DealLawyers.com Blog

This HLS blog post from John Johnston of Vinson & Elkins and Christine O’Brien of Edelman Smithfield asks — and answers with examples — how boards know when settling with an activist is unlikely to be the right outcome and a proxy fight is necessary. Here are some scenarios they highlight:

– When the board believes the demands are unreasonable — for example, board composition changes that mean disproportionate influence for the activist, reduced independence or fewer key skillsets represented on the board

– When the board believes the outcome proposed by the activist is not in the best interest of shareholders — for example, when the activist is seeking a publicly disclosed sale process or strategic review, but the company has already privately tested the waters and the board believes a public process would destroy value

– When the activist seeks removal of a CEO and that CEO has full support of the board and no near-term viable successor

– When an activist insists that a member of their team join the board but the board expects this would materially disrupt board dynamics and vision

To avoid rushing to settle with a suboptimal outcome, the blog suggests that, before negotiations, a board may want to:

– Define clear non‑negotiables 

– Align on what it will and will not accept

– Honestly assess their position

– Evaluate their relative strength

That includes taking into account TSR and financial results against peers, investor sentiment, analyst views, and management’s credibility on long-term strategy to assess what is in the best interests of the corporation.

– Meredith Ervine