Activist Investor Issues

Though rarely acknowledged, there is a natural tension between corporate operators and investors. Boards of Directors and operating executives are dedicated to establishing and consistently expanding companies that command greater market share, consistently increasing market value and the perpetuity of those corporate entities.

Investors own these companies by virtue of their stock ownership and are entitled to expect the best possible return on their invested capital. Boards and management have a fiduciary responsibility to drive the value of the enterprises in which they are entrusted. Each party depends on the other to operate in such a manner as to further the interests of both parties. The rough and tumble of the free markets produces winners and losers. Although nothing is guaranteed as to the outcome, this arrangement has produced the greatest pool of capital and wealth that the world has ever known.

Shareholders have the right to demand, and to exact, changes in management and board members of companies that are chronically underperforming or are blatantly mismanaged. Occasionally, the above equation of furthering the interests of both parties is interrupted by an outlier variable -- the activist shareholder. This is a shareholder, or a group of shareholders, with a large enough stake in the company to demand changes through the proxy process. In some cases the aim of the activists is not to further the interests of all parties, but only their own. We are increasingly witnessing rapacious shareholders intent on taking control of companies with the expressed goal of breaking up the enterprise, dismissing valuable employees, selling off valuable components of the business, and gaining control of cash balances.

Responsibility for fending off the attacks of financial predators lies primarily with the Board, which should address key questions:

• Does the Board fully appreciate the make-up of the shareholder base?
  • Does management maintain adequate dialogue with shareholders to understand the motivations of the various holders?
  • Does the Board have a plan to address activist shareholder issues?
  • In conjunction with the management team, does the Board maintain an up-to-date strategic operating plan presentation to deliver to the various proxy advisory firms should it become necessary?

Lytham Partners' professionals will assist the Board and management in successfully protecting against unwarranted attacks, destruction of corporate assets and diversion of operational focus. The best defense against the opportunistic predator is foresight, preparation and strength of conviction. We can successfully help to protect all that your company has worked to achieve.