USA Law and Practice Contributed by: Kai Liekefett, Derek Zaba, Ram Sachs and Evan Grosch, Sidley Austin
companies. These disclosures can help a company identify an emerging activist threat (eg, Schedule 13D filing) or provide an activist with information to use in its campaign (eg, disclosures in a proxy statement or annual report). • Governing documents can facilitate or restrict an activist’s rights. Shareholder rights vary based on the terms of the certificate of incorporation and by-laws. • Other legal documents that may restrict activism include employment or severance agreements, debt instruments or other agreements with change- of-control provisions. Activists leverage a variety of legal tools to pursue their objectives. While the specific mechanisms vary by situation, activists can: • submit books-and-records demands to gain access to confidential information of the company, including shareholder lists, board minutes, board materials and other documents; • submit a nomination notice for the purpose of electing directors or proposing other business at a company’s annual meeting; • call a special meeting of shareholders to replace directors or consider other business, or pursue similar actions via the written consent of share- holders if permitted by a company’s organisational documents; • leverage litigation to pressure the company, where such litigation may challenge the legality of a com- pany’s by-laws or the sufficiency or accuracy of a company’s past disclosures; and • engage with regulators to influence corporate deci- sions (eg, merger approval). 11.2 Aims of Shareholder Activism Activist shareholders typically have primarily eco- nomic goals in pursuing a campaign. However, activ- ists occasionally also use arguments related to ESG topics. Activist demands frequently include the following. • M&A: (a) sell the company; (b) spin-off or sell a particular division or asset;
and (c) challenge announced M&A transactions. • Balance sheet: (a) initiate a share buy-back or special dividend; (b) increase leverage; and (c) change the capital allocation policy. • Operational: (a) replace the CEO or another key executive officer; (b) increase operational efficiency to increase profit margins; and (c) pursue new business strategies. • Board of directors/governance: (a) change the board’s composition; (b) separate the chair and CEO roles; and (c) enhance shareholder rights/reduce takeover defences. • Compensation: (a) reduce executive compensation; and (b) modify executive incentive structures. • Environmental and social: (a) pursue sustainable policies, disclosures or diversification; (b) challenge political contributions; and (c) push for a political and/or social response/ statement by the company. 11.3 Shareholder Activist Strategies Activists use a variety of strategies to pursue change at a target company. These strategies can be catego- rised as follows. Stakebuilding Typically, the activist will build a stake in the company in secret, including by acting in concert with other shareholders or utilising derivative instruments. An activist may be required to disclose its stake even- tually due to required Form 13F, Schedule 13D/G, and Hart-Scott-Rodino filings (see 3.4 Disclosure of Inter- ests ). Engagement Typically, an activist attempts to first engage privately with the management and board of a target company before making public demands. For example, the activist may send a private letter calling for a specific
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