Law360: “More Proxy Battles, ESG To Propel 2022 Shareholder Activism” – Sidley’s Kai Liekefett Quoted

Charlie Innis writes for Law360 about the 2022 proxy season. Sidley’s Kai Liekefett is quoted. The article is below.

More Proxy Battles, ESG To Propel 2022 Shareholder Activism

Charlie Innis, January 3, 2022

Shareholder activism is expected to come back in full force in 2022, with activists less hampered by the pandemic and more determined to scrutinize a company’s approach to environmental, social and corporate governance principles, particularly how those matters affect the bottom line.

After a COVID-19-induced hiatus, activists appeared to pick up the pace last year, with a?few standout campaigns making headlines over the summer. But the numbers tell a slightly different story. A shareholder activism report published by Insight Activist in October reported a 7% decrease globally in public demands in the first three quarters of 2021 compared with 2020.

That should change in the new year, attorneys said, as more activist investors are taking new positions in companies and arranging their pieces on the chessboard.

“What we are seeing as of right now is an extraordinary amount of activity behind the scenes,” said Sidley Austin LLP partner Kai Liekefett, who co-chairs the firm’s shareholder activism practice.

He said he had heard from more clients about activist activity in November than he has in previous years.

“This is not so visible to the media from the outside, but when you are on the inside representing companies, you know this is the high season — November, December, January, February,” Liekefett said.

In addition to an anticipated uptick in proxy battles, some attorneys in the shareholder activism practice think they’ll see more campaigns that hone in on ESG as a value measure, in addition to more emboldened defensive maneuvers by boardroom leaders.

Predicted Uptick in Activist Campaigns

Historically speaking, activist activity tends to kick up after an economic crisis, Liekefett said. After the Great Recession, there was a surge of proxy battles in the U.S, and he expects a similar phenomenon to occur in 2022, seeing how the most disruptive shutdowns caused by the pandemic are behind us, at least for now.

“In a crisis situation, it really shows whose companies have great management teams, and which companies don’t,” he said.

The pandemic forced company leaders to adapt to rapidly changing circumstances, he said. Some industries were disrupted and reinvented themselves, while others blossomed.

“A crisis like that can demonstrate whether you have good judgment or bad judgment or good luck or bad luck,” he added.

He expects more activists will get involved in unsolicited or hostile takeover bids, and he is seeing more newcomers initiating proxy fights for the first time, which he expects will continue as a trend in the new year.

Partner Elizabeth Bieber of Freshfields Bruckhaus Deringer LLP, head of the firm’s shareholder engagement and activist defense practice in New York, also predicts the next proxy season will be much busier than it has been since the onset of the COVID-19 pandemic.

“We’ve seen activists be more willing to approach companies than during the peak of the pandemic,” Bieber said.

In the early months of the pandemic, companies grappled with a lot of uncertainty, and activists appeared less inclined to pick up the megaphone, she said.

“There was actually a little bit of a reputational impact, where it’s really difficult to go in and hammer a company that is struggling to understand where it will be in six months or 12 months or 24 months, when the whole world is a little bit upside down,” Bieber said.

When a company is trying to figure out how a global crisis like the pandemic may affect its books, it becomes harder for an outside actor, like an activist hedge fund, to come in and try to build its own model for what the company could look like in the short-, medium- and long-term.

“I think we’re at a point now where, yes, there are still uncertainties,” Bieber added. “But there is more modeling that is able to be done both by companies and activists, which permits activists to return to their prior levels of investment and involvement.”

ESG Activism to Make More Appearances

Bieber is seeing activism move into what she calls a “good governance space.” Increasingly, activists are willing to take lengthier positions in companies, and they are looking at how a boardroom’s strategy may affect their investment returns in both the immediate and the long term, she said.

Activists are especially starting to hone in on ESG as a financial measure, she said, and in those cases, dissidents are not arguing for a “cleaner company” simply for the sake of being more environmentally conscious.

“It is pushing companies that would be affected by significant impacts of climate change or other ESG impacts in a way that is going to make them more financially sustainable in the future,” Bieber said, referring to the?point of view of the activists.

She said the phenomenon was also part of an overarching trend of activists finding more and new ways to make their arguments.

“Of course, things like M&A, return of capital, and some of the core activism theses are definitely still in play. I’m not going to say that they’ve gone away or diminished in any way,” she added. “But it’s a broader playbook.”

Coming on the heels of Engine No. 1’s successful campaign at Exxon, other activist investors may look under the ESG umbrella to find new ways to bolster their campaigns, partner Andrew Freedman of Olshan Frome Wolosky said.

Freedman, the co-chair of the firm’s shareholder activism practice, called ESG principles “the next frontier of the intersection of value creation and inefficiencies.”

Activists have not historically considered the social and cultural side of a company, or its environmental issues or blind spots, to be particularly relevant to what makes a business more valuable, he said.

“But I think now, in the wake of the pandemic, the social justice issues that came out of the pandemic, and a keen focus on climate and the environment, that activists will creatively find the ways that the ‘E’ and the ‘S’ of the ‘ESG’ construct weaves into their value creation thesis,” he added.

What is important to society can trickle into a company’s financial performance, said Eleazer Klein, the chair of Schulte Roth & Zabel’s M&A and securities group. Klein also led in representing Engine No. 1’s campaign in ExxonMobil.

For example, Klein said, if a company ignores diversity or has a track record of hiring child labor, people are now more willing to boycott or protest the business as a way to hold the company accountable.

“That clearly will translate to the bottom line and allow competitors to take over the marketplace that they’re in,” Klein said.

Cos. Eye Bolder Defensive Maneuvers

A number of public companies moved aggressively this year to impede activists’ efforts, Freedman said, and he expects that will continue through the new year.

“What was kind of at the forefront of the 2021 proxy season were companies that, rather than try to battle with activist investors on the merits, have really gone scorched-earth in their entrenchment approach to proxy fights,” he said.

In the wake of CytoDyn’s battle with a stockholder group last year, more companies may try to push back against activists on their nomination notices, Freedman said.

CytoDyn’s board rejected a stakeholder group’s nomination notice to introduce dissident board candidates last year, saying the notice was invalid because it made false statements and omitted important information about potential conflicts of interest. The group sued the company in Delaware Chancery Court to force the board to accept the nominees, but ultimately lost.

Freedman also expects to see more of what he calls “vote-buying defensive financings,” when a company facing an imminent proxy contest works a deal with a third-party investor that sides with the board to buy a hefty stake, thereby diluting the shareholder base and tilting the scale in their favor.

“The brazenness of public companies on the advice of defense counsel is at an all-time high,” Freedman said. “And it’ll continue until it blows up in their face, which I think is bound to happen in 2022.”

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