Companies Prepare for Wave of New Activists After Change in Proxy-Voting Rules

As stock prices decline and proxy-voting rules change, more and more first-time shareholder activists are feeling empowered to seek changes at some of the biggest corporations in America. These activists are motivated by a desire to improve the performance of these companies and create value for shareholders. In many cases, they are successful in winning concessions from management and boards of directors.

Companies are feeling particularly vulnerable to activist advances as a result of new rules imposed by U.S. regulators in September requiring the use of a so-called universal proxy card in corporate-director elections, bankers and lawyers say.

The new format for shareholder voting will allow investors to choose between directors nominated by the company and those put forth by activists. This will give investors more control and flexibility in how they vote.

Advisers to companies say that smaller players are likely to gain at least one board seat. This is especially true given that they will no longer incur the expense of printing and mailing proxy cards to all shareholders. This lowers the barriers to entering the activist game.

Activists are increasingly pressuring companies to improve their performance on environmental, social and governance (ESG) issues. This pressure can take the form of deal-making or other means.

Activists typically make contact with a company in late fall or winter, often privately, to initiate a campaign. Proxy-voting season runs from roughly mid-April to June, when most publicly traded businesses host their annual meetings.

According to Shaun Mathew, a partner at law firm Kirkland & Ellis LLP, this proxy season is shaping up to be the busiest on record. Mathew advises companies on how to prepare for and respond to activists.

"Companies are concerned that the new system will attract first-time activists who think they can use proxy contests to create leverage for their agendas," he said.

Even before the proxy change, a surge in newcomer activists had been building. Many of these activists were inspired by Engine No. 1 LLC, a hedge fund that won a proxy battle against Exxon Mobil Corp. in 2021. In this battle, the first-time activist won three board seats after arguing that the oil giant was a climate laggard. Even though Engine No. 1 LLC only owned a tiny fraction of Exxon Mobil Corp.'s stock, its victory was still significant.

Since then, a number of other rookie activists have launched campaigns at companies including Hasbro Inc. and Wall Street Journal parent News Corp. (In some cases, these first-timers have been started by people who used to work at big-name shops like Elliott Management Corp.)

Strive Asset Management, founded earlier this year, sent letters in September to the boards of Apple Inc. and Walt Disney Co., urging them not to let a focus on ESG get in the way of corporate decision-making. Strive also publicly called on Chevron Inc. to pump more fossil fuels over the next decade and slow spending on its energy-transition plan.

According to data compiled by Lazard's Capital Markets Advisory group, the percentage of activist campaigns launched globally at companies with market capitalizations over $500 million that have been spearheaded by first-time activists has increased from 17% in 2021 to 25% so far this year.

As of September 30th, a total of 171 campaigns have been launched this year- a 39% increase from the same period last year. This surge can be attributed to activists seeking out cheaper entry points to place their bets.

This could provide a boost to the depressed merger market. After a record year in 2021, about $1.4 trillion of deals have been struck in the U.S. through mid-November, down 41% from the comparable period, according to Dealogic.

Activist campaigns pushing for mergers and acquisitions have accounted for 38% of all activist activity through September, according to Lazard. The number of "sell the company" demands has exceeded totals in both 2021 and 2020.

Alfredo Porretti, head of Shareholder Engagement and M&A Capital Markets in North America for JPMorgan Chase & Co., said that while M&A activity may be slowing down, shareholder activism remains fairly busy.

If a company does not have an immediate and logical buyer, activists may push for spinoffs or breakups, according to Bill Anderson, a senior managing director at Evercore Inc. and head of the firm's global activism-defense business. This is because rising interest rates have made financing deals more difficult, particularly for buyout firms.

Earlier this month, the Journal reported that Carl Icahn has a sizable stake in Crown Holdings Inc. and believes the company should take steps to improve its performance, including shedding noncore units. In September, the Journal also reported that Jana Partners LLC has a nearly 10% stake in Freshpet Inc. and believes the pet-food company could be an attractive target for larger competitors.

Mr. Anderson believes that technology will be the most active sector in 2023, with many companies seen as potential takeover targets after the Nasdaq Composite Index fell by 29% this year.

Peter Michelsen, head of Activism and Shareholder Advisory at Qatalyst Partners, agrees that shareholder activism is on the rise. He attributes this to the fact that investors are becoming more aware of the potential for activist campaigns to create value.

"There has been a dramatic shift in the technology sector, with investors now focusing on profitable growth rather than just growth. This has created new opportunities for activists to push for operational improvements."

In an open letter to Mark Zuckerberg last month, investment firm Altimeter Capital said that Facebook META 0.54%.

Meta Platforms Inc. should reduce its workforce and scale back its plans for a metaverse. This comes after activist hedge fund TCI Fund Management called on Google parent Alphabet Inc. to cut costs and reduce losses in its long-term bets, such as the self-driving-car business Waymo.

"Activists always run the risk of catching the proverbial falling knife," said Mr. Mathew from Kirkland. "However, I still believe that the excitement and energy within the activist community is more powerful and influential than any negative factors."