Activist-Board Settlements Hit Record High
Activist-Board Settlements Hit Record High
Article published on July 27, 2015
By Lindsay Frost
Incumbent boards settled with dissident investors 33 times in the first six months of the year, the highest level since at least 2001.
So far this year, boards have also won more than half of contested proxy votes outright for the first time since 2012.
The two trends reflect a greater willingness on the part of directors to reach an agreement with activist investors before a damaging proxy battle takes place.
“Management may be less likely to settle if they have a winning campaign — like at DuPont — but what we are experiencing is that management still takes a pragmatic view at a number of companies, especially if they are approached by sophisticated investors,” says Bruce Goldfarb, founder and CEO of Okapi Partners, a proxy solicitation firm. “[Management] is more willing to settle than engage in a fight that’s going to be costly in terms of time, money, attention, media and investor scrutiny.”
Data from FactSet shows that as of July 21, public companies won outright 53.3% of proxy contests that went to a vote, up from 2014’s rate of 39.1%. FactSet’s data goes back to 2001. Since the beginning of June, there have been three more settlements, bringing the total to 36 so far this year. Some of these deals incorporate standstill agreements, which restrict the activist from certain activities, such as stock purchasing or proxy soliciting, for a set period. Activists are often given seats in return.
For example, last month Pep Boys, a car parts and repair service, settled with Gamco Asset Management by naming three of Gamco’s nominees to the board. The company’s annual meeting was held on July 10. Other high-profile settlements this year include American Apparel shareholder Jeffrey Kolb’s withdrawing his slate of nominees after an agreement was made; Staples’ naming a Starboard Value nominee to its board; and PepsiCo’s naming Trian Fund advisor William Johnson to its board.
At the SEC’s Investor Advisory Committee meeting on July 16, Pat McGurn, executive director and special counsel at ISS, highlighted that a theme for this year’s proxy season was the loss of momentum for activists due to the increased number of settlements.
Activists Get More
In 2014, across all campaigns — including those that did not go to a vote — activists sought an average of four seats, while so far in 2015 activists are seeking three.
However, activists are more successful this year when campaigns lead to a vote. As of June 5, activist investors won an average of three seats per campaign, compared to last year, when activists won an average of one and a half seats per campaign.
“[In some cases] the activist is overstating the number of seats that it truly wants so that it can settle for one to two seats, i.e., anchoring the settlement negotiation,” writes Anthony Garcia, account executive at FactSet, in an email.
Activists also continue to settle for share buybacks and higher dividends. Many campaigns pick apart companies for sitting on large amounts of cash, and push them to return it to shareholders. However, according to Activist Insight, a research and publishing company, fewer activist campaigns in 2014 demanded these measures than in previous years because companies had often pre-empted a possible activist confrontation by announcing dividend and buyback programs in advance. Of the 344 activist campaigns in 2014, 11% included balance sheet demands, down from 28% in 2013.
Qualcomm, a technology company, caved in to pressure from activist Jana Partners in late May by announcing a $5 billion share buyback program. The company also announced last week that it would be cutting its workforce of 30,000 by 15%, cutting spending and adding three new board members from Jana’s recommended slate.
“My sense is that we have entered an era of refined activism that seeks to improve companies in a less dramatic and more continuous nature than in the past,” says Conrad Ciccotello, director for the Tortoise Capital Advisors funds and associate professor and director of wealth management programs at Georgia State University.
“The larger supply of activist firms now rationally target a larger number of [companies] with problems that they believe can be fixed, with some pressure. Hence, the larger number of proxy contests as a way to get an improved input into company policies.”
According to the FactSet data, incumbent boards have had 21 successes in proxy contests this year through either winning votes outright or dissidents’ withdrawing their own slates. In late May, Legion Partners withdrew its slate of three nominees at Perry Ellis, a retailer, after the company’s CEO stepped down. Land and Buildings Investment Management withdrew its board slate at MGM Resorts, also in May, after failing to drum up enough shareholder support.
Goldfarb expects management teams to do a better job of presenting their case to shareholders, which would lead to activists’ withdrawing their slates more often.
“There is a much more enriched understanding of how investors think and behave, and a better understanding of how to do outreach and engagement and explain your business plan and strategy to your investors so that when there is a potential proxy fight, the playing field is possibly more level,” Goldfarb says.
The number of settlements is also expected to continue to rise as boards prefer to avoid media scrutiny and the high cost of a full-blown proxy campaign. It will vary case by case, but overall companies and activists are determining that the battle isn’t worth the time, says Michael Levin, activist investor and author of The Activist Investor blog.
“Boards of directors have decided that it’s worth it to settle matters by granting investors a couple of director seats,” Levin says.
“A couple of board of director seats can’t threaten incumbents in a board vote, yet they give investors inside perspective on how the company works, and allows at least some influence.”