As we discussed in our previous post, when a board finds itself in the crosshairs of an activist, establishing a special 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. Equally important to the decision to establish a committee and the scope of its mandate, is the decision about who should serve on the committee. While the prevailing consideration in selecting a committee member should be the individual’s independence, the board should also consider other factors, including the individual’s expertise, the availability of the individual to devote the necessary time to participate meaningfully, and the ability of committee members to work together as a group.
To enhance the committee’s credibility, all members should be free of competing interests that could reasonably be viewed as adversely impacting their judgment. For example, in a proxy contest, allegations by an activist of management underperformance create an inherent conflict for any member of management who sits on the board since a win by the dissident may result in a loss of employment. While the committee in these circumstances should consult with management where its expertise and knowledge of the business is required, management board members should be excluded from serving on the committee.
While independence is a prime consideration in establishing committee membership, it is also important to ensure that those on the committee have the expertise and experience to evaluate and respond to the activist’s proposals. Given that a successful defense often requires the coordinated efforts of many team members, working closely with a number of professional advisors to communicate a clear and compelling vision for the company, a committee will benefit if one or more members has strong leadership experience or recognized industry expertise.
Responding to an activist, particularly where the activist has made its approach and proposals public, will also require committee members to devote a significant amount of time to attend meetings (preferably in person where feasible), engage with advisors and review a significant amount of materials, often in a very truncated time period and often with short notice. To establish and maintain momentum it may be necessary to engage in a robust public relations campaign that may include press releases, letters to shareholders, media interviews, analyst conference calls and, of course, meetings with shareholders; directing or participating in these activities also takes a significant amount of time.
Finally, the board should consider the working dynamic between committee members. In the pressure cooker of a public proxy campaign, it is vital that all committee members are able to work together cohesively and efficiently and resolve competing points of view amicably in order to present a united front.
This is the third 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.