Management faces criticism and scrutiny from short-selling parties, questioning their business strategies and financial performance.
Managing Short Seller Allegations: A Strategic Response
By Daniel Zapf and Stefan Bressler
Short sellers, financial investors who profit from falling stock prices, often publish reports critical of the companies they target, outlining perceived misconduct to induce stock price declines. While these reports can highlight legitimate concerns, it's essential to recognize that the short seller's model is not an altruistic pursuit but an unprejudiced enlightenment of the capital market.
The reports by short sellers typically offer varying degrees of factual support, with the quality of facts and the assumptions and conclusions drawn from them dramatically different. Although these reports may occasionally raise legitimate criticisms, it is crucial not to disregard the fact that the primary objective of short sellers is not the betterment of companies but the realization of profits.
Capital markets and stakeholders, such as investors, auditors, or government bodies, now usually take the claims contained within short seller reports seriously, especially when they are sensationalized. This can lead to a deterioration in the affected companies' stock prices and other significant consequences.
The Detrimental Cycle
The detrimental impact is exacerbated when financing partners postpone essential funding in response to the allegations, or when auditors face challenges in issuing an unqualified audit opinion without detailed clarification. The lack of an unqualified audit opinion then triggers additional repercussions (e.g., termination options under existing financing or commercial agreements), escalating the downward spiral.
Under such complex circumstances, companies must respond rapidly to allegations, refute them, and demonstrate their lack of substance. Short seller reports tend to provoke quick responses, which carry the risk of inaccuracies and rash reactions. Moreover, subsequent allegations from the short seller often follow the initial report, further undermining the company's credibility.
It is increasingly common to observe short sellers publishing multiple reports at intervals of a few weeks, partially announced in advance and partially as a countermeasure to the company's responses. There have also been instances of short sellers attempting to influence financing partners or the company's auditors.
Coordinated Crisis Management
To effectively manage such allegations, a thoughtful and coordinated response is vital. Crisis management should involve collaboration with all relevant stakeholders, including financing banks, auditors, shareholders, key business partners, and other market participants.
A thorough investigation conducted by independent external advisors, with open communication about the findings, is recommended. The company may consider engaging its own auditor for efficiency reasons, although this could potentially lead to conflicts of interest. It's advisable to carefully evaluate the potential consequences before adopting a confrontational approach towards short sellers, such as filing criminal charges.
Transparent communication and thorough clarification can not only correct market distortions but also restore trust in the company should irregularities or necessary governance improvements be found.
Preventive Measures
To minimize the risk of short seller attacks, companies should proactively identify potential vulnerabilities by monitoring market trends, scrutinizing their financials, and disclosures, and implementing robust compliance systems. Continuous risk assessment is crucial for spotting potential entry points for short sellers and for developing an emergency plan that can be swiftly implemented in the event of an attack.
A strong governance structure can both help ward off short seller attacks and reinforce trust among investors and other stakeholders over the long term.
Ensuring transparency and openness towards stakeholders, engaging legal counsel, regularly updating the playbook, and diversifying the investor base are other strategic steps that companies should consider when dealing with short seller allegations. By following these strategies, companies can mitigate the financial and reputational consequences of short seller attacks, preserving stability and confidence in the capital markets.
*) Daniel Zapf and Stefan Bressler are partners at White & Case.
- In the context of business and general-news, a company's strategic response to short seller allegations is vital, involving coordination with stakeholders like financing banks, auditors, shareholders, and partnering with independent external advisors for a thorough investigation.
- To protect against potential short seller attacks, companies should proactively monitor market trends, enhance compliance systems, engage legal counsel, maintain transparency, and diversify their investor base, ensuring a strong governance structure and long-term investor trust.
