August 13, 2018

Activism: Activist Tactics Continue to Evolve

Here’s a recent memo from Kirkland & Ellis on how activist tactics continue to evolve in response to more sophisticated corporate defensive strategies and the entry of new activist funds. This excerpt reviews how activists may target different parts of a company’s capital structure:

With the multitude of securities and undisclosed derivatives available for investment and hedging up and down the capitalization structure, activists are increasingly using various entry points to deploy activist measures in situations where their true economic motivations may not be evident. For example, debtholders with economic positions designed to profit from a default in a company’s debt (i.e., through credit default swaps) are more frequently threatening to assert a default directly.

Strategies include raising the possibility of tripping the change of control covenants by buying up large equity stakes on the cheap, acquiring a position sufficient to block a shareholder vote for a transaction necessary to stave off insolvency, or,as Aurelius is pursuing at Windstream, formally asserting a technical covenant default on a transaction approved and consummated years ago. While the CFTC has publicly suggested that other strategies involving a company and creditor “manufacturing” a default designed to trigger credit default swap payments to the creditor may constitute market manipulation, we expect continued creativity from activist investors seeking to profit from their varied and hedged debt and equity positions.

The memo also says that activists are more often pursuing proxy contests for board control, rather than running a short slate of one or two nominees. They are also increasingly willing to use “withhold campaigns” to address events arising after director nomination deadlines, and are using ESG-based strategies to increase their support among passive investors.

John Jenkins