10 February 2012

New Rule:  Engage Activists for Your Own Good

Toronto Ontario - As shareholder activists became more popular and more powerful over the past decade, the corporate lawyers who act for and against them rewrote the rulebook that dictates how to manage them. Today, the landscape looks totally different.
 
"There has been a sea change," said David Katz, of Wachtell, Lipton, Rosen, & Katz, who was in Toronto Thursday to speak on a panel hosted by Goodmans LLP. The old motto was "don't talk to them, don't engage." These days, he encourages chatting with activists as soon as possible.
 
The old approach stemmed from an aversion to the hostile bidders of the late '80s. "In some contexts, it was the same as [telling clients] don't talk to a raider, in a hostile deal," said Steve Halperin of Goodmans.
 
As time passed, however, it became clear that only a select few activists want things to get ugly. "The really good ones don't want a public battle," Mr. Halperin said. That means engaging them can lead to healthy discussions, rather than forcing each side to posture in the media.
 
Of course, this doesn't always work out. In the case of Canadian Pacific Railway and Bill Ackman, the two sides held preliminary discussions but didn't much like what each other had to say, so the battle quickly escalated.
 
In general, Mr. Katz advocates hashing out a preliminary plan for dealing with activists before you're even approached so that the shock of it all doesn't put your back up against the wall. "You're in a much better position in these situations if you can go on offence," he said.
 
He also noted that the easiest way for an activist to win is to divide a company's board and its management, which often happens at mid-sized firms who don't think they'll ever be a target. Yet if these companies are prepared, and management has open communication with its board, there's a much better chance both groups will be on the same page if the company is approached.
 
Still, even though lawyers advocate engaging with activists, that doesn't translate into them suggesting firms should give into new demands right away. Many activists have a short term focus, and that means they're more than willing to slash costs to get a short term bump in the stock, for their own benefit.
 
"To the extent that we further empower that, I think that means more companies will suffer," Mr. Katz said.
 
Tim Kiladze.