July 17, 2015
Rana Abdel Fattah
When an Activism Risk Arises, a Special Committee Can Prove Beneficial
We recently stumbled upon an interesting read on Timely Disclosure, a blog that covers updates and commentary on current issues in corporate finance, securities, and mergers & acquisitions. The article primarily discusses what a board can do if and when there’s a risk of activism. We thought it might be helpful to outline a brief summary of the article, given the increase in the number of activists and proxy contests.
Across most companies, the board’s function is quite authoritative – overseeing the management team when necessary. While the board doesn’t get involved in the day-to-day operations of a company, it does set strategic goals of the company and observes the management’s performance against its strategy. However, if an activist shareholder emerges and challenges the company’s strategy and the management’s performance, that’s when the board adopts an active role in responding.
If the board doesn’t interfere in an appropriate manner though, there could be unruly changes followed with distressing costs for the company. This is when a board from a special committee will come into place to initiate the response strategy, should the opportunity arise.
The article goes on to indicate that when an activist appears in the picture, “time is of the essence.” Moreover, board members who are also part of the management team may face challenges if their performance is affected as a result of the activist’s campaign. If this occurs, as the article outlines, the establishment of a special committee of independent directors accommodates a procedural safeguard to make sure that any decision made is done so by members who’re free of any potential conflicts. This process is very important with a court in concluding whether a board has exercised appropriate business judgment or not.
You can read the full article here, as well as access more information on special committees in a publication cited in the article, titled: “20 Questions Directors Should Ask About Special Committees.”