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.