Lazard's latest quarterly review of global trends in shareholder activism, Lazard's Review of Shareholder Activism – Q1 2020, has identified that COVID-19 has dramatically decreased levels of activist activity.
Impact of COVID-19
Levels of activism globally have significantly slowed since the outbreak of the pandemic in March
- Activity in January/February 2020: Global activism activity in January and February was in-line with historical averages while capital deployed posted a record $13.1bn. 42 campaigns had been initiated at 42 companies with total capital of and $13.1bn deployed in January and February.
- Since the outbreak of the pandemic in March, global activism activity has significantly slowed. March 2020's campaign initiation was the slowest since 2013. This quarter has seen a 38% month-over-month drop relative to February 2020 with weekly capital deployed decreasing from ~2.8bn to ~0.3bn.
- Global trend: Dampened activity in March has been consistent across the US, Europe and the Asia Pacific region (APAC)
Impact of COVID-19 on existing campaigns (and on activists)
- Impact on existing campaigns: Lazard observes that some larger activists have been able to take advantage of current conditions to increase pressure/opportunistically increase their positions. For example, Lazard identifies that Icahn and Starboard have maintained their heightened level of activity despite the pandemic. In other instances, activists have opted to settle, postpone or withdraw campaigns amid the market volatility: 10 campaigns settled in March and multiple others were withdrawn/postponed due to current conditions.
- Shift in tactics? No board seats were won through proxy fights in Q1 2020, all 43 were secured through settlements.
- The impact on activists also varies. Some smaller activists with lower cash buffers and shorter lock-up periods with LPs have begun to face significant pressure and capital outflows and may be unable to hold positions long enough for the market to recover. In contrast, some outperformers have reportedly employed hedging strategies to mute broader market impacts.
(Necessary) shift in focus
- Campaigns with an M&A thesis have decreased: M&A activity has significantly decreased because of COVID-19, with March marking the 2nd slowest month in seven years. Activist campaigns with an M&A thesis have likewise decreased with only 5 of the 16 activist campaigns initiated in March having this objective.
- Campaigns with a capital returns these have decreased with only 1 activist campaign having this objective so far in 2020. Lazard attributes the drop to the increased corporate focus on cash preservation. So far, 80 US companies and 201 European companies have suspended or decreased their dividend and 123 US companies and 8 European companies have announced suspensions or reductions to their share repurchase program.
Implications for ESG and shareholder engagement?
- ESG is predicted to remain a key focus despite the pandemic given: a) the heightened expectations of large index funds (despite the pandemic); and b) heightened investor focus on governance concerns in light of the crisis (eg actions companies have taken in response to the pandemic, particularly as it relates to human capital management, executive compensation, and business strategy).
- ESG fund/sustainability oriented fund performance: Despite the current conditions, environmental, social and governance (ESG) and sustainability-oriented funds outperformed conventional funds globally in Q1. Lazard comments that this strong Q1 performance is in contradiction to recent observations which label sustainability as a 'luxury good'.
On pace for most poison pills since the global financial crisis?
2009 saw 50 poison pills implemented. Q1 2020 has seen 22 implemented (mostly by small and microcap companies) as companies seek to protect themselves from unwelcome activist attacks.
Lazard cautions that despite investors and proxy advisers signalling that they will not automatically oppose poison pills in the current climate (provided there is a valid reason to implement it eg a rapid decline in share price), regardless of market conditions, poison pills with nonmarket, unreasonable terms will likely be rejected.
[Note: Glass Lewis recently released a 'policy note' on Harvard Law School Forum clarifying its existing policies n poison pills and how they will be applied during the COVID-19 pandemic. Glass Lewis says that though it generally opposes the adoption of poison pills because in limiting opportunities for corporate takeovers, they also potentially reduce management accountability, it is not necessarily opposed in the current circumstances provided that certain conditions are met. These conditions are that: a) the duration of the pill is limited to one year or less; b) the company discloses a sound rationale for adoption of the pill as a result of COVID-19; and c) seek shareholder approval of any renewals of the pill. If these conditions are not met, Glass Lewis says that it will recommend opposing the re-election of all board members who served at the time of the pill's adoption. See: Harvard Law School Forum on Corporate Governance and Financial Regulation 11/04/2020]
COVID-19: Predicted impacts on activism going forward?
- Lazard predicts that the pandemic will create a new class of activist targets eg companies with complex or vulnerable supply chains.
- Impact on activist tactics: The pandemic is likely to result an increased focus by activists on governance failings with regard to human capital, executive compensation, disaster preparedness and risk management which Lazard predicts activists will use to garner sympathies with passive investors' stewardship teams and other governance focused investors.
- Lazard predicts that levels of activity will increase as the broader economy normalises and M&A market returns as a viable path to value creation.