Activists’ Expanding Influence in M&As

Corporate Governance and M&A in the Age of the Activist

Activist campaigns and predictions are dominating the headlines this year as shareholders are calling for changes at companies across the globe. With this constant flow of shareholder activity, governance has climbed up the priority list for corporate boards — particularly when it comes to preparing and executing M&A deals. Boards are also anxiously awaiting a verdict on the Securities and Exchange Commission’s (SEC) controversial universal proxy proposal, which could see more rights granted to shareholders, making it easier for activist investors to gain a place on corporate boards.

Healthy Activist Appetite

The activist appetite for M&A is far from waning. According to a MergerMarket poll, 72 percent of executives believe shareholder-activist-driven M&A will continue to increase in the next year, with 32 percent saying the increase will be “significant.” In the U.S., 456 activist demands were made on businesses in 2016, compared to 418 in 2015. And the activity is not just up in the U.S.: In the same period, the number of companies targeted by activists in Europe increased from 72 to 97 and in Asia from 52 to 77.

This frequency is predicted to continue increasing due to the pressure 1) to merge with a competitor and 2) to spend cash on acquisitions. Shareholders and other institutional investors are increasingly pressuring organizations to carry out M&A of high- and low-profile competitors, recognizing this as the next big step to significantly increase returns. Shareholder activists are no longer playing small, because they want the most from their investments.

Shareholder Challenges in International M&A Deals

While it’s clear that cross-border M&A activity is growing, what’s not so apparent is what will happen to shareholder challenges in international M&A deals. A point of contention is whether different geographical jurisdictions and legislation are increasing or decreasing challenges.

On one hand, increased cross-border deal activity could come with more challenges from shareholders because a lack of uniformity across various jurisdictions makes completing deals more difficult. Therefore, companies need to explain to shareholders the rationale for deals and be clear about their expansion goals.

On the other hand, some international markets are making efforts to standardize legislation and businesses are devising new strategies to take shareholders’ feedback but reduce their direct influence, which could decrease challenges.

Impact of the New U.S. Administration

What is clear is that companies are getting support from the new U.S. administration. The new SEC chair, Walter J. Clayton, comes from a background of closing deals, having been on the front lines of major M&A and capital markets transactions. His presence leads many to believe that shareholders’ rights will be restricted — a major boost for corporate board interests who will have better control over decisions in the company.

However, the SEC’s vote on the universal proxy proposal, which would give shareholders the ability to vote by proxy rather than having to vote in person, is harder to predict. The proposal may make it easier for dissident candidates to be elected to corporate boards and would likely change corporate governance practices and activist negotiating strategies.

The Age of the Activist

The shareholder activism world will continue to increase in size and reach. Activists challenge and trigger M&A transactions with increasing prevalence and success because of their access to capital and serious equity in large companies. While the debate continues as to whether shareholder activism is a blessing or curse, it’s clear that this is the age of the activist.  Smart companies are tracking these changes and developing strategies on how to address them.