As we discussed in our previous post, a board faced with the arrival of an activist on the scene can benefit from establishing a special committee of independent directors. While a quick response time is one of the more obvious benefits of having a small group of directors lead the charge, a committee of unconflicted directors with clear marching orders from the board may allow for more thoughtful decision-making under pressure and lend credibility to the company’s response, particularly where management’s performance is under attack.
Proxy contests can often involve trench warfare with a daily barrage of press releases and other breaking developments. In these circumstances, it is easy to revert to a reactionary, knee-jerk defence of management and the company’s strategy. Mounting an informed and thoughtful defence is more likely with a small group of independent directors who can engage in an expeditious, yet thorough, analysis of the activist’s claims. The company’s public response can be just as vigorous, but a skeptical shareholder may be more receptive to the company’s counter-attack if that attack was developed by independent decision-makers.
The committee’s credibility starts with its mandate: a committee with sufficient latitude to consider the activist’s claims, engage independent advisors and report to the board is more likely to bolster the company’s response than a committee whose mandate is more narrow and circumscribed. A clear mandate adopted at the outset of the committee’s work will also clarify the committee’s duties, including its interactions with management, and will reduce the possibility of internal disputes later in the process.
A committee mandate in connection with a proxy contest could include the following:
- meeting with the activist to receive details of the activist’s proposals;
- considering and evaluating the activist’s proposals against the alternatives available to the company;
- directing or approving any response by the company to the activist’s proposals;
- negotiating with the activist, including with regard to any settlement discussions; and
- supervising and participating in the company’s shareholder engagement efforts, including any proxy solicitation efforts.
This is the second in a series of recurring blogs on special committees focused specifically on contested transactions, including proxy contests and hostile bids. For more information on special committees, please refer to 20 Questions Directors Should Ask About Special Committees, a publication co-authored by Fasken Partners William K. Orr and Aaron J. Atkinson for CPA Canada.