Fighting Off the Activists

3-2-15-CommerceSt.pngShareholder activism is on the rise and has become an increasingly relevant topic in boardrooms throughout the country. The regional and community banking sectors have also seen an increase in activist investors submitting shareholder proposals. The adage is true: The best defense is a good offense. With activist investors, the best defense is maintaining an extremely efficient, profitable bank with performance metrics and key operating ratios in the top quartile of a realistic peer group.  If this does not describe your situation, then your bank may prove an ideal target for an activist. An honest, objective assessment of a bank’s susceptibility to an activist, as well as strategic preparation about the bank board’s initial response will largely dictate the outcome of an activist’s approach. 

Regulatory structures, such as passivity agreements and certain requirements of the Bank Holding Company Act of 1956 (i.e. acting in concert), offer management advantages that are not available to non-banks. However, regulatory impediments generally do not provide much of a deterrent to activists who support their cases with empirical evidence designed to gather the support of other shareholders. More importantly, the playbook for an activist defense too often results in some form of capitulation to an activist. It is not uncommon for an activist to be awarded a board seat or for the target to be forced into announcing a review of its strategic alternatives. While arguably a compromise, too often those concessions are akin to letting the fox in the henhouse and simply put, things are never the same.

Accordingly, even with regulatory protections or other structural impediments that a company may have to slow down an activist, if a board has concerns about its vulnerability to an activist, it would be wise to seek the advice of experienced investment bankers.  Even if the board does not have concerns, it is wise to consult with an investment bank that has not been involved in the business activities of the bank or its holding companies, and is experienced in activism. The investment bankers can provide an independent assessment of the bank along with the available strategies and appropriate tactics to respond to the activist. The investment banker should be prepared to provide underperforming banks with strategic advice on the steps to be taken to increase the profitability of the bank and simultaneously prepare a strategic plan to fend off the unwanted advances of an activist. The plans need to be anticipatory in nature. If the board begins to plan only after an attack, its actions are reactive and the activist is in control of the situation.

When an activist calls, it is often the temptation for management to recommend that the board reject or stonewall the initial foray against the target or as described above, quickly compromise. The circle-the- wagons approach provides the activist just the type of unreasonable response that may garner support for the activist cause.  Failure by management to communicate with the activist shareholder is usually the response that motivates other shareholders to immediately align with the activist. 

Activists do not initiate contact without specific reasoning to put forward valid shareholder proposals. The typical activist is looking for ways to maximize the value of its investment rather than run the bank or remove mangers.The failure to recognize this point causes most targets to act unreasonably and cause the activist to pursue that very strategy of removal. Rather than an out-of-hand rejection, the board should give the activists’ recommendations serious consideration. In some situations, compromise or embracing the viable ideas of an activist may actually have some merit and show that the board is reasonable and confident that it has a plan to address shareholders’ concerns. Whatever the initial reaction by the target, it should not be based on a hasty decision-making process. 

Although it may be wise to give studied consideration to shareholder proposals, this is a far cry from acceptance. In the initial phases of a discussion, the board should consider the ultimate objective of the activist. Is this activist a long-term investor interested in a strategic acquisition? Is he a short-term investor interested in receiving a higher price in the near term? Or, regardless of the investment holding period, is he interested in putting the bank in play in order to precipitate a takeover and obtain a higher price for all shareholders? The ultimate objective of an activist, which can evolve as circumstances change, will often dictate the appropriate corporate response. The board needs to demonstrate it is acting in the best interests of all shareholders and exercising is its fiduciary duties in good faith.

Tom Lykos