First there were the pirates of the 1980s and their swashbuckling raids of RJR Nabisco and other corporate booty. In the 1990s, blue chip companies legitimized the use of hostile M&A as a credible corporate strategy. Then came the mid-2000s wave of disruptive hedge fund activism. Today, shareholder activism is alive and well, though in shrewder forms.
“With activism now its own asset class—one that is outperforming the stock market and many other asset classes—activist hedge funds remain focused on the takeover front and M&A transactions,” asserts Morrison & Foerster securities partner David Lynn.
“These funds are heavily targeting technology and life sciences companies, attracted to their stock price volatility, accumulated cash, and, often, weak takeover defenses,” says Morrison & Foerster partner Spencer Klein, cochair of the firm’s Global M&A Group. “In the fast-paced, deal-driven tech market, people are more focused on quickly growing the business and looking to sell than on creating a robust anti-takeover position. That strategy misses the point: robust defenses can create negotiating leverage to maximize shareholder value in a potential sale.”
Whether criticizing announced deals, challenging statutory appraisal rights, or making unsolicited bids, activists can crash the M&A party in several ways. “Public companies shouldn’t sit around waiting for an activist fund to knock on their door,” says Lynn. “A good defensive strategy involves effective shareholder communications, awareness of activist threats, and having an advisory team at the ready.”
“Companies should structure their M&A transactions carefully to minimize activist empowerment,” adds Klein, citing Carl Icahn’s attack on the 2013 merger agreement between computer giant Dell and private equity sponsor Silver Lake Partners as an example. “The original deal included a shareholder voting structure that gave Icahn considerable leverage.”
Savvy U.S. activists are also turning their attention abroad. In Germany a legal “peculiarity” is attracting attention, says Dirk Besse, a corporate partner in Morrison & Foerster’s Berlin office. “After a takeover, an acquirer holding at least 75 percent of the share capital can effect a ‘Domination and Profit-and- Loss Transfer Agreement,’ which allows it to take over the company’s business and access its cash flows,” he explains. “Intended to foster synergy between merged entities, DPLTA also obliges the buyer to acquire stock held by its minority shareholders at a price set by the court. This is where activists step in, suing to challenge share value. It’s a low-risk, high-upside strategy—the court rarely rules below the offer price.”