TheCorporateCounsel.net

This HLS Blog from some of the folks at FTI Consulting addresses five fallacies about controlled companies and how they interact with investors and the capital markets.

Fallacy: Management and Board Members of Controlled Companies Are Unaffected by Public Criticism and the Threat of Shareholder Activism.
Fallacy: Signaling and Predictability Are Less Important for Controlled Companies Because There Are No Potential Repercussions.
Fallacy: Performance Alone Drives Valuation.
Fallacy: Everyone Running a Controlled Company Has the Same Views on Strategic Decisions.
Fallacy: Controlled Companies Don’t Need to Attract Capital or Sell the Stock.

Each of these is followed by an explanation, example and list of recommendations for controlled companies. For example, here is what the blog has to say on that last point above:

Explanation: Just because controlled companies don’t need investors to help them secure their votes doesn’t mean they’re insulated from capital markets or indifferent to valuation. Even in a controlled structure, companies still rely on public markets for financing, liquidity, employee compensation, and more. A depressed stock price can increase the cost of capital, reduce strategic flexibility, and have other negative impacts.

Example: In 2021, Meta began investing heavily into the metaverse, a strategy to become the next major computing platform that would allow users to participate in a persistent, immersive digital environment. Following $40 billion spent on the metaverse, Meta announced the “Year of Efficiency” in February 2023, effectively stopping its investments in the Metaverse. Despite being a controlled company, Meta publicly pivoted its capital allocation strategy in response to investor sentiment.

Recommendation for Controlled Companies: Show why the path forward is the right one for value creation. Controlled companies have underperformed widely held public companies on both five- and 10-year total shareholder return metrics. Controlled companies must communicate strategic decisions in terms of value to all shareholders if they want to build lasting confidence. This does not mean that all capital expenditures are frowned upon – it just means shareholders should understand the return on investment and how a capital expenditure fits into the company’s broader long-term strategy.

I think controlled companies and the attorneys who represent them will appreciate hearing these myths called out, since they’ve probably experienced at least one of these scenarios. I’d also add another myth: That controlled companies don’t receive shareholder proposals. Even smaller controlled companies that aren’t big, well-recognized brands aren’t immune from shareholder proposals. (Though they may be more likely to decide to just put them to a vote.)

– Meredith Ervine