Is the Coronavirus Killing the Proxy Season?

Kai Haakon E. Liekefett and Derek Zaba are partners at Sidley Austin LLP. This post is based on their Sidley memorandum.

Everybody is talking about it: the coronavirus or COVID-19. It has started to impact the global economy and affect people’s everyday lives. Will it impact the 2020 proxy season as well?

The vast majority of public companies in the U.S. hold their annual shareholder meeting between April and June. Most of these companies require in the bylaws advance notice of director nominations by shareholders. These nomination deadlines are typically between January and March. In other words, now is the time of the year when activists are forced to “put up or shut up.”

However, it is important to understand that if an activist launches a proxy contest to replace directors, an activist must be prepared to remain in the stock for the foreseeable future—at least until the annual shareholder meeting and, if successful in obtaining board seats, at least 6-12 months beyond that. While there are no legal restrictions to the contrary, as a practical matter, an activist cannot initiate a proxy contest and sell or reduce its position shortly afterward. An activist who does this stands to lose credibility with long-term institutional investors and becomes more susceptible to being portrayed as a “short term” investor in future activism campaigns. It is even more difficult for an activist to exit a stock if an employee of the activist fund, rather than candidates that are at least nominally independent, takes a board seat. Material nonpublic information received by the activist employee in the board room is imputed to the activist fund, thereby restricting the fund’s ability to trade in the stock.

The problem activists currently confront is the enormous volatility in the stock market, due to the coronavirus and other factors, such as the uncertainty over the U.S. presidential election. Some may argue that this an overdue market correction after 11 straight years of a bull market. From an activist’s perspective, however, now is a risky time to make a multi-year commitment to a stock. The problem is compounded for those activists whose funds do not adequately limit redemptions. If the stock markets continue to deteriorate, these funds might face significant capital redemptions from their own limited partners without the ability to sell their investments.

As a consequence, it may turn out that the coronavirus is Corporate America’s most effective poison pill this proxy season. There are already dozens of cases where activists decided against moving forward with a slate, including a few large and mega-cap situations. Now, this does not mean that proxy fights will be nonexistent this year—there are still several contests underway. However, the coronavirus crisis will likely chill some activity this proxy season, particularly in economically heavily exposed industries where an activist can run a perfect proxy campaign but still lose millions of dollars.

Moreover, we expect to continue to see many shareholder activism campaigns against merger and acquisitions (M&A) transactions. That is because challenging an announced M&A transaction typically requires an activist to be prepared to stay in the stock for only a few months. Thus, we expect to see the number of so called “bumpitrage” remain elevated this year.

Lastly, once the coronavirus crisis is over, Corporate America should expect shareholder activists to return with a vengeance. After all, 2009 was the last record year for proxy contests in the U.S., when activists launched more than 130 proxy fights in the aftermath of the financial crisis. That is because structurally challenged companies can sometimes hide in a bull market, but a market correction tends to make clearer who is performing or who is not. Therefore, we might see more proxy fights again as early as this fall when the rest of the public companies with an off-cycle fiscal year hold their annual meeting of shareholders.

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