Shareholder Activists Should Be Careful About Quick Settlements

Date:


You can’t always get what you want

But if you try sometime you’ll find

You get what you need

— Mick Jagger

The 2023 proxy season is not yet at its peak, but shareholder activists have already completed campaigns at several large companies. Campaigns for board seats by Trian Fund Management against Walt Disney
DIS
, Elliott Management versus Salesforce Inc., and Third Point LLC with Bath & Body Works, to cite a few prominent examples, were commenced but concluded quickly.

Significantly, in these and many other cases, the activists and target companies were able to resolve or settle their differences in ways that allowed both sides to declare victory. Recently, The Wall Street Journal noted that more activists are “laying down arms” and declaring truces rather than going ahead with full proxy votes.

Activists who are considering a negotiated settlement need to consider all the consequences –and as Mick Jagger intimated in the oft-quoted lyrics of the closing track of the Rolling Stones’ classic album, Let it Bleed, there may be no shame in settling as long as they make sure they’re truly getting ”what they need” out of the bargain.

In the first quarter of this year, the vast majority of proxy fights were resolved with handshakes rather than full-blown hand-to-hand combat. According to an Insightia report, Shareholder Activism in Q1 2023, activists won a total of 50 board seats at U.S. public companies during the recent quarter – and a whopping 94% of those seats were gained through settlements. In contrast, settlements were responsible for 82% of the board seats won by activists in 2022.

For activists, if you can win the war without having to fight the battle, that’s typically a good thing. And, my firm, despite being known for our get-out-the-vote expertise, frequently advises activist clients to “take the win”. Nevertheless, you should always be willing to go the distance and make sure not to settle for anything that could harm your position or reputation down the road.

For many target companies, persuading activists to make peace may be the best course of action to avoid the “distraction” of an ongoing campaign. Yet, companies are frequently advised not to stand down, on the theory that the activists’ hands may not be strong enough to justify a fight. There are also costs to a proxy fight on all sides. All that said, boards shouldn’t shy away from making their case to shareholders, especially if their performance has been strong or their go-forward strategies are solid.

To Fight or Not to Fight

Activists need to carefully consider all their options before deciding to reach a truce with the board. If the target company is willing to give you everything you ask for – or at least make serious concessions – then you are clearly better off settling and avoiding a protracted, costly and possibly unsuccessful proxy battle. On the other hand, a committed shareholder activist must consider the optics of reaching settlements too early or too often.

Companies take a hard look at the track records of activist investors in staking out their positions and formulating their defense strategy. An activist who is willing to “stay in the fight” all the way to the shareholder vote is sending a clear message to all future targets.

But in deciding whether a truce is in their best interests, activists should pay attention to all the settlement terms, some of which may limit their ability to pursue a subsequent campaign.

  • Companies often propose settlements that include onerous standstill agreements, which could prevent activists from increasing their stakes or running another campaign until sometime in the future.
  • Activists may be asked to waive or limit the reimbursement of their campaign fees.
  • Typically, activists are asked to agree to non-disparagement and confidentiality clauses that prevent them from criticizing the company if it doesn’t follow through on promised initiatives.

The Impact of Universal Proxy Cards

Another consideration for activists and companies alike is the SEC’s adoption of universal proxy cards. With some limitations, SEC regulations now require public companies and activists to use a universal proxy card – which must include both the company’s and the activist’s nominees – when soliciting shareholders in any director election.

Companies have expressed concern that the universal proxy card, by presenting all director nominees on one ballot, will make the path to election easier for activists. As I’ve written in the past, the universal proxy card also makes proxy fights more “personal” by possibly encouraging shareholders to scrutinize individual directors’ backgrounds and qualifications. These factors, along with a desire to avoid the stigma of losing a proxy fight, may motivate more companies to settle early on – perhaps on terms more favorable to the activists.

By the same token, activists have reason to believe that universal proxy cards may significantly enhance their leverage in settlement negotiations. A recent post from the Harvard Law School Forum on Corporate Governance noted, in part:

“The universal proxy card has challenged well-worn expectations about proxy contests. We are seeing dissidents attempt to exploit this uncertainty by making more aggressive initial settlement demands than in prior years in pursuit of unusually dissident-favorable settlements. Most notably, we have seen certain dissidents appear to be less willing to settle for one or two new director appointments, which was the typical settlement in recent years.”

All that is to say that so-called “friendly activism” only goes so far. The fact that universal proxy cards may make it easier for activists to reach a settlement with target companies doesn’t mean this approach is always the best option. Activists need to determine if a settlement is really the best way to achieve their goals, whether the terms place too many restrictions on future campaigns, and what sort of message a settlement sends to other targets about the activist’s willingness to “go the distance”.

Bottom line: Activists shouldn’t settle unless they “get what they need” – which means having most of their demands met in a way that preserves their reputation. Companies and their boards of directors will be watching.



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