An interview with Douglas Schnell, partner in the Palo Alto office of Wilson Sonsini Goodrich and Rosati, and Sebastian Alsheimer, corporate partner in the New York office. Both are leaders of the firm’s shareholder engagement and activism practice, focusing on shareholder activism, proxy contests, corporate governance, and mergers and acquisitions.

What are your key takeaways from the 2023 proxy season?

DS: Volume was lower than people probably expected on the advisory side. There were fewer situations, they settled faster. But we did a lot of work behind the scenes. We’re big on engagement and we’re trying to fend these things off without becoming public, ideally. A couple of campaigns that stand out include a good result at VirnetX. Forte Biosciences was also significant from a Delaware law perspective.

Speaking of Forte, activists have made many demands at life sciences companies over the last year. What’s driving this?

DS: Life science companies tend to sit on a lot of money because they need the money to run trials, and it’s going to take several years before a breakthrough. Some activists look at that and they say, “I don’t like the pipeline you’ve got,” or, “I don’t like the management team,” so you should just wind up and give the money back to investors. But I think there’s a misunderstanding from a lot of activists on how difficult it is to wind up a life sciences company. It’s not like you just walk in one morning and you flip off the light switch and all the money that’s in the system flows out. There’s a lot of costs and steps that have to happen for the company to wind up, and I think some are a little naive in how they look at monetization of these research companies.

Wilson advises both companies and activists. Can that model be challenging or does it produce opportunities?

DS: We think it makes our advice better. It gives us the ability to see both sides, understand both perspectives, and allows us to deliver fully informed advice to our clients.

SA: It does mean we have conflicts that other firms don’t sometimes. But like Doug said, it makes the whole team better. Some other firms just go in and demonize the activists or the company. Our view is there are good activists and bad activists, and there are great companies and companies that are struggling and vulnerable. It’s not binary.

This was the first year we had universal proxy in play. Did it change the pattern of proxy contests?

SA: From what we’ve seen, they have been more muted than a lot of people had predicted. So far it is not a game changer. But we have only one season to consider, and we’ll have to get a couple more seasons in before we can do a full autopsy on how things have changed.

The SEC recently updated disclosure rules shortening the13D filing deadline for activists from 10 calendar days to five business days. Might that change the way activism is conducted?

DS: It’s not really going to change anything in my view, particularly on the sophisticated side. People a lot of times would go over 5% and then buy a lot of shares in the 10 days because nobody could see. That little trick is muted a little bit. But I think the good and big activists were always very focused on 13D compliance.

SA: I’ve filed a lot of 13Ds over the years. And the sophisticated investors can have that ready in two days. So effectively shortening the deadline by three [business] days doesn’t really matter.

Do you see dedicated activists continuing to use ESG as part of their campaigns?

SA: I think they tried using it as a wedge issue for several years to expand the appeal of purely financial motives. But we’ve seen proxy advisors and others tell them, “we see what you’re doing, and we don’t like it.” ISS has been very clear on that. So, I think that’s going to fade.

DS: I think it will still be a tool in cases where it’s relevant and makes sense, in the same way they roll out specific governance criticisms. It may not be the focus of campaigns in the way it was at other points, unless it’s an ESG dedicated activist like an Engine No. 1. Good, sophisticated activists look for opportunities to leverage whatever they can. And if there’s an ESG play, I don’t think they’re going to be shy about doing it.

Will bylaw changes continue to be an area of contention in 2024?

DS: It has always been an area of contention. I think this year you saw some people push it a little further than it has historically been pushed. My view is that reasonable advance notice bylaws are something every public company should have, and they should not be afraid to put them in place. I personally don’t advise clients to be on the cutting edge of them, you want to go with the herd most of the time. There are circumstances where it’s going to be different, but so long as you’re sort of in the meat of the curve on how your bylaws work in relation to others, I think you should be pretty safe from anybody objecting.

SA: There are some fair questions that you could ask of a nominating shareholder and the nominees but when it crosses the line, it becomes a tool just to frustrate the shareholder franchise and that’s not the way forward.

What kind of demands are you seeing more of going into 2024?

DS: I think capital structure, capital return, is back. I think one that’s going to come back is M&A because you’re seeing some stability in the M&A market. Interest rates have been stable for a while. I think people are out there doing deals and looking to buy. So, you’ll see activists put their hand up again and say, “this company really needs to be sold and you need to figure out how to get it done.”

Activists are figuring out how to exist in a world where capital isn’t free. We’re at the point where companies that are still laggards now that we’re past the pandemic, that haven’t been on top of governance changes, are very vulnerable.