© Hogan & Hartson LLP. All rights reserved. NACD Capital Area Chapter Washington, DC September 9, 2008 Activist Hedge Funds in the Board Room: What Public Company Directors Need to Know Stuart G. Stein Partner Hogan & Hartson

© Hogan & Hartson LLP. All rights reserved. What is an “activist” shareholder? Large shareholders that make their views known to the Board Institutional Investors; Hedge Funds; Investment Funds Opportunists !!!

© Hogan & Hartson LLP. All rights reserved. Why are activists more prevalent today than ever before? – In 2005, approximately 8,000 hedge funds held assets of about $1.3 trillion worldwide–up from $186 billion in – Liberalization of Proxy Rules in 1993 created safe harbor for “exempt solicitations,” though not from 13D – SOX in 2001 and Corporate Governance – Activism + ISS / RiskMetrics acquiescence = an irresistible force

© Hogan & Hartson LLP. All rights reserved. Who are the activists? What are they looking for? Targeting – from an activist’s website : – Characteristics of the companies targeted include: (i) recent operational stumble(s); (ii) poor corporate governance; (iii) a decline in analyst coverage; and (iv) limited earnings visibility.

© Hogan & Hartson LLP. All rights reserved. Targeting “A stock that is trading well below industry comparables.” “Many of these small-cap companies remain under the radar of larger investment funds that seek liquid, more passive opportunities.” “The resulting paucity of talent and capital investing in this universe of companies creates tremendous inefficiencies and the opportunity for extraordinary returns.”

© Hogan & Hartson LLP. All rights reserved. What does an activist typically want? Board seat? Change in governance? Oppose management initiatives (e.g., stock options)? * * * Stock re-purchases… Explore strategic alternatives … to “maximize shareholder value” = SALE R eturn O n I nvestment

© Hogan & Hartson LLP. All rights reserved. Tactics Form 13D – public discussion of management’s inadequacies Call for changes in financial, business or operating strategy Call for changes in management Call for a share repurchase program Push for sale of the company (or a portion) – “explore strategic alternatives” Board Nominees (full slate / short slate) Campaign for a vote against a pending merger or other corporate proposal before shareholders Multiple and combination demands

© Hogan & Hartson LLP. All rights reserved. Prepare … Strategic long term planning for business and transactional opportunities – Have an “answer” to a potential activist before you have an activist – Be able to communicate the answer to shareholders – Stay close to analysts and institutional shareholders

© Hogan & Hartson LLP. All rights reserved. Prepare … Get your ‘team” organized – Key management members – IR / PR – Legal Advisors – Financial Advisors

© Hogan & Hartson LLP. All rights reserved. Prepare … Review governance profile – Charter / bylaws [director elections, repellants; poison pill; ability to call special meetings, stockholder vote requirements, election of directors (staggered, majority vote) …] – Board composition

© Hogan & Hartson LLP. All rights reserved. Prepare … Pay attention to stockholders! – Who are they? – Changes? – Issues? – Are you a target? – Proxy analysts services Communicate with stockholders!

© Hogan & Hartson LLP. All rights reserved. An activist attacks No script!!! Each situation is different. Different stockholder profile Different ‘story” to tell

© Hogan & Hartson LLP. All rights reserved. An activist attacks No panic. Put into action the team which should already be assembled. Do not feel the need to immediately comment. Indeed, companies should always have a no comment policy on market rumors. Only communicate through a designated spokesperson. Make sure all Company officials and Board know not to comment.

© Hogan & Hartson LLP. All rights reserved. An activist attacks Information about the activist: KNOW YOUR ACTIVIST !!! Review activist goals with advisors. Call special Board meeting to update Board.

© Hogan & Hartson LLP. All rights reserved. An activist attacks In designing response, consider regulatory regime. Federal / State Regulator Change of control

© Hogan & Hartson LLP. All rights reserved. An activist attacks Cost! Fortitude / Thick skin Stockholder communications!!!

© Hogan & Hartson LLP. All rights reserved. Analysis of Corporation Defensive Provisions Shareholder rights plan (“poison pill”) Staggered board of directors State Law / Shareholder Protection laws and Control Share Acquisition Provisions Blank check preferred shares Supermajority vote for a merger, consolidation or sale of substantially all of the corporation’s property

© Hogan & Hartson LLP. All rights reserved. Analysis of Corporation Defensive Provisions, cont’d Limitation on shareholders ability to call a special meeting of shareholders Advance notice required for shareholder board nominations and proposals Shareholder action by written consent Election of Directors Limited to Annual Meeting Limitation on removal of directors by shareholders Election of Directors Limited to Annual Meeting

© Hogan & Hartson LLP. All rights reserved. Analysis of Corporation Defensive Provisions, cont’d Exclusive right of Board to fill Board vacancies (whether resulting from an increase in the number of directors or otherwise) Right of Board to fix size of Board (subject to limits) Supermajority shareholder vote is required to amend sections of the Bylaws/Articles Vote for Director Election (Plurality / Majority)

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