Activist investing activity broke records in 2022. While Elon Musk’s Twitter takeover stole the news, it was just one of 777 activist investor campaigns that took place in the first half of 2022.
Although Musk’s acquisition grabbed all the headlines, microcaps are more vulnerable to activist campaigns. Investors became emboldened in 2022 due in part to a 2021 law that made it easier to demand management address climate change and human rights as part of company operations.
The new law also makes it easier for activist investors to gain seats on corporate boards. Universal ballots will take away a loophole companies have used to reduce the likelihood of losing board seats during a takeover attempt.
As part of the updated universal ballot, shareholders will receive an electronic ballot containing the names of every candidate. This ballot will include the names of candidates presented by the board of directors and shareholders. Without the universal balloting system, shareholders voting electronically cannot see the names of every candidate. Only the in-person voters can see every nominee hoping for a seat on the board.
SEC Chair Gary Gensler cited the amendment as a big win that would level the playing field between in-person voters and investors voting by proxy. He cited the amendment as “an important aspect of shareholder democracy.”
How the Universal Ballot Affects Activist Investing in Microcaps
The universal ballot gives activist investors wider access to voters. Not getting listed on electronic proxy cards limited their voter pools in the past, but they no longer face this restriction.
Schulte Roth & Zabel’s co-chair of the M&A and Securities Group, Eleazer Klein, believes the universal ballot puts more power into the hands of activist investors. “[The ballot] is an impactful change.”
The universal ballot helps with activist investors seeking seats on any corporate board, but activist investors targeting small caps have additional advantages.
Since microcap stocks have lower market caps, activist investors and their partners can buy more shares on the open market.
Depressed stock prices will also help activist investors. A bad year in the stock market has made most companies more affordable, making it easier for activist investors to accumulate meaningful positions. Shareholders who are unhappy with their performance in 2022 may also be more open to activist investors who see potential in a target rather than the current board members who oversaw the company during last year’s tumultuous market.
The request for a universal ballot isn’t new. While activist investors can finally utilize this resource and add more democratization to electoral contests, this wasn’t always the case. In 2015, DuPont rejected activist investor Nelson Peltz’s request for a universal ballot. Peltz’s hedge fund Trian Partners initiated an effort to take four of the 13 corporate seats. Without the universal ballot, DuPont could send its own version of a ballot to shareholders, while Peltz had to create another ballot for shareholders. Corporations held more power, and a large corporation’s reluctance to enable a universal balloting system should demonstrate the significance of the new universal ballot policy.
While the universal ballot helps activist investor campaigns, Klein doesn’t believe the new policy will result in a surge of activist investor activity. He has not bought into the prediction that the new universal ballot policy increases the number of activist investor campaigns.
“Everything else considered, if I was going to have 50 campaigns last year, I don’t think I am going to have 60-70 campaigns because of the universal proxy. I expect to have the same number of campaigns.”
It’s still expensive and time consuming to initiate an activist investor campaign. If activist investing continues its growth trajectory, Klein believes it’s a product of the market rather than the universal ballot policy. A correlation doesn’t necessarily identify the root cause.
Activist Investors and Microcaps
For better or worse, activist investors keep corporate boards on their toes. They prevent boards from getting comfortable and doing as they desire, sometimes at the expense of shareholders. Activist investors can swoop in on unethical business practices, such as excessive executive bonuses that hurt the company’s ability to gain market share and maintain operations. Some management teams are happy to overcompensate their executives even if they are getting crushed by competition. Activist investors can challenge those practices and advocate for important business decisions. They can encourage businesses to pursue new opportunities or give up on unprofitable ventures. Even if an activist investor does not gain a corporate seat, management may make some changes to appease shareholders, so another activist investor doesn’t campaign on the same promises and win in the future
Activist investors can become a problem for shareholders if they put other initiatives ahead of profits. Environmental activists can force companies to slow down or eliminate ventures that have a negative impact on climate, for instance. While these efforts can help the environment, they can also hurt profit margins and translate into losses for shareholders.
A flurry of first-time activist investors and companies with smaller market caps can increase the likelihood of activist investors who prioritize ecological change and modifications in other areas at the cost of revenue and profits. It’s possible for some investors to underestimate the impact their proposals will have on these metrics, and that can result in long-term losses for shareholders.
Companies can also respond harshly to activists trying to gain corporate seats. A common strategy is the poison pill. If an activist investor accumulates too many shares or attempts a hostile takeover, the company can issue more shares and quickly repurchase them to reduce the activist investor’s percentage of ownership in the company. This can cause existing shares to lose value.
Activist investing remains an important investment strategy in the stock market, but increased accessibility and options for activists can bolster its appeal.
The universal ballot makes it easier for shareholders to vote for activists instead of relying on companies to supply ballots and limit voting choices. Microcap valuations make them prime candidates for activists to catalyze change to corporate structures, business opportunities, and potential. Shareholders should review an activist’s proposals and assess if they align with their values and the company’s profitability. It’s also a good idea to look at an activist’s track record to gauge their ability to make meaningful changes at the target company.
