajority Voting:
- Requiring a higher threshold (e.g., 67% or 80%) of shareholder votes to approve certain actions like a merger or a change in control.
- Effect:Â Makes it harder for an activist to force a transaction even if they have a majority.
- Criticism:Â Can entrench management and prevent value-creating transactions.
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