Goodwin Insights October 02, 2018

Jumpstart Bio Series Recap: A Short Program on Shorts

Life science, biotech, and technology companies often dominate the list of most shorted stocks with earnings and product announcements, and are frequently hit with short seller reports which usually result in internal dilemmas and disagreement about whether and how to respond. These short sellers often attract activists and other event driven investors who can assert pressure on a Board.

On Sept. 11 Goodwin hosted its 2nd event in the Jumpstart Bio series, “A Short Program on Shorts.” Goodwin partners Caroline Bullerjahn and Joe Johnson, and Andrea Rose, a partner at Joele Frank  discussed the rise in short selling and short seller attacks, resulting implications, and related SEC rules and regulations (or lack thereof). In addition they shared helpful tactics for responding to the attacks, including two scenario simulations.

To kick off the discussion, the speakers addressed the rise in short seller attacks in recent years, citing “25% of short campaigns targeted the healthcare sector in 2017” and predicting that the number will rise in coming years. Ms. Rose explained: “There is always going to be some shorting in the market, but they can be a two day thing, and the stocks go down 2%, or they could last two years.”

So what happens after a short seller attack? These attacks and resulting stock drops can precipitate shareholder litigation, as plaintiffs increasingly are relying on short seller reports in securities fraud complaints. Companies hit with short seller attacks are also often vulnerable targets for shareholder activism, as a short seller attack and response(s) thereto can call into question the credibility of the current Board and management team, precipitating activist interest. In today’s world, inundated with social media, Mr. Johnson explained: “It’ll be all over Instagram, all over Yahoo, all over the world that we live in, and that’s what they want,” advising that “winning is showing patience, winning is showing it’s a long run, it’s not a sprint.”

The speakers covered tips and best practices for responding to short attacks. First, one should truly understand the attack, and assess the motive and credibility of the short seller. Ms. Bullerjahn explained “It’s a team approach, so when a short report hits we’re usually on the phone with a crisis communications firm like Joele Frank, and our clients immediately. This is an all hands on deck situation and we deal with these issues all of the time.” Next, this team needs to assess the facts and circumstances and whether a response is warranted. If a response is issued, it should be carefully crafted to correct inaccuracies and fabrications and proactively focus on the Company’s positive fundamentals. Tips to keep in mind throughout the responsive process include being truthful and accurate, telling the whole story (no cherry picking), and always complying with Reg FD. “Timing and potential impact” according to Ms. Bullerjahn should be top of mind when crafting a response plan.

Goodwin's Jumpstart Bio breakfast series gathers leaders in the biotech and pharmaceutical community to discuss the intersection of science, business, and the law. This series equips drug development and commercialization professionals to anticipate, prepare for, and respond to issues on the horizon for the industry.

We hope to see you at our next Jumpstart Bio event, “Growing Up and Going Global” on October 23, 2018.