CHAPTER 04 Shareholder Activism Abates, but Not for Long: Significant Activity and Developments in 2020
Our Take: When to Settle? There Is No One-Size-Fits-All Solution
Settlements have become more common in recent years and, generally, are also happening earlier in the process. According to data collected by Activist Insight , approximately 63% of board-related demands in 2020 H1 were resolved through a publicly announced settlement before reaching the shareholders’ meeting, compared with 50% in 2019 H1. And of course, many more board renewals are the result of constructive behind-the-scenes engagement between shareholders and boards that are not accounted for in publicly available data. The rise in settlements, especially in board-related activism, is not surprising. It is consistent with the maturation of the activist market and reflects an acknowledgment, on both sides, of the costs associated with lengthy contests. In addition, the rise in board-related activist settlements is likely due to the fact that board-related activism better lends itself to settlement because it provides a path forward that is based on cooperation. In contrast, balance sheet activism and event-related activism, such as M&A activism or one-off situations, may not be as amendable to settlement as the contest may revolve around two different and wholly irreconcilable visions for the future of the target. Regardless of the type of activism faced by issuers and undertaken by activists, where there may be some middle ground, both sides are well-advised to
consider settling a contest to the extent practicable given the substantial time and costs associated with pursuing a proxy contest all the way to a shareholder vote. However, there is no one-size-fits-all template for evaluating settlement terms. The majority of settlement agreements contain similar clusters of rights and obligations, which we discuss below, but achieving the optimal outcome will vary in every situation. In the end, issuers and investors alike need to be wary of “buying peace” (which can sometimes prove to be illusory or short-lived at best) at too great a price. 1 Branding the settlement. Parties wishing to achieve a mutually agreeable outcome are increasingly using more descriptive titles for their settlement agreements, as well as different terms within them, to better signal and achieve their objectives. For example, while naming an agreement “settlement agreement” may seem simple and be unlikely to garner attention, it can connote the parties’ laying down their arms and compromising on an outcome. In some cases, referring to the agreement as a “board refreshment agreement” may better indicate that the agreement was the result of constructive discussions aimed at enhancing a board’s existing complement of skills and experiences, rather than in response to
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