This post discusses the emergence of shareholder activism among large, publicly traded technology companies, especially the effect that activism and its regulation can have on corporate policy beyond financial results. The most recent activist campaign was against Twitter, which recently settled with Elliot Management, an activist hedge fund. In the process, Elliot Management nominated four directors to the board and attempted to remove CEO Jack Dorsey. Twitter then entered into a settlement with Elliot Management, which promised corporate policy changes, board representation, and suggested future stock buybacks.

Shareholder activism is a strategy where corporate shareholders attempt to modify the policies and direction of a corporation, as opposed to being passive investors. In the technology industry, activists often split between financial motivations and broader corporate policy motivations. Financially motivated activism often originates with activist hedge funds. These hedge funds will buy a stake in a corporation and attempt to force changes such as corporate governance modifications and share buybacks to increase immediate shareholder returns. Policy-motivated activism will target issues such as data security and privacy to guard or unlock shareholder value. Shareholder activists often claim their actions will reduce agency costs and force boards to focus on shareholder primacy. As technology companies face government inquiries regarding privacy concerns, could shareholder activists play a bigger role in holding corporate boards accountable beyond the balance sheet?

The legal and logistical mechanics of shareholder activism often begin when a hedge fund or other large shareholder makes a public announcement or has private discussions with the target board of directors. The activist will disclose their position if they have not already reached the ownership threshold that will mandate a Schedule 13D  filing with the U.S. Securities and Exchange Commission (“SEC”). At the time this notification is made, the shareholder will often propose changes to corporate policy. Sometimes the activist’s intentions are communicated by a letter sent directly to the board of directors. Other times, it is publicly announced by the activist to the press. Most disputes with shareholder activists are settled before there is a contest for control of the board.

Shareholder activism within technology firms has been limited in recent years because many technology companies have dual-class equity provisions embedded in their corporate charters. These provisions dilute public shareholder voting power and effectively guard against an activist campaign, keeping board elections within the grasp of founders and current management. But recently, technology companies have seen a surge in shareholder activism, especially among larger and more established companies. Within the technology industry, some investors have used shareholder activism in order to promote policy changes that they believe are underregulated by the government.

One positive aspect of shareholder activism is that it can strike at the center of an organization by forcing board turnover and changing the strategic direction of the firm. Most often, however, activist investors are looking to only appoint one or two board directors, and they are primarily motivated to make financially focused changes. With slow government responses to regulating the technology industry, especially with regards to data security, stock prices may tend to price these risks by discounting market values of companies with prior data breaches below their index over the long run. Activists now and in the future may see a change in privacy strategy as a new vehicle to unlock shareholder value akin to selling off a poorly performing division. With the emerging challenges that technology companies face from sustainability to data security, what role should shareholder activism play? Last month, the SEC ended the comment period to a proposal that would have curtailed proxy access, one of the key mechanisms for shareholder activists. Given these developments, do these new regulations that limit the impact of activism encourage innovation or entrench mismanagement? Could shareholder activism be an effective means to discipline privacy lapses or enforce environmental sustainability measures?

Alon Sugarman

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