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April 01, 2009 (Vol. 29, No. 7)

Staying Ahead of Activist Stockholders

Six Steps Every Public Company Should Be Taking to Maintain Control This Year

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    Joseph E. Gilligan

    Even with the credit crisis raging and a hedge fund industry troubled by heavy losses, public companies and their boards of directors should not expect to see any relief from stockholder activism in 2009. On the contrary, after the dramatic drop in stock prices in 2008, activists are expected to continue their recent high level of activity during the upcoming 2009 proxy season.

    The heightened anger of investors over perceived poor performance and rich compensation packages for management will likely encourage these activists to expect widespread support as they again target boards of directors for change. Heavy media coverage of bankruptcies and bailouts are likely to make government officials and the general public less than sympathetic to the concerns of management and board members.

    Proxy contests, which have roughly doubled in number in recent years from 63 in 2001 to 124 in 2008 according to FactSet SharkRepellent, can be relatively inexpensive to conduct. Solicitation and advertising expenses can be greatly reduced through the use of Internet publication and distribution, and no minimum level of investment or share ownership is required in most jurisdictions, other than the basic requirement of being a shareholder.

    With these challenges ahead, board members and senior management should consider a detailed review and planning process as a critical component in preparing their companies for the upcoming proxy season.

    The first step in preparing for activist stockholders is to designate a small team responsible for planning for and responding to activist activity. In addition to several senior company officers such as the chief financial officer, the general counsel, and the director of investor relations, this team should include a financial advisor and legal counsel experienced in responding to activists.

    The company should also consider retaining a proxy soliciting firm and a communications or PR firm experienced in these types of stockholder issues—both to facilitate communications with stockholders and to have these advisors on retainer if an activist stockholder emerges. Most of these advisors will be fairly inexpensive to engage as they generally require only minimal up-front financial retainers in the hope of being involved in any future conflict.

    This working group, once established, should identify the precautionary steps to be taken immediately and then meet periodically to update their plans to reflect recent market activity.

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    Brian C. O'Fahey