This has been called “the heyday of hedge fund activism,”1 and it is certainly true that today boards of directors must constantly be vigilant to the many and varied ways in which activist investors can approach a target. Commencing a proxy fight long has been an activist tactic, but it is now being used in a different way. Some hedge funds are engaging in proxy fights in order to exercise direct influence or control over the board’s decision-making as opposed to clearing the way for a takeover of the target company or seeking a stock buyback. In some cases, multiple hedge funds acting in parallel purchase enough target shares to hold a voting bloc adequate to elect their director nominees to the board. A recent Delaware case addressed a situation in which a board resisted a threat from hedge funds acting together in this manner. The court determined that a shareholder rights plan, or poison pill, could, in certain circumstances, be an appropriate response. As a general matter, boards of directors facing activist share accumulations and threats of board takeovers can take comfort in this latest affirmation of the respect accorded to an independent board’s informed business judgment.
Similarly, hostile takeovers are not new, but the tactics being used by today’s activist investors in their approaches to corporate targets are unprecedented. Boards are facing carefully crafted attacks that exploit (or seek to exploit) legal loopholes and take advantage of the climate of corporate governance that has led to the dismantling of many takeover defenses. Boards should be forewarned and forearmed as they pursue their plans for long-term value creation in the current, precarious environment that clearly favors the activist investor.
