June 7, 2019

Activist Settlements: “Peace for Our Time” or for Peace for a Short Time?

Settlements between companies & activists are common, with many companies agreeing to changes in governance, the addition to new board members, new strategic or restructuring initiatives, and/or a substantial return of capital to investors.  In exchange for these concessions, corporate management hopes to buy peace and prevent a future proxy contest.

This Sidley memo says that’s not how it usually works out. The memo reviews common post-settlement issues, and says that any peace obtained through a settlement agreement is likely to be short in duration.  Here’s an excerpt:

A settlement agreement may fail to provide an enduring peace. Many activist situations that were resolved with a rushed settlement subsequently escalated into a full-blown public fight after the standstill period expired. In other words, many settlements ultimately fail to achieve the board’s primary objective of preventing a public proxy battle.

The first important action a board can take when considering a settlement with an activist is to ensure it is negotiating state-of-the-art terms. Settlement agreements in shareholder activism are trend-driven; activists are reluctant to accept terms that will make them look weaker than their competitors. At the same time, with the right incentives they can be encouraged to sign a settlement agreement that commits them to a longer and more comprehensive standstill provision than they might otherwise accept.

Before signing the settlement agreement, the board should make sure it has thought through all of the ways in which this activist can harm the board and management during the term of the agreement. Will the CEO be specifically targeted? Will the board be subjected to new books and records requests? Does the draft agreement adequately regulate the activist investor’s ability to communicate with its designees on the board? Is the board comfortable that the new director will not unduly harm productive dynamics in the board room? Is the duration of the standstill sufficient to allow the company to accomplish objectives it would need to accomplish to pre-empt a repeat activist campaign when the standstill period ends?

The article says that boards need to take a hard look at their chances for success in a proxy contest before agreeing to a settlement.  It points out that despite although companies often settle, they also typically win more proxy contests than do the activists opposing incumbent management.

John Jenkins