Though progress has undoubtedly been made on the COVID-19 front, companies are remaining vigilant—and understandably so—as they continue to direct their attention to the crisis and to its impact on their employees, customers, communities and business relationships. One such impact relates to severe market volatility and is the source of several financial market aggressions.
Boards of directors and management at public companies across different industries are experiencing declining share prices and considerable changes in share ownership and are finding that this makes them more vulnerable to certain financial market aggressions. This post focuses on two—unsolicited hostile takeover bids and short selling—and suggests defensive measures that public companies can take.
Proactive defense strategies in the face of COVID-19 financial market aggressions
1) Hostile takeover activity
Foster board-management engagement. Your directors should regularly engage with management to better understand the impact of COVID-19 on the industry and on business because having that understanding is key for a board to be able to carefully respond to any takeover bid. Your directors should also continuously evaluate the value of your business so that they’re able to measure any bid against future business expectations, especially since share price valuations may not accurately reflect the value given market volatility and the unknowns surrounding COVID-19.
Though it’s important that your directors be on top of your financial health, they should consider whether it would be more efficient to delegate to a subcommittee the day-to-day planning for responding to takeover bids. This day-to-day would involve preparing and updating key information to help the board adequately respond to unsolicited bids, including a rundown of actions to take when receiving a bid, response considerations, and an outline of relevant legal and regulatory duties of your directors.
Engage with stakeholders. During these unpredictable times, it’s extremely important for your directors to regularly engage with shareholders, customers, local/state/national authorities and other stakeholders, to understand and address their concerns and to keep their interests in mind when considering whether to recommend a takeover bid. It’s also worth their while to make sure that shareholders have ample information about future business prospects so that they’re better equipped to evaluate bids.
Monitor shareholder activity. To help guard against rapid accumulations of significant and potentially controlling blocks of stock, your directors ought to monitor your shareholder base and investigate any unexpected or substantial changes. For example, they should keep an eye out for Schedules 13D and 13G filed with the SEC (available on Thomson Reuters Checkpoint) and for Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) notifications filed with the FTC and DOJ.
Granted, the current HSR threshold of $94 million is high, meaning that a person or group could accumulate a large stake without having to make an HSR filing. So, unless the potential acquiror’s stake exceeds 5% of your outstanding shares (triggering a Schedule 13D or, under certain circumstances, a Schedule 13G), you may not be on notice that your shares are being accumulated. And even if these Schedules must be filed, the potential acquiror is allowed 10 days before having to disclose its position.
Still, regular monitoring of these SEC and HSR filings is an invaluable tool when trying to spot potential acquirors.
Consider shareholder rights plan. As the pandemic continues to wreak havoc on share prices and companies try to build resilience in the face of COVID-19 financial market aggressions, you should think through whether adopting a shareholder rights plan (a/k/a poison pill) is the right move for you to reduce the chances of a potential acquiror gaining control without adequately compensating your shareholders. Though rights plans neither prevent hostile takeovers nor allow your directors free rein to ignore unsolicited takeover bids, they do encourage anyone attempting a takeover to negotiate with the board beforehand by threatening the potential acquiror with the prospect of considerable dilution of its common stock position if it exceeds a certain ownership threshold (usually 10-20%).
What complicates matters is that proxy advisory firms Institutional Shareholder Services (ISS) and Glass Lewis have long frowned upon rights plans adopted without shareholder approval out of concern that the lack of approval may limit management’s accountability to shareholders, and they have a history of recommending that shareholders vote against directors who adopt these rights plans. But in April 2020, ISS and Glass Lewis issued guidance suggesting that they’re receptive to some deviation from their traditional philosophy on account of COVID-19. ISS said, “A severe stock price decline as a result of the … pandemic is likely to be considered valid justification in most cases for adopting a pill of less than one year in duration.” Similarly, Glass Lewis said, “We consider companies that are impacted by coronavirus and the related economic crisis as reasonable context for adopting a poison pill” if “[t]he duration of the pill is limited to one year or less; and [t]he company discloses a sound rationale for adoption of the pill as a result of coronavirus.”
With that said, a rights plan should be tailored to your circumstances and address the customary concerns of proxy advisory firms. For example, it should speak to a limited duration, include a triggering threshold that isn’t unreasonably restrictive, lay out the timing of shareholder approval or alternatively the reasoning for proceeding without that approval, and express the specific threats that your board is looking to address as opposed to a mere intent to prevent a person or group from accumulating a stake.
For a discussion of several companies that recently adopted short-term shareholder rights plans, check out SECPlus Filings Highlight, ON Semiconductor and Others Adopt Short-Term Rights Plan as Defensive Measure During COVID-19 Crisis.
2) Short selling
Monitor your stock activity and related news. Given recent market fluctuations, you may see a rise in another one of the COVID-19 financial market aggressions—short selling—as investors bet against the market attempting to capitalize on the volatility. Some short sellers take it a step further and publicly discredit the stocks that they’re shorting in the hope of accelerating a price drop, a ploy that has come to be known as a short-and-distort scheme. It’s difficult to watch out for this risk. SEC rules don’t require disclosure of short positions, and it remains to be seen whether the SEC will issue any rulemaking to that effect during the COVID-19 crisis. Back in 2008, during the financial crisis, the SEC issued emergency orders banning short selling in a number of financial stocks and requiring institutional money managers of a certain size to report short sales to the SEC weekly (available on Thomson Reuters Checkpoint), the reasoning being that investors were aggressively short selling financial institution stocks and creating sharp price declines in securities that weren’t related to actual price valuation. Nowadays, the SEC pushes back against any suggestion that the US do away with short selling during the crisis. In fact, Chairman Jay Clayton said in a CNBC interview on March 30, 2020 that short selling is critical “in order to facilitate ordinary market trading,” and added that the SEC already has rules in place limiting the risk of short selling.
With that in mind, one tell-tale sign that you or your assets are under attack by short sellers is the presence of undue downward pressure on falling stocks. Another is evidence of public berating of you and your assets in press releases and on social media and stock message boards, suggesting that you may be the target of a short-and-distort scheme. Keep your eyes peeled.
Be prepared to refute misinformation quickly. A swift response in the case of short-and-distort schemes is key, especially since companies have very few, if any, effective tools to respond to false or misleading public statements by short sellers. Your board could delegate to a subcommittee the responsibility of putting together information to guide the response process, including material on how best to anticipate the substance of attacks from short sellers and prepare relevant, responsive disclosures.
For an illustration of how precious metals company Novagold Resources recently addressed the short-and-distort scheme carried out against it, check out SECPlus Filings Highlight, Novagold Responds to “Misleading and False” Short-Seller Report.
Takeaways
Regardless of whether you’re defending against a hostile takeover bid or a short-and-distort scheme, the common thread is that regular monitoring and awareness are key. Being ready to act quickly is essential when navigating these COVID-19 financial market aggressions. Hopefully, the guidance herein helps in that regard.
Also, stay abreast of rulemaking, filings and guidance as the crisis continues to unfold: SEC and HSR filings and ISS/Glass Lewis proxy guidance in the context of hostile takeover bids and SEC guidance and rulemaking in the context of short selling. Doing so may help inform your defensive strategies.
