Sam Taylor, S-RM's Head of Disputes and Investigations in the US, looks at how a well-connected investigations firm can put general counsel on the front foot in the face of hostile takeover attempts.
With M&A activity remaining strong, and a new US administration more disposed to removing tariffs and trade barriers, we can be sure that hostile takeovers and contests for control of company boards will remain a persistent factor in corporate decision making. In fact, activist investors may be emboldened in coming years, as the potential for change from recent asset price stability increases. The first and central point of contact to ward off such actions is the general counsel.
In France, we have seen Veolia Entertainment’s hostile action against Suez SA, initiated last year – a rare occurrence in the French Republic – which suggests US-style corporate governance may be seeping into parts of the world once thought immune to such aggressive tactics. Proxy contests can be expensive initiatives, and even more expensive to ward off. Proctor & Gamble’s 2017 proxy defence is estimated to have cost as much as USD 100 million.
Hiring outside legal counsel, a public relations advisor, an investment banker, and a communications firm all contribute to bottom line costs. Engaging a corporate intelligence and investigative firm as early as possible can be a cost saving measure – and critical to the overall success of any defensive action.
Undisclosed interests and where to find them
The low hanging fruit in any defence is to quickly identify any disqualifying issues in the background of a proxy nominee. Shareholders may be susceptible to outside ideas and new thinking but will think twice before entrusting the management of their prized asset to someone hiding past transgressions.
These nominees will almost certainly have been vetted by the outside party for basic background issues such as criminal records and public misrepresentations. However, a well thought out proxy defence also requires an in-depth analysis of the nominee’s professional history, with a critical assessment of the performance of firms where they previously served in a management or board position.
A well-vetted nominee is unlikely to be harbouring an undisclosed drunk driving record, inappropriate social media comment, or undisclosed conflict of interest. Yet questions of corporate governance during the tenure of a nominee are often overlooked. Has the nominee properly executed their role as an independent director? What was their response to critical corporate governance issues within the firm under their watch? A holistic assessment of these issues may yield that piece of information or analysis vital to unlocking a strong defensive strategy.
If you can demonstrate that a candidate has lacked independence historically, shareholders will be more likely to side with the experience of tenured management."
Scrutinising director independence
Additionally, shareholders are increasingly aware of the value of board independence. A successful hostile takeover defence should seek to identify common themes among a slate of proxy nominees, corroborating any links and testing their level of loyalty to an activist investor. Shareholders are more likely to reject candidates whose interests align with an individual person or outside entity rather than the performance of the company they were nominated to serve. If you can demonstrate that a candidate has lacked independence historically, shareholders will be more likely to side with the experience of tenured management.
Detrimental director dealings
Issues identified by intelligence firms in the past include a lack of transparency in the behaviour of board candidates, a penchant for litigation, demonstrable action to dilute the value of common shareholders over time, and worker and employee issues. Have candidates shown a disregard for employees or a predisposition for dismantling the work of prior management, in order to temporarily increase shareholder returns? Exposing these controversies in close coordination with management and public relations advisors is central to any defence.
Most intelligence firms will tell you that their work begins in the public record. Rigorous and experienced scrutiny of open sources can yield tremendous results; hopefully the work can end there. In some instances, augmenting this research with discreet source enquiries can be a valuable step, albeit one that carries increased risk.
However, it should not be discounted when shareholder value is on the line. It is critical to fully understand whether a hostile director is seeking to reap significant personal reward at the expense of shareholders; but such information may not be found in the public record.
Another defensive strategy commonly employed is to identify issues with serving board members and management to prepare for offensive measures from the other side.
In preparing to make their move, activists have likely spent significant time and resources investigating the company’s performance and background beyond the balance sheet.
General counsel need to be as well informed as their opponents if they are to mount a successful defence.
Do not be afraid to seek help in highlighting areas of concern. It can be sensitive, but your shareholders will thank you for it.
General counsel need to be as well informed as their opponents if they are to mount a successful defence. Do not be afraid to seek help in highlighting areas of concern. It can be sensitive, but your shareholders will thank you for it."
Corporate intelligence firms: key to a successful defence
General counsel would be wise to consider engaging an intelligence firm as early as possible for any thorough defence, providing:
- Long experience
- Research methodologies
- Cutting-edge open source Intelligence (OSINT) capabilities
- Analytical expertise.
This means they can typically extract much more information than an internal corporate officer or outside counsel from:
- Securities filings
- Public records
- Media archives.
Conclusion: how to keep your focus
As general counsel, you assume a myriad of roles: advising on the corporate legal structure of a new acquisition; defending your company against a years-long class-action lawsuit, or ensuring that sales (or client) agreements contain the right covenants and comply with various local jurisdictional laws.
You are there to ensure that the business remains on course and is not knocked off track. With all these day-to-day efforts there is only so much time to spend worrying about nefarious actors pursuing adverse actions against you that fall outside of the scope of a CISO or CSO.
Companies are constantly responding to these challenges. So, find a well-equipped and dedicated intelligence firm, experienced in responding quickly to hostile takeovers and competitor threats, and have them on call for when the time comes.