From the September 2009 issue of Treasury & Risk magazine

Warding Off Proxy Battles

Public companies contended with more scrutiny on compensation and corporate governance issues from shareholders during the 2009 proxy season, and this trend is expected to continue. In such an environment, companies need to be ready for communications from activist shareholders so that such interactions do not rise to the level of a proxy contest. According to RiskMetrics, average support for the 50 shareholder proposals (as of June 1) relating to an advisory vote on compensation was 46.7%, up 5.2% from the average support in 2008. RiskMetrics data also show that average support for 19 proposals to require an independent board chairman increased 8.8%, to 38.1%.

Shareholder interest in compensation and governance issues will not dissipate anytime soon. As companies prepare for the 2010 proxy season, it's possible Congress may enact legislation requiring public companies to provide a say on pay vote. Public companies need to be proactive about communications with activist shareholders.

Putting a shareholder response team in place can help. This team should include key officers, along with outside counsel, a financial public relations firm, investment bank and proxy soliciting firm. A company should have developed a well-known communication policy so that everyone within the company knows whom to contact in the event a shareholder contacts him or her. The policy should clearly identify a point person from the response team who will respond to shareholder inquiries.

Management needs to determine the nature of the shareholder contact before apprising the full board about it. Factors to consider include whether the shareholder has a history of activism, such as bringing proxy contests or shareholder proposals. If the team decides the potential threat from the shareholder is real, the board should be notified. In such situations, the company will need to consider whether to, and who should, meet with the activist shareholder. Initial meetings will often be with the company's investor relations person or CFO. Additional meetings, if necessary, typically include senior managers, and the activist shareholder may request board members to participate.

A public company and its management and board of directors can anticipate contacts with activist shareholders by developing consistent and frequent discussions with shareholders about the company's strategy, challenges and performance. The effort to maintain such a dialogue with investors may pay dividends in terms of increased support from the company's shareholder base should any conflict with an activist shareholder arise. Another way to anticipate potential issues is to perform self-analyses to understand factors that may make the company the target of a proxy contest or an attractive takeover candidate. Typical factors include recent poor stock price or financial performance or value that is easily transferable, such as excessive cash.

John K. Wilson is a partner in the transactional and securities practice of Foley & Lardner LLP and regularly represents companies on corporate governance, securities law and takeover defense matters.

Benjamin F. Rikkers, an associate at Foley & Lardner, helped prepare this article.


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