Outlook for Activism in 2023

Shareholder activism continued to rise in 2022, and is poised to bubble over in 2023. As we turn the page on 2022, the overall macroeconomic and geopolitical picture portends continued market volatility and recessionary-like conditions, and activists of all stripes will look to capitalize on valuation re-sets and broader disruption to push their agendas at companies at home and abroad.  While we expect many of the activism trends from recent years to continue, that does not mean activism in 2023 will necessarily reflect business as usual. A number of recent developments will likely cause meaningful shifts to the activism landscape and playbook, which companies should be prepared to navigate. Some of these key developments and likely forces of change in 2023 are discussed below.

More New Faces

Continuing a multi-year trend, 2022 saw a broad range of new entrants to the activism field, bringing with them new aims, strategies and tactics. While the most prominent activists (Elliott, Icahn and the like) are as active as ever, there has been a notable rise in the number of campaigns initiated by first-time activists. Many of these actors are fusing the types of strategic and financial goals traditionally espoused by activists with ESG and corporate governance aims. Some have also demonstrated more aggressiveness and unpredictability as they seek to establish a track record and garner notoriety they can leverage into greater fundraising success. Companies should continue to be aware of the expanding roster of activists and their tactics as they refresh their activism defense playbook in the new year.    

Universal Proxy Reshapes the Playing Field

The adoption of the universal proxy rules—which came into effect on September 1, 2022—represents the most important development in shareholder voting in a generation and is already reshaping the activist playbook. Proxy advisory firms and shareholders can now more easily pick and choose among company and dissident director nominees in contested elections. We expect this will make elections more personal, with greater focus on, and scrutiny of, individual director candidates. Companies should keep this in mind when making board composition and refreshment decisions; rather than focusing on just the collective strength of their boards, companies should also carefully consider the vulnerabilities of individual directors and proactively address those issues. Companies should also recalibrate how they market their directors to investors to thoughtfully highlight the skills each director brings to the table and tie their respective skillsets to the company’s business model and broader objectives.   

The ability of activists to use the notice-and-access solicitation method could allow single-issue and gadfly players, for whom a full mailing may be prohibitively costly, to more easily run ESG and other statement campaigns against companies. We would not be surprised to see “withhold” campaigns morphing into targeted director replacement campaigns where activists seek to oust and replace individual directors on ESG or human capital grounds. As such, companies should continue to proactively engage with their stakeholders on these issues so as to preempt (or at least be in a better position to respond to) these types of campaigns.

In the wake of the universal proxy rules, hundreds of U.S. public companies have amended their advance notice bylaws to implement the new rules and modernize other elements of their bylaws. These next generation advance notice bylaws are designed to ensure boards and shareholders have access to the full set of information necessary to make an informed decision and help protect against the potential abuse of the universal proxy regime. While activists and their advisors have been quick to criticize the latest bylaw enhancements, the mainstream form of these bylaws adopted on a clear day and based on an appropriate record are likely to pass judicial muster and unlikely to draw the ire of institutional investors and proxy advisor firms. We recommend that companies continue to evaluate their takeover defenses holistically and ensure they are tailored to the new threat environment.     

Implications of Interlocking Directorate Enforcement

Activists may also find their directors under the microscope as a result of the DOJ’s stated intention to ramp up enforcement of the Clayton Act’s prohibition on interlocking directorates. This long-standing statutory provision, which bans competitive companies from having overlapping directors and officers in an effort to prevent collusion, has not been a primary focus of the U.S. antitrust agencies in the past. This appears to be changing. In October 2022, seven directors from five companies resigned in response to an interlocking directorate probe from the DOJ, which also announced that its Antitrust Division would be “undertaking an extensive review of interlocking directorates across the entire economy and will enforce the law.”

Activist-nominated directors—particularly activist insider nominees—will need to be more closely assessed for antitrust and interlocking directorate concerns. Of particular concern for activists will be the “agency” or “deputization” theory of liability—even if a single individual does not sit on the boards of competitors, the DOJ may find an interlocking directorate when different individuals deemed to be representing the interests of the same firm sit on the boards of competitors. Under this theory, the ability of activists to place representatives on multiple boards in the same industry may be hampered.

Will the SEC Reform 13D?

The SEC’s proposal to reform the 13D beneficial ownership reporting rules, together with rules regarding securities-based swaps reporting, would, if adopted, represent a sea change in the disclosure of cash-settled derivatives and other means often used by activists to clandestinely accumulate their positions. The more expansive definition of a “group” for purposes of beneficial ownership disclosure would also more closely regulate the ability of activists to tacitly coordinate with each other on campaigns without alerting the market. 

If effected, these changes would give companies and the market more timely notice of emerging activist accumulations. Companies should continue to monitor regulatory developments on this front and be prepared to incorporate any 13D reforms into their activism preparedness planning and shelf rights plan language.

Pass-Through Voting Accelerates

In 2022, some of the largest asset managers rolled out programs designed to give certain of their investors greater say over how their shares are voted. Vanguard announced it would test a pilot program in 2023 in which investors in several equity index funds would have options on how their shares are voted. Similarly, BlackRock and State Street have begun giving institutional investors input on the voting of their shares, and Charles Schwab is testing a program for polling investors on their preferences to inform proxy voting decisions. 

We believe pass-through voting is here to stay as political pressure on the Big 3 intensifies and ESG-oriented investors increasingly second guess the ESG priorities of asset managers’ stewardship groups. This trend will make it more important than ever for companies to engage deeply with their shareholder base and understand which institution will be the one exercising voting authority.

Navigating the ESG Crossfire Hurricane

While ESG is here to stay, the controversy surrounding it likely is as well. 2022 was rife with political backlash against ESG and so-called “woke capitalism.” Anti-ESG activists emerged, targeting several large-cap companies for their human capital policies, engagement with political issues, and purported failure to focus on maximizing shareholder value[1]. While the wave of anti-ESG activism will likely continue into 2023, we expect that shareholder support for such proposals will remain low, while support for pro-ESG proposals will likely persist. In any event, companies should be prepared to contend with activists on both sides of ESG issues.

We recommend companies monitor and proactively assess their ESG profiles, shareholder engagement strategies and defensive preparedness measures in light of these developments.  Activists will certainly change up their playbooks in reaction to the shifting landscape in 2023, and companies would be well advised to do the same.

[1] For further discussion, see Public Companies and Politics: How to Co-Exist.