United States: Cooley's 2023 Activism Year In Review: Wolf Packs At The Gate

As we look ahead to the 2024 proxy season (and beyond), let's review the key 2023 trends and developments from activism playbooks, with a sharp focus on the ever-changing landscape in the technology and healthcare sectors.

Momentum building for 2024?

Globally, 229 campaigns launched in 2023, just under 2022 campaign levels, ushering in the most active two-year period on record.¹ Activism in Europe was a core driver of activity, representing 28% of all campaigns and a 30% increase from 2022.² Nearly three-quarters of activist campaigns in the US concentrated in core sectors of technology (24%), healthcare (21%), industrials (15%), and communications and media (10%).³ Elliott Management (15 campaigns), Starboard Value (9), Align Partners (8), ValueAct Capital (8) and Ancora (6) topped the activist leaderboard for the year, with JANA Partners and Sarissa Capital Management also highly active in the technology and healthcare sectors.⁴

Activists won 134 board seats globally in 2023, a 30% increase from 2022. Notably, only 18% of these directors were activist employees (versus 27% over the trailing 5 year period), suggesting that companies are deploying effective strategies to keep activist principals out of the board room.⁵ As in past years, most of the activist-won board seats were gained at the settlement table rather than at the ballot box (98 in total). Only 17 proxy contests⁶ for US-listed companies went to a vote in 2023, with the company prevailing (no activist nominees elected) in eight contests and activists winning at least one seat in nine contests (with multiple activist candidates elected in six of those contests).⁷

Winning the support of the proxy advisory firms (ISS and Glass Lewis) continued to be crucial, particularly for the activists: Of the nine activist proxy contest victories, only two came without the support of at least one of the proxy advisory firms. (On the flip side, the company fully prevailed despite one or more proxy advisers recommending for an activist candidate in three of the contests). One clear winning streak for activists came in management change campaigns – activists waged over 30 campaigns to oust CEOs in 2023, with a 25% success rate. CEOs of companies battling activists found themselves in hot water, regardless of the campaign theme. A whopping 176 CEO departures were logged in 2023 at companies battling activist campaigns, a 74% increase from 2022.⁸

M&A-themed campaigns (sell the company/division or agitation against an announced transaction) made up 49% of all activism campaigns globally, well above the trailing four-year average of 42%.⁹ We expect the prevalence of M&A-themed campaigns to remain elevated in 2024 as M&A levels bounce back from 2023 levels. For buyers with public company targets in their sights, evaluating the investor response to a transaction should be a core element of the strategic planning process – activists closely monitor the rationale for and market reaction to M&A transactions, and are quick to pounce with a campaign if a buyer's stock price drops significantly following the announcement of a major transaction.

Activist target profile: Top flags for tech and healthcare companies

Activists are stock pickers – generally building a position at a target company only if they can drive meaningful risk-adjusted returns. Accordingly, a dramatic fall in stock price or underperformance relative to peers is as a single factor unlikely to immediately attract an activist (although it may garner a spot on a "watchlist"). Activists are more keen to engage if they can champion a natural "fix" for issues in their campaign (i.e., a sale, divestiture, change in strategy or management, return of capital to shareholders, etc.). To that end, many top activists stay close to private equity firms (or even activist buyout funds) to assess targets ripe for an M&A campaign. Activists also regularly discuss potential capital allocation and change in strategy campaigns behind the scenes with the target's stockholders or even competitors.

These dynamics help explain why, despite significant sector-wide declines in public tech and life sciences company valuations from 2021 peaks, we have yet to mark a dramatic increase in activism campaigns relative to historical levels: for many would-be targets, there was no clear "fix" available. For example, only eight US-listed software companies were publicly targeted by activists in 2023.¹⁰

So, what does place tech and healthcare companies in activist crosshairs? We've listed select key examples below.

Software companies with a target on their backs

Public software companies (particularly those with mature revenue growth rates) are often ripe acquisition targets for mega cap tech and highly acquisitive, software focused private equity sponsors, and therefore present easy targets for "sell the company" campaigns by activists. Recent examples include:

• New Relic settling with JANA Partners in 2022 in exchange for two board designees, then agreeing to be acquired by Francisco Partners and TPG in 2023 for $6.5 billion.
• Sumo Logic settling with Scalar Gauge Management in 2022 in exchange for two board designees, then agreeing to be acquired by Francisco Partners in February 2023 for $1.7 billion.
• Starboard Value and private equity sponsor Hellman & Friedman both investing in Splunk over the course of 2022, with Splunk agreeing to be acquired by Cisco in September 2023 for $28 billion.
• Software companies Citrix, Zendesk and Anaplan each being sold to private equity sponsors after activist campaigns in 2022.

Vulnerable M&A deals up for a vote

Since 2022, a number of public company stockholders have launched aggressive campaigns against pending M&A deals, including at Coupa Software, Avalara, Zendesk, POINT Biopharma, Taro Pharmaceutical and Abcam. Campaigns aimed at selling companies tend to be waged by existing stockholders, some of whom may be first time activists. As a result, activist "wins" in this context are somewhat rare, as target stockholders are unlikely to vote down a premium transaction absent a compelling alternative. On the other hand, campaigns by buyer stockholders (particularly if a buy-side stockholder vote is required and the buyer's share price drops significantly following deal announcement) tend to be much more likely to succeed (or at least result in a recut deal) because the activist can credibly convince peer stockholders that the buyer share price will bounce back following an abandoned deal.

Commercial-stage pharmaceutical companies with lagging share price, financial performance

This group includes companies that are performing poorly relative to their peers and have perceived strategic, operational, or governance issues. Recent examples include:

• Sarissa's campaigns at Alkermes and Amarin.
• Jonathan Milner's campaign at Abcam.

Note, these campaigns are generally much lower risk for activists than campaigns at riskier, clinical stage biotechnology companies.

Clinical-stage biotechnology companies trading below cash value

Historically, activists have tended to avoid waging campaigns at clinical stage biotechnology companies, since the highly uncertain and binary outcomes of clinical trials can make bets on those companies more of a roulette wheel spin than the typical high conviction activist target. However, in 2023 the market logged a notable uptick in "sell-the-company" and "wind-down-the-company" campaigns at clinical stage companies with market capitalizations below cash balances and either very early stage or failed lead programs. The activist thesis in these campaigns are simple: in a generationally tough financing environment for clinical stage biotechnology companies, stockholders would be better served by getting their cash back than by the companies incurring additional cash burn and dilution in a fight to continue their programs. A number of these companies have received unsolicited public proposals to be acquired for a percentage of the company's cash balance plus a contingent value right for proceeds realized by the acquirer from divesting the company's assets after the acquisition.

Former deSPAC companies

Many companies that went public via deSPAC transactions in 2021 and 2022 are trading well below the $10 per share special purpose acquisition company (SPAC) initial public offering price – and delivering financial results far afield from projections in their deSPAC prospectus – making them a logical target for shareholder activists. Many of these campaigns agitate for go-privates – arguing that companies are not equipped for the spotlight or expense of being a public company. These campaigns often are waged not by traditional shareholder activists but by significant pre-deSPAC shareholders or other insiders of the former private company. While external shareholder activism advisers are able to quickly bring these first-time activists up to speed from a technical perspective, these campaigns often can be more unpredictable, as first-time activists do not necessarily follow the typical activist playbook.

Influence of new universal proxy rules (if any?)

As many commentators expected, the universal proxy, which was first required in the 2023 proxy season, did not immediately lead to a radical shift in activism tactics or outcomes: There was no meaningful uptick in launched or completed proxy contests or the election of dissident nominees. 2022 and 2023 stats were nearly identical in important respects – the number of proxy contests launched, proxy contests that went to a vote and proxy contests resulting in the election of at least one dissident nominee. Advisers are watching one notable change from 2023, however. Certain data may suggest that companies may have been more likely to settle threatened proxy contests prior to a vote than in historical periods. The number of proxy contests that resulted in a formal settlement increased from 34% in 2022 to almost 42% in 2023. Proxy contests also were settled earlier in 2023 – while 57% of the proxy contests settled in 2022 were done so before progressing as far as the activist distributing preliminary proxy materials, in 2023, 68% of proxy contests were settled before reaching that stage.¹¹ Still, these changes are marginal rather than revolutionary.

Further (and, anecdotally), we're not seeing a meaningful decrease in the cost of activists waging a proxy contest. While estimated costs are only disclosed for proxy contests that progress to at least a PREC14A filing, that limited data set supports the anecdotal evidence, revealing that median activist costs remained unchanged at $1 million in 2022 and 2023.¹²

Given this, while the universal proxy rules may make it easier for activists to target weaker incumbent directors by enabling shareholders to more efficiently "mix and match" director slates, the significant costs of waging a successful proxy contest – particularly solicitation costs and professional advisory fees for lawyers, proxy solicitors, and communications firms – will continue to disincentivize all but the most committed activists from waging a proxy contest.

Wolf packs and swarms ratchet up the pressure

In 2023, activists often turned to "wolf pack" tactics (multiple activists pursuing a target with some level of express or implicit coordination) or "swarming" behavior (multiple activists pursuing a target without any express or implicit coordination) to de-risk campaigns. Examples include Salesforce, Disney, Exelixis, Berry Global and Enhabit, among others.

Wolf pack campaigns can significantly ratchet up the pressure on target companies. Wolf packs tend to collectively hold a significant percentage of the company's voting power, which affords a higher likelihood of success in a proxy contest or "vote no" campaign. The presence of multiple activists also can lend greater credibility to claims made to key stakeholders (institutional investors, retail investors, media) and result in greater media coverage of the campaign, which can itself be destabilizing to the company and its stakeholders. Further, ISS and Glass Lewis tend to give greater credence to activist theories and claims if they are held by multiple investors.

Defending against multiple activists can be a challenge, but well-prepared companies can mitigate the risk. Suggested strategies include:

• Proactive refreshment of the board with highly qualified directors early in the campaign.
• Settlement or other alignment with a "friendly" activist who will support the company and board against additional activist threats.
• Proactive adoption of some (or all) policies and changes called for by the wolf pack in order to neutralize agitation or potential saber-rattling.
• Adoption of a limited duration stockholder rights plan to deter the members of the wolf pack from rapidly accumulating shares in the open market and acquiring "creeping control" of the company.
• Efforts to win public support for the company's strategic plan from other key institutional investors and analysts.

Core takeaways: Preparation is key

The combination of an ever-growing number of activists and the increasingly sophisticated strategies they deploy only reinforces the need for all public companies (and soon-to-be-public late-stage private companies) to proactively prepare for activism on a clear day. Regularly teaming with experienced legal, financial and investor relations advisers is a "must-have" as activists gear up for the 2024 proxy season. We've noted some best practices below.

Board best practices

• Ensuring the board is actively engaged in developing and refining the company's strategic plan.
• Briefing the board regularly on burgeoning trends in and risks to the business – and potential available strategic alternatives and capital allocation strategies.
• Refreshing directors proactively to ensure that the board has the right mix of skills and experience to oversee the company (particularly for companies facing secular shifts in their businesses).
• Monitoring director tenure and potential overboarding.
• Conducting regular board performance assessments.
• Maintaining a robust internal director candidate pipeline.
• Promoting director share ownership where possible, including through open market director purchases.
• Benchmarking executive compensation relative to peers.
• Maintaining active succession plans for key executives.
• Developing a direct director-shareholder engagement program.
• Reviewing periodically the company's structural defense profile (staggered board, supermajority organizational requirement standards, ability for stockholders to call special meetings or act by written consent, advance notice bylaws) – in particular, boards should evaluate existing advance notice bylaws in light of the recent Kellner v. AIM Immunotech decision in the Delaware Chancery Court, as well as the advance notice bylaw-focused campaigns at Masimo, Crown Castle and ContextLogic.
• Placing a shareholder rights plan "on the shelf."

Management best practices

• Evaluating the company and its performance from the vantage point of an activist to assess potential lines of attack and effective rebuttals.
• Proactively monitoring and engaging with the investor base, including laying conceptual groundwork for material strategic transactions outside existing strategy and maintaining detailed contact log with top stockholders.
• Taking investor feedback into account, as well as taking credit in investor materials and communications when changes have been made in response to feedback.
• Monitoring performance relative to peers, including on a total shareholder return basis over one-, three- and five-year periods.
• Educating management and the board regarding best practices for activism defense – and what ISS and Glass Lewis look for when evaluating proxy contests.
• Preparing "break the glass" communications plans.
• Conducting tabletop exercises.
• Assembling a response team of seasoned advisers.

Footnotes

1. Barclays 2023 Shareholder Activism Review ($500 million market capitalization at campaign initiation)

2. Barclays

3. Barclays

4. Deal Point Data; Cooley analysis. In late November 2023, Inclusive Capital Partners, the ESG-focused fund founded by ValueAct Capital founder Jeff Ubben, announced it was winding down and returning capital to its investors, an indicator that in the current market environment investors have a lower appetite for ESG-focused strategies.

5. Barclays

6. Deal Point Data, target market cap over $200 million

7. Deal Point Data; Cooley analysis; US-listed targets with market capitalization of at least $200 million at the commencement of the campaign

8. Evercore 2023 Year in Review

9. Barclays

10. Deal Point Data; Cooley analysis; US-listed targets with market capitalization of at least $200 million at the commencement of the campaign

11. Deal Point Data

12. Deal Point Data

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.