Sullivan & Cromwell recently published its annual report on 2022 shareholder activism and activist settlement agreements. The publication addresses a wide range in activism trends and the terms of settlement agreements between companies and activists. One of the many interesting observations in the report is the way last year’s market volatility and macroeconomic shocks have influenced activist strategies:
Although activists have not been deterred by the market volatility, these underlying macroeconomic conditions appear to have driven changes in activists’ objectives. Campaigns targeting corporate strategies and operations (including demands for cost-cutting measures) have significantly increased this year, while the absolute number of capital allocation and M&A-related campaigns (historically the most common campaign objectives) has declined.
Market conditions briefly rebounded over the summer, leading to a short-lived uptick in the number of M&A-related campaigns (particularly, attacks on announced deals) and capital allocation campaigns (including campaigns demanding the return of cash to shareholders at companies that built up cash reserves during the pandemic).
However, with higher interest rates in effect for the foreseeable future, slower M&A markets and impending laws and regulatory proposals that could impact M&A activity and/or corporate cash reserves, activists may reduce or shift their capital allocation or M&A demands as we enter the 2023 proxy season. For example, the Inflation Reduction Act, which takes effect on January 1, 2023, will impose a nondeductible 1.0% excise tax on public company share repurchases that involve more than $1 million in the aggregate per tax year, which could make share buybacks a less desirable capital allocation strategy for activists.
While activist demands for M&A and buybacks may be down in the current environment, the report says that there was a significant uptick in campaigns calling for management changes in 2022. For the first 10 months of the year, 54 campaigns were launched against U.S. companies demanding the removal of officers, compared to 37 in 2021 and 42 in 2020. The report notes that last year’s total was the second highest number of campaigns demanding management changes in the first 10 months of any year since Insightia began tracking this data in 2010.
— John Jenkins, DealLawyers.com, January 12, 2023