August 31, 2023
Fiduciary Duties When Settling with Activists
Gibson Dunn recently published its 2022 Activism Update. The report gives detailed information about individual activist campaigns & settlements and some summary stats, like this one related to settlement agreements:
23 settlement agreements pertaining to shareholder activism activity were filed during 2022, which is an increase from the 17 filed in 2021. Those settlement agreements that were filed had many of the same features noted in prior reviews, including voting agreements and standstill periods as well as non-disparagement covenants and minimum-share ownership and/or maximum-share ownership covenants. Expense reimbursement provisions were included in less than half of those agreements reviewed, which is a decrease from previous years.
Potentially due to some UPC-related activism anxiety, this trend seems to have continued in 2023. With this in mind, the reminder in this recent post from the Milbank General Counsel Blog about fiduciary duties when settling an actual or threatened proxy fight seems particularly timely.
Boards often settle actual or threatened proxy fights by trading away board seats to activists. Delaware courts will analyze this trade as a defensive device, much like greenmail, where the board trades away something valuable to avoid a battle for corporate control. It follows that, like greenmail or a poison pill, this defensive device would be subject to scrutiny under the Unocal standard. Yet boards in general seem to be remarkably lax in analyzing whether they have fulfilled their fiduciary duties in making such a trade.
On the application of Unocal, the blog notes that: “settlement of a proxy fight would seem to necessarily involve the stockholder franchise, and, accordingly, be subject to review under Blasius. However, Blasius review has recently been ‘folded into Unocal review to achieve the same ends,'” citing the recent Delaware Supreme Court opinion in Coster v. UIP Companies, (Del.; 6/23), which John has blogged about twice. In light of fiduciary duty considerations and potential for Unocal scrutiny, the post then reviews the following key questions boards should ask and answer before awarding one or more board seats to an activist, discussing each:
Has the board identified a cognizable threat?
Is giving away board seats reasonable in relation to the identified threat?
What is the nominee’s relationship with the activist (including alignment on agenda and ongoing communications)?
What is the activist’s agenda?
Finally, the blog argues for improved disclosure around activist settlements, especially on what the settlement means for the company — what the company gained, what threat was neutralized and why settling for a board seat was preferable to allowing a vote.
– Meredith Ervine