March 29, 2017

Activism: Navigating the Challenges of a Quick Settlement

Quick settlements involving major concessions to activists have prompted a skeptical response from major institutions – who often think that board’s desire to avoid the disruption of a proxy fight may take priority over the views of long-term shareholders in these situations.

There are sometimes good business reasons to reach a quick and comprehensive settlement with an activist, but persuading investors of the merits of such a settlement is a challenging process. This blog from Cleary’s Arthur Kohn, Ethan Klingsberg & Elizabeth Bieber and Young Conaway’s Rolin Bissell discusses the novel way that one company – CSX – has approached that challenge.

CSX recently entered into a settlement with activist hedge fund Mantle Ridge. The settlement has a lot of the elements that have prompted investor angst – after only 47 days, the company conceded 4 board seats and installed a new CEO at the behest of an activist owning less than 5% of the stock.  But the board signaled that investor input would be sought – at one point during the fight it announced that a special meeting would be held to address the activist’s proposals & that a board recommendation on the vote would not be issued.

The special meeting idea was abandoned when a settlement was reached, but the blog notes that the settlement included some unusual features designed to provide for investor input:

– Portions of the new CEO’s pay package would be put to an advisory vote at the company’s next annual meeting of shareholders (on which vote the board again indicated that it would not provide any recommendation)
– The decision of the board whether to have the company assume these portions of the package would be deferred until after this advisory vote, and
– The new CEO intended to resign if the board elected not to have the company assume these portions of his package.

Agreeing to submit a CEO’s pay package to a shareholder vote in this fashion goes beyond a “say-on-pay” vote – and this excerpt says that was exactly what CSX intended:

Through this additional say on CEO pay vote, shareholders are being given the gift of a unique opportunity to register their opinions on a controversial topic and arguably the strategic direction of the company which is tied to the new CEO’s presence.  This aspect can be seen as a positive development for shareholder rights generally, and more specifically can be seen as responsive to State Street’s open letter criticizing companies for settling with activists too quickly and without long-term shareholder input.

The blog notes that investor perception of this approach is an open issue – an argument could be made that the shareholder vote is merely a veneer to protect the board, and not an effective means for obtaining input from long-term shareholders. It also addresses several other governance and corporate law issues raised by this unique effort to win the hearts & minds of long-term shareholders.

John Jenkins