DealLawyers.com Blog

In this post for the HLS Blog, three Skadden partners discuss the unique risk of short attacks. We’ve all seen that risk play out many times this year with numerous high-profile short attacks in the news. As the blog notes, while a traditional long activist is seeking to enhance value, the goal of a short attack is to have the opposite effect on shareholder value — to profit from a drop in the target’s stock price resulting from the release of a short report and accompanying media campaign. As Kevin LaCroix recently pointed out on the D&O Diary, over a third of recently filed SPAC-related securities suits include allegations that were first raised in a short report published prior to the complaint. These unique threats require tailored preparation and response.

The HLS post suggests ways boards and management teams can prepare for a short attack & understand and address vulnerabilities, provides important considerations for responding and identifies pitfalls to avoid. Here are two recommendations from the blog regarding the target’s communication strategy:

Do Not Expect To Engage With the Short Activist

There is rarely any point to engaging with a short activist. Unlike traditional long activism campaigns, where the goal is to cause the company to take action to increase shareholder value, the short activist’s sole goal is to destroy shareholder value. Consequently, the short activist is not interested in coordinating with or engaging with management to do what is in the best interests of shareholders. These investors have a thesis and generally are unconcerned with the company’s contrary position. Therefore precious time and resources should not be expended attempting to sway short activists to change their positions. Instead, energy should be directed to making the company’s case to the broader investor community.

Do Not Ignore the Attack or Leave It to Shareholders To Sort Out the Truth

In general, it is not in the company’s best interests to completely ignore a short attack. Companies should not rely on the investor community to identify how a short activist’s claims are incorrect or misleading. Failing to address a short seller report or campaign publicly may increase investor uncertainty and lead investors to assume the truth of the short seller’s claims. The onus is on the company to disprove these claims.

Responses should be well-articulated and, although time is of the essence, they should not be impulsive: They should be focused on addressing the substantive criticisms and allegations and not on the activist or its motivations. Any personal attacks or aggressive language toward the short seller are counterproductive and may be viewed as unprofessional and unbecoming of the company’s leadership, lending support to the short campaign.

In rare circumstances, if there has been no notable impact on the company’s stock price and if the campaign has not gained traction with the company’s investor base or the media, a company may consider not responding. In such instances, responding could simply put the spotlight on the short seller’s allegations.

Even if the board deems that a public response is unwarranted, the short campaign should be carefully tracked, and the company should remain prepared to respond if circumstances change.

– Meredith Ervine