Shaun J. Mathew and Daniel E. Wolf are Partners at Kirkland & Ellis LLP. This post is based on a Kirkland & Ellis memorandum by Mr. Mathew, Mr. Wolf, Sarkis Jebejian, Eric L. Schiele, Erin Nealy Cox, Bob M. Hayward and several other Kirkland partners. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch; and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine Jr.
As the 2023 proxy season comes to a close, attacks by high profile activist hedge funds at blue-chip companies continue to dominate headlines, and a close review of campaigns conducted during the first season under the SEC’s new universal proxy rules reveals changes to strategy and tactics that companies, activists and their advisors are carefully considering. As such, it’s no surprise that activism preparedness continues to rank high on the priority list of many public company boards.
But as this past year has shown, a public attack by an activist is not the only form of corporate crisis. The current macroeconomic environment and depressed valuations have led to bidders (both strategic and financial sponsors) more regularly making unsolicited and, in some cases, even openly hostile M&A approaches. Sophisticated hedge funds specializing in short attacks are growing bolder and expanding their targets to more mature, global companies, with several campaigns leading to significant stock price reactions, governmental investigations and executive departures. ESG continues to be a focus, but companies now face increasing tension between pro-ESG and anti-ESG groups, with areas of vulnerability expanding beyond shareholder proposals to litigation, state legislation, and possible state AG investigations and federal Congressional investigations, as well as potentially significant business, reputational and financial risks (e.g., via boycotts or aggressive social media campaigns), all of which can be interrelated and even fuel one another. The landscape for director (and officer) liability for Caremark (oversight) claims continues to evolve, in cases ranging from cyberattacks and allegations of employee sexual misconduct to more traditional areas of risk including natural disasters, critical regulatory and enforcement compliance issues and fraud. Boards now also find themselves operating in an era of rapid-fire and unprecedented regulatory change in critical areas, including antitrust and environmental policy — not to mention accelerating business and industrial change via technological disruption (including GenAI) that continues to upend and threaten business models.
In our experience, the boards that respond most effectively to major corporate crises are those that approach crisis preparedness proactively and holistically rather than from a reactive posture focused on individual risk silos. While there is no one-size-fits all approach and each company (and each board) is different, the following questions may be helpful to consider in making sure the board is prepared.
