The question is what is happening in these other times. Numerous settlement agreements placed designated activists on boards that interim directors had never heard of until the campaign. In many cases, designated activists have little or no experience in the corporate industry. Most funds appoint directors to a board of directors because they want those directors to implement the fund`s program – in most cases, the order is to sell the company as soon as possible. Many activist directors deliberately try to be cops in the china shop because they want to pressure their fellow board members to sell the business. A typical “standstill clause” is designed to prevent the activist from pursuing a public campaign against the company; For example, the activist cannot conduct a proxy contest, call a special meeting of shareholders, directly make proposals for a shareholder vote, or participate in a public “struggle campaign” against the company or its board of directors. These provisions make sense – the parties are trying to resolve proxy competition and avoid an ongoing public battle. Other provisions designed to get the activist to work on the board arguably make sense and also reflect good corporate governance – if an activist is represented on the board, the activist should usually try to make changes and advance the board`s proposals. Abuses by boards of directors in this area could lead courts to remove some of these provisions as illegal anti-takeover measures or in violation of directors` ability to perform their core functions as trustees. It could also lead proxy advisory firms such as ISS to implement formal voting policies or, in some cases, take action that leads to negative vote recommendations against directors implementing blatant settlement agreements. In the meantime, activists should be careful to avoid the pitfalls often set by boards of directors in settlement agreements, and they should pass on their case directly to shareholders if boards go too far. While directors may seem like the first targets in an activist`s line of sight, the CEO is often the real primary target. Companies facing shareholder activism typically see their CEO leave within 18 to 24 months of the arrival of an activist commissioner on the board.
For example, an activist fund we recently met triggered the departure of a CEO in 14 of its last 17 campaigns. Remarkably, this fund has not always made the CEO an explicit target during his proxy campaign. Companies also often try to limit the number of shares an activist can acquire or the number of shares the activist can transfer to another shareholder. If a corporation has not chosen to set a share limit that applies to all shareholders of the corporation, e.B. by a poison pill, why should such a limit be imposed on the activist? Boards often decide not to take anti-takeover measures such as a poison pill to avoid the negative vote recommendations of proxy advisory firms such as ISS, which pursue policies that reject the introduction of a poison pill without shareholder approval. If a company can`t have a poison pill because of the impact of the ISS or the opinions of its shareholders, why would a company be able to implement the equivalent of a poison pill in a settlement agreement with an activist? It is contrary to the corporate governance structure that the Board of Directors has chosen or had to implement for all its other shareholders. This memo from Sidley indicates that it usually doesn`t work that way. The note reviews the common problems within the framework of the settlement and indicates that any peace achieved through a unification agreement is likely to be short-lived. Here`s an excerpt: Still, companies often push for a long litany of additional restrictions to be imposed on the activist while having a representative on the board of directors, including preventing the activist from contacting other shareholders by simply proposing changes in the composition of the board of directors or the company`s anti-takeover regulations and making public statements about the company. or even express their views on extraordinary corporate events such as a planned sale of the business.
Companies often try to require the activist to vote on his or her shares for any board proposal while having a representative on the board of directors, whether or not the activist accepts the proposal as a shareholder. Companies often look for provisions that would prevent an activist from taking steps that could be aimed at preparing for a future proxy contest or other campaign to support change in the company. Companies often try to prevent the activist from making an offer to acquire the company, privately or publicly, which certainly does not seem motivated to promote the interests of shareholders. Therefore, boards of directors should not abandon the idea of a proxy fight until they have made a complete and informed analysis of their potential path to victory in a contested election. While settlement agreements continue to be commonplace, boards of directors are even more likely to win in proxy contests than activists. If your business is one of those that have a good record for themselves, then your business may be better off confronting the activist directly and abandoning their campaign as soon as possible. In several jurisdictions (including Delaware), an activist designated person is allowed to share information with the shareholder who obtained the nominee`s position on the board of directors – information that the director could not legally provide to other shareholders. Many customers are surprised to learn the extent of Delaware`s leniency in this regard. This information, once passed on to the activist fund, may not be information that the fund can trade with, but it can become grist to the mill of the activist`s agenda. While your activist may have laid down his slingshots for the duration of the settlement agreement, his agents are picking up stones from the board.
Too often it is assumed that these legal standards should give the company and its interim directors the assurance that after joining the board of directors, an agent of an activist fund will set aside their land ties to the fund and instead focus on creating long-term value for all shareholders. In reality, fiduciary duties do not prevent activist appointees from pursuing policies and taking positions in the boardroom that advance the programs of the funds they have appointed. The activist director only has to conclude that the interests of the fund and the interests of “all shareholders” coincide – and it is difficult to prove otherwise. Boards often underestimate an activist`s potential to disrupt the board process because they overestimate the legal impact of fiduciary duties. Too often, companies negotiating settlement agreements underestimate the disruption these new board members can cause. Settlement agreements generally do not limit the ability of activist commissioners to push a board in directions it would not otherwise. Activist agents can ask for large amounts of information. In many jurisdictions, an administrator`s ability to deny these requests is limited. The activist filmmaker can use this information to steer conversations in his favorite directions and “reopen the books” on closed topics.
Designated activists almost universally claim to be independent and may seek to participate in discussions that affect the interests of the funds they have appointed – this can lead to internal conflicts within the board over the creation and formation of special committees, and the access of excluding directors to information created by, and discussions that take place within, these committees. Activists also often create “dirty” files on their colleagues and management team, using this as a bargaining lever to advance their agenda. Research conducted by Wei Jiang, a senior researcher at Chazen, examines why activists are increasingly entering into settlement agreements with target companies The article states that boards should closely examine their chances of success in a proxy contest before accepting a settlement. He points out that while companies are often settled, they also tend to win more proxy contests than activists who oppose the management in place. NEW YORK – From Bed, Bath & Beyond to PG&E, activist shareholders are competing with publicly traded companies and participating in a growing number of high-stakes proxy contests. But new research by Wei Jiang, a Chazen senior researcher at Columbia Business School, shows that these competitions often lead to deals in which activists settle for board seats instead of the structural changes they want. If your board is like many others, you may be looking at the clock for a settlement agreement and waiting for the next knock on the door. The time to start planning this shot is as soon as possible. If the activist fails to get his program into the conference room, another battle is likely.
If the company is not prepared for this, the activist can come back after the settlement agreement to take control of the narrative before the company does. Your activist will then try to appreciate your best ideas in addition to his own, unless you first openly claim those ideas and initiatives. Worse still, some companies have required activist representatives to sign and submit in advance director resignations that are automatically triggered when the board decides that the representative has violated the settlement agreement, which often includes a long litany of board bylaws and policies that the representative must comply with. .