Attorneys for Activist Investors

The strategy and process for activist investing entails considerable interaction with Federal and state laws and regulations. State corporate law and regulation prescribes how public companies structure and operate internal corp gov and BoDs. Federal securities law and regulation addresses communication with shareholders, say in soliciting proxies and disclosing information to other investors.

Any time law and regulation comes up, lawyers get involved, seeing as they write and interpret those laws and regulations. So, activist investors frequently encounter legal questions and problems as they interact with and seek change at portfolio companies:

❖What does a shareholder need to disclose about an investment?
❖How does a state of incorporation affect an activist situation?
❖What SEC regulations affect the proxy process?
❖How should the settlement of a proxy contest look?
❖How can an investor trade around an activist position?

In this guide, we provide a resource for PMs about when to retain legal counsel for activist investments. We also suggest types of attorneys for different situations.

When You Need Not Retain Counsel

We note that a PM can handle many of the routine tasks of an activist investment without retaining legal counsel. Reading bylaws, Delaware General Corporate Law, and SEC regulations does not require or even demand a law degree. However, when a PM moves beyond many of the basic tasks in an activist project, the right legal counsel goes beyond necessary, and becomes critical.

We think a PM can and should take on many tasks directly. Thus, we have previously urged PMs to do so on a number of subjects, including disclosure, communicating with other investors, and settlements. We intend those comments, and this resource, as informed background about these subjects from an investor who has researched them, rather than legal advice relevant to a specific activist situation.

When to Retain Counsel

We can think of several specific areas that merit professional legal advice.

Interpreting bylaws and certificate of incorporation

All companies have these, of course. We read them thoroughly at each portfolio company, as they represent a form of contract among shareholders, executives, and directors. We sometimes find unusual terms that require some analysis in the context of a state’s corporation laws. Or, we want to know if a bylaw provision would hold up if challenged in a lawsuit. So, in activist situations that advance to a very contentious stage, say to a proxy contest, it makes sense to have a legal review of the bylaws.

Disclosure

Federal law and SEC regulations prescribe when, what, and how one shareholder discloses details to other shareholders. These requirement are far from simple and straightforward, and afford significant room for interpretation. Legal counsel can advise when an investor needs to file a Form 13D instead of a Form 13G, when to amend earlier filings, and what, exactly, to disclose in different circumstances.

Proxy Process

Similar to disclosure, the process for nominating and electing directors follows a confusing path. The SEC prescribes arcane rules about when, what, and how one shareholder communicates with other shareholders throughout the process. State corporation law and the company bylaws set forth confusing deadlines for notifying the company and other shareholders of your intentions. And, intricate procedures dictate how to work with brokers, Broadridge, custodians, and banks. The documents needed for soliciting proxy authority from a single shareholder quickly becomes puzzling and complex. Miss a filing date, mis-state a credential, or use the wrong mailing address, and a months-long project could collapse. So, when planning a proxy contest, it helps to lay out the entire plan, and consult an attorney to advise on those areas that seem unfamiliar or confusing.

Communicating Among Shareholders

Investors can talk freely on many matters. Yet, you can cross a line that triggers a disclosure obligation or a poison pill. Your attorney can advise about that line, the gray areas around that line, and how your planned and actual discussions with other investors get near or across that line.

Settlements

Few activist situations escalate to an actual vote. Most of the time, the shareholder settles the matter with the company. These settlements typically bring with them reporting, compliance, and voting obligations. Your attorney can suggest what is customary or unusual in the terms that a company demands, and can suggest other terms that an investor can demand of the company. These thus serve as an informed basis for negotiating a favorable resolution to a proxy situation.

Drafting Documents

The classic role of an attorney is of course drafting contracts, disclosures, and other intricate documents. In these situations, they will draft specific SEC disclosures (Form 13D, proxy materials), agreements among shareholders (joint filing, promote terms), and settlement agreements with a portfolio company.

Litigation

If you want to sue a portfolio company, naturally you’ll need to hire a lawyer.

Which Counsel to Retain

Investors have some choices. A logical first stop is the attorney who handles your other corporate and securities matters. Your corporate attorney already knows your business and operation, and has earned your trust.

However, very particular Federal and state law and regulations pertain to corp gov. Few general corporate attorneys know thoroughly the state corporation codes and SEC laws and regulations that can affect an activist project. So, when a PM hires an attorney, he or she probably should work with a firm or individual lawyers that specialize in the field.

Many large corporate firms have securities practices with the requisite expertise and experience. A small number represent only BoDs and executives, including Wachtell, Lipton and Latham & Watkins. Many will represent both companies and investors, with emphasis on companies. To our knowledge, in the US only three represent investors exclusively. All are larger New York-based firms that have worked extensively with financial services firms in a variety of capacities, including corporate and securities work. So, each firm’s activist investing practice has become a logical extension of the other services they provide to hedge funds, asset managers, and other investors.

Olshan Frome Wolosky has about 20 attorneys who represent investors in activist situations. Steve Wolosky leads the practice. They represent numerous mid-sized activist investors. Notable clients include GAMCO (Mario Gabelli), Steel Partners (Warren Lichtenstein), and Starboard Capital (Jeff Smith). Steve Wolosky led the legal team in Starboards’ recent BoD restructuring at Darden Restaurants.

Schulte Roth & Zabel has about 24 attorneys who represent investors in activist situations, located in New York and also in an new small office in London. Marc Weingarten and David Rosewater lead the practice. They also represent many mid-sized activist investors, and also some larger ones, including JANA Partners (Barry Rosenstein) and Trian Partners (Nelson Peltz). They have an interesting Shareholder Activism Resource Center with several useful resources, and a popular activist investing conference, in October the last few years.

Kleinberg, Kaplan, Wolf & Cohen has seven attorneys who represent investors. Chris Davis leads the practice. While smaller than Olshan and Schulte Roth, they feature some notable clients, including Marty Whitman of Third Avenue Management and emerging activist investor Lane Five Partners.

Many other attorneys in corporate practices around the country have excellent credentials in working with investors, even though their firms also work with companies. We’ve gotten to know Claudia Allen at Katten Muchin Rosenman (Chicago), Derek Bork at Thompson Hine (Cleveland), Murray Indick at Crowell & Moring (SF) and Wes Nissen at DLA Piper (Chicago), among others.

Or, find another one that seems to deliver decent work. Browse through SEC filings, and see who represents one or another activist investor that you respect and admire. Most Form 13D filings identify the attorney and firm that represents the shareholder, so you can start there.