Shareholder Activism Could Heat Up. Should Boards Fight Back?

An activist shareholder campaign at Dallas-based Comerica highlights a pressing matter that bank boards ought to be alert to.

The $78 billion Comerica is facing pressure to sell from HoldCo Asset Management, which owns about 1.8% of voting shares in the company, according to a July presentation from the asset manager. HoldCo argued that Comerica should seek a sale due to its perceived long-term underperformance of the stock, along with the bank’s performance compared to peer institutions. HoldCo added that it held stock in several regional banks it identified as underperformers with strong deposit bases.

At a September investor conference, Comerica CEO and Chairman Curtis Farmer addressed shareholder pressure to sell. “My management team and the board, we fully understand our fiduciary responsibility,” he said. “How do we enhance shareholder value, how do we execute against the strategic priorities that we have set forth that we believe are the right things for our company and drive value longer term.” Comerica did not respond to Bank Director’s request for comment.

Activism isn’t just an issue at Comerica. Banks could face greater pressure from activists to sell now that the M&A environment has turned more favorable. Boards will need to examine their strategic plans for vulnerabilities, understand what to expect from activists and consider other defensive measures.

“Over the last couple of years, there has been more activity in activist investors engaging with banks than we’ve seen in probably a good 10 years,” says David Hooper, a partner who cochairs the securities and capital markets group at Barnes & Thornburg. He believes there’s been a rise in investor activism that is connected to the industry’s profitability struggles in recent years, due to the rapid rise in interest rates between March 2022 and July 2023.

“Activism in banking is a function of pricing generally,” explains Peter Weinstock, a partner at Hunton Andrews Kurth. As of Sept. 23, the KBW Nasdaq Bank Index was up 20% year-to-date, outperforming the S&P 500 — but bank stocks generally underperformed in 2023 and early 2024. “Activists tend to buy in when bank stock pricing is depressed, and they tend to be more aggressive when M&A pricing is higher.”

Activist shareholders can fly below a board’s radar for years, gradually accumulating shares until they have enough of an ownership stake to force a change. Motives can vary widely. Some may want the company to sell outright, while others want to see an improvement to profitability. Some may seek a board seat to have a say in decision-making.

An ounce of prevention is worth a pound of cure and when it comes to activist shareholders, that means developing a strategy that provides fair value to shareholders, Weinstock says. “Manage your business as if you could have an activist shareholder someday,” he says. “If your shares are trading at an attractive price, it makes it a lot more challenging for an activist to come in and say, ‘There’s mismanagement here.’”

More boards may benefit from regularly taking a critical look at the strategic plan, Hooper says. If approached by an activist, the board will have to defend that plan and articulate why it’s in place. Regularly examining the plan can help ensure the board isn’t caught off guard.

Hooper recommends boards acquaint themselves with activist investor groups that tend to operate in the banking space. “Understand who the activists are, what their goals are and what their typical tactics are,” he says. The bank’s legal and investor relations teams should be able to provide that information.

Boards can also consider other defensive measures that may guard against activist shareholders. For example, bylaws could be modified to require longer notice periods for stockholders to put forth proposals, thereby allowing more time to prepare for an activist. Employee stock ownership plans can also provide some defense against activist shareholders, leaving fewer shares available for purchase by hedge funds and private equity firms. It can also be helpful to use holding company capital to buy back stock from shareholders who are looking for liquidity, Weinstock says, rather than leaving those shares available for potential activists to buy up.

If confronted by an activist shareholder, the board needs to first understand its responsibilities under the law. Those vary by state. For example, companies incorporated in Delaware must adhere to the Revlon rule, which stipulates that when a takeover is inevitable, then the board’s duty is to obtain the best price possible for shareholders. In that instance, directors would not consider other stakeholders such as employees or customers.

“It certainly wouldn’t help if you try to fight it from the get-go. Part of your governance responsibility is to listen to and consider any valid proposal,” says Denise Devine, an independent director with $32 billion Fulton Financial Corp., in Lancaster, Pennsylvania.

An experienced public company director, Devine had her own encounter with shareholder activism when she served on the board of Cubic Corp., a company specializing in defense and public transportation equipment. She said the hedge fund Elliott Investment Management, along with a private equity firm, argued the company was undervalued by the market and sought to take Cubic private.

“Once you get an activist involved, the board better be prepared to put in a lot of time,” Devine says. Directors met 66 times over an eight-month period, she recalls, and the board had to enlist the help of specialized advisors and lawyers. It also obtained an independent valuation for the company. A group of investors, including an Elliott affiliate, bought out the company in 2021 and took it private.

In spite of the enormous time and resource commitment, Devine says the activist in that case was never hostile toward the board, which resigned following the buyout.

Boards dealing with activist shareholders should resist the impulse to be defensive, Hooper says. Contrary to popular conception, an activist may not necessarily want to upend the strategic direction of the bank. “It’s best to listen and see if there can be improvements,” he says.