Nine developments and trends shaping US shareholder activism in 2023

Following a brief decline during the pandemic, shareholder activism in the US rebounded to pre-pandemic levels in 2022 despite—or perhaps because of—volatile markets, depressed share prices and macro-economic uncertainty. Specifically, there was an approximately 36 percent increase in activist campaigns in 2022 compared to 2021, and 2022 was the busiest year for activists since 2018.

Against this backdrop, we looked at the following developments that are shaping the activism landscape in the US so far in 2023.

1. Shifting campaign focuses: Established activists and a substantial number of new entrants to the market are pursuing an increased number of campaigns focused on ESG and on corporate strategies and operations. Conversely, due in part to the decline in the overall M&A market, there has been a decrease in the number of campaigns focused on M&A, as well as on capital allocation.

2. Greater scrutiny of ESG-related campaigns: Despite the surge of ESG-related campaigns in 2022, during the course of that year some of the largest institutional shareholders (including BlackRock) began carefully scrutinizing these campaigns, and their success depended in large part on a credible underlying economic thesis. For example, Icahn Capital's proxy contest against McDonald's Corporation based on the company's allegedly cruel treatment of animals through the use of gestation crates for pregnant pigs was soundly defeated in large part because the campaign lacked an economic rationale.

3. Evolving activist goals: Not surprisingly, board representation will remain a frequent goal of activists, with the vast majority of board seats being obtained through settlement agreements rather than successful proxy contests. In some cases, however, activists may see less value in continuing a proxy contest as long as the target company agrees to take actions desired by the activist in exchange for foregoing board representation. For example, activist investor Nelson Peltz recently ended his battle for a seat on Disney's board after the company announced a reorganization and cost-cutting plan consistent with his demands.

4. Frequently targeted sectors: Technology will continue to be one of the most frequently targeted sectors by activists, with software, services and the internet among the most targeted subsectors within technology. Industrials will also likely draw the attention of many activists, with engineering and construction and machinery likely to be among the most frequently targeted sub-sectors within industrials.

5. Large-cap companies no longer safe: Due in large part to activist campaigns such as Engine No. 1's successful proxy contest against ExxonMobil in 2021 and Third Point LLC's successful campaign against Walt Disney Company in 2022, there will likely be a surge of activist campaigns targeting S&P 500 companies. These campaigns have demonstrated that size alone is not a defense to a well-funded, thoughtful activist attack.

6. "SPACtivism" to continue: The flood of SPAC IPOs and de-SPAC transactions in 2020-22, and the depressed share prices of many de-SPACed companies, likely means that activism targeting these companies, which substantially increased from 2021 to 2022, will remain at elevated levels (if not increase further) in 2023.

7. Institutional shareholders to empower their investors: Emerging programs at the largest institutional shareholders (including BlackRock, State Street and Vanguard) to seek voting instructions from their investors could have unpredictable consequences for activist campaigns as the voting habits and practices of these investors will be harder to predict than those of the institutional shareholders themselves, most of whom have publicly stated their investment and governance goals and policies.

8. Targets likely to implement defensive measures: Continuing high levels of activism, combined with depressed share prices, will likely lead many companies to adopt defensive measures such as more onerous advance-notice bylaws and shareholder rights plans (i.e., poison pills).

9. New laws and regulations will have potential impact: The following newly enacted or proposed laws and regulations will impact—or, if and when enacted, likely impact—the US activism landscape.

• Universal proxy rules adopted by the SEC in November 2021 will require the use of universal proxy cards in contested director elections. The likely impacts of universal proxy rule changes on activism include:
  • Making it easier for activists to get one or two nominees elected to boards, although perhaps making it harder for them to elect a majority
  • Increasing the focus on individual candidates and director qualifications rather than on entire slates
  • Making proxy contests easier and more affordable, thus encouraging smaller activists with fewer resources to pursue campaigns
  • Giving activists greater negotiating leverage with target companies even without launching proxy contests and
  • Encouraging companies to adopt bylaws that facilitate, but perhaps make more onerous, the use of universal proxy cards
• Proposed Schedules 13D and 13G amendments: In February 2022, the SEC proposed amendments to Schedules 13D and 13G relating to beneficial ownership reports that would accelerate the deadlines for disclosure of certain share accumulations, which would make it harder for activists to accumulate large blocks of a target company's shares before having to disclose the stake (or increases thereto). The amendments would, among other things:
  • Shorten the time by which a shareholder is required to file a Schedule 13D after acquiring more than 5 percent of a company's shares from ten days to five days
  • Provide that material changes in shareholdings by a Schedule 13D filer would be required to be reported within one business day of the change rather than "promptly" as under the current rule (which many activists have interpreted rather liberally); and require passive institutional investors to file a Schedule 13G within five days of the end of the month in which they acquire more than 5 percent of a company's shares rather than within 45 days after the year-end in which such threshold is exceeded
• Excise tax on share repurchases: The Inflation Reduction Act, which took effect January 1, 2023, imposes a 1 percent excise tax on public company share repurchases that exceed US$1 million in a tax year, which may undermine a common thesis of many activists that target companies should allocate capital to such repurchases. However, despite this excise tax, share repurchases surged through the first six weeks of 2023. In his State of the Union Address in February 2023, President Biden proposed increasing this excise tax from 1 percent to 4 percent, although it seems unlikely that the Republican-controlled House of Representatives would approve such an increase.

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

_{© 2023 White & Case LLP}