Let's make a deal: a look at recent activist settlements

With activists now considered a credible group rather than ‘corporate raiders,’ settling to avoid a vote has become the in-vogue practice for companies

Settling might be considered the new black within the increasingly scrutinized world  of proxy contests. Companies from Microsoft to Sotheby’s have reached compromises  with activist shareholders rather than allowing  a contentious issue to come to a vote. And if  settlements are now in vogue, the latest trend is for these settlements to come very early – often before an official proxy contest is even announced.

‘Proxy settlements are certainly becoming the rule in terms of activist engagement with public companies, while proxy contests are becoming the exception,’ says Andrew Freedman, a partner in  the activist practice at Olshan Frome Wolosky. To illustrate, he notes that at the roughly 40 companies for which his firm had submitted nomination letters from an activist or shareholder as of mid-November, around 75 percent have ended in settlements.

‘Back in the day, there was a much more  defensive stance and an unwillingness to engage in meaningful dialogue,’ says Freedman.

‘In the past five years, that attitude toward activists has  completely reversed.’ He also points out that ‘a  meeting of minds through constructive engagement and dialogue’ has led to fairly amicable resolutions across a wide range of companies.
Freedman acknowledges that his experience might be skewed because companies that hire his firm may already be open to settling. What’s more, good data on settlements is hard to come by because many settlements take place before a dust-up becomes public. That said, London-based research firm Activist Insight finds that 33 percent of the 40 proxy fights in North America in 2014 settled, versus 32 percent, 20 percent and 17 percent in 2013, 2012 and 2011, respectively. In 2010, however, 38 percent of the 24 proxy fights ended in a settlement.

When it comes to settling versus battling to the bitter end, one thing that has altered is public  perception. Now that shareholder activism has been embraced as a credible investor classification, activists are no longer dismissed as ‘barbarians at the gate’ or ‘corporate raiders’, according to Freedman.

Money talks

Bruce Goldfarb, president and CEO at Okapi Partners, agrees, noting that the sheer dollar value of assets within the activist category means these shareholders’ demands are more likely to be taken seriously. Executives are also increasingly aware that proxy contests are expensive, distracting and time-consuming – and that a winning outcome is by no means a foregone conclusion. Investors and the media are also highlighting the financial toll and opportunity costs associated with protracted spats.
Allergan is a case in point. In an attempt to derail a hostile takeover offer from Valeant Pharmaceuticals and Pershing Square Capital Management, Allergan’s board began talks with friendlier buyers, including Salix Pharmaceuticals and Actavis. As of December 1, it looked like Actavis would be the acquirer.

‘I can’t imagine how much Allergan will end  up spending to try to prevent Bill Ackman from engineering an acquisition by Valeant,’ says Michael Levin, an activist investor and founder of the Activist Investor website. ‘It’s got to be tens of  millions on the company’s side, and that’s serious money. Settling would be much less expensive.’

Activist activity in the US is running at  near-record levels, according to SharkRepellent.net. More activist campaigns have been waged against S&P 500 companies in 2014 than in any other full year since 2006, when the website began collecting data. Many of the 29 S&P 500 campaigns waged in the first 11 months of 2014 involved household names like Amgen, Apple and eBay.

‘The larger, more successful companies are no longer immune from activism,’ observes Robert McCormick, chief policy officer for Glass Lewis. ‘With more assets devoted to activism, there are  necessarily more targets, and activists are looking further afield for companies.’

Companies are also increasingly well versed in cautionary tales from activist campaigns. Levin cites Starboard Value’s 2014 campaign at Darden Restaurants: ‘When a whole board of directors gets turned down like that, it sends a message. Boards will continue to be interested in settling and  not blowing off investors.’

The bright side

In addition to growing awareness of the risks,  companies are recognizing the upside of settlements. ‘Boards want to be able to focus 100 percent of their efforts on the company and on unlocking and enhancing shareholder value,’ says Freedman; when embroiled in an activist campaign, ‘management and the board are spending a great deal of their  time meeting and having teleconferences to decide how to respond to the activist.’

That these lessons are being heeded is evidenced in a new trend toward early-stage settlements. ‘We had between five and 10 activist situations in 2014 that were settled before the activist even submitted its own slate of director nominees,’ says Freedman. In an early-stage settlement, the entire matter  may come to light only after an agreement has  been reached, he explains.

It’s hard to know whether companies would have softened their stance had a new breed of activist not arrived on the scene. Levin points out that many of today’s activists don’t champion ‘the grand changes that really would have made a company oppose them in the past’. Activists also have more tools, such as say-on-pay votes, to help them succeed, and are gaining valuable support from the huge mutual funds that have historically sat out proxy contests.

‘Activists are frequently willing to settle even when they have what’s perceived to be a winning hand, because there is a strong desire to help the company become better,’ says Goldfarb. ‘You don’t become an activist to win an election campaign; [you become one] to make money by having the price of the shares of the company you own go up.’

In many ways, activists are benefiting from a virtuous cycle: as more settlements come to light, activist investors gain great leverage and credibility for their willingness to invest in and engage with a management team, says Freedman.
In the future, many proxy experts believe  settlements will continue to grow in popularity. ‘Once you stop immediately putting up barriers  and adopting poison pills, each side becomes more comfortable with the other’s opinions and less  fearful of its tactics,’ says McCormick.

Goldfarb makes a similar point. ‘We’ll continue to see situations where parties settle because the middle ground is a reasonable outcome for most  situations,’ he observes.

That said, Goldfarb emphasizes that a greater willingness to engage on the part of both companies and activists doesn’t herald an end to proxy contests altogether. ‘There will always be proxy fights because there will always be times when the parties just won’t be able to reach agreement,’ he says.

A SAMPLING OF SETTLEMENTS

Each proxy settlement has its own twists. Here are a few recent ones every corporate secretary should know about.
Microsoft and ValueAct

ValueAct president Mason Morfit was the first director to gain a seat on Microsoft’s board outside the board’s discretion. Morfit was quietly appointed in 2013 on the heels of investor discontent with then-CEO Steve Ballmer.

Robert McCormick, chief policy officer at Glass Lewis, points out that Morfit’s election to the board attracted  attention because ValueAct owned less than a 1 percent stake in Microsoft. He views this as an example of how behind-the-scenes conversations can often lead to a mutually acceptable compromise. Sometimes a settlement provides ‘more opportunity for robust, constructive dialogue without the rancor that comes down to the actual vote,’ he says. ‘This may be an example where the engagement forestalled an actual full-fledged contest. It seemed to be a process that was not very contentious and not very public.’

Hess and Elliott Management

In 2013, when Elliott revealed its 4.5 percent stake in Hess, the activist hedge fund accused the oil and gas company’s board of being packed with cronies of the founding family, according to a May 16, 2013, article in the New York Times. Elliott put together a slate of its own directors – and the company reached a settlement with Elliott only hours before the annual meeting was scheduled to start.

In the end, Hess replaced its own incumbent directors with a group of independent board members; it also separated the chairman and chief executive roles and supported a  plan by which directors would be re-elected annually rather than every three years.

Bruce Goldfarb, president and CEO of Okapi Partners, points out that this last-minute settlement allowed the board to be revamped, forestalling a potentially more divisive board based on the outcome of a proxy contest.

Abercrombie & Fitch and Engaged Capital

In late 2013 Engaged Capital approached Abercrombie and suggested that the company replace controversial CEO Michael Jeffries and consider putting itself up for sale.

What matters here, says Andrew Freedman, partner in the activist practice at Olshan Frome Wolosky, is that ‘Abercrombie settled with Engaged Capital where traditionally large market-cap companies have shown more willingness to go to the mat with the activist and fight it out.’ In addition, he emphasizes that the settlement was reached at an early stage with a shareholder that owned less than a 5 percent stake. ‘The company saw the writing on the wall,’ he says. ‘Shareholders demanded change, so Abercrombie ultimately settled with Engaged Capital.’

Also telling is Abercrombie’s two-stage settlement  negotiation. On January 28, 2014, in response to the Engaged challenge, management proactively suggested a raft of corporate governance changes, including a separation of the chairman and CEO roles, the addition of three  independent directors and the elimination of the company’s poison pill. ‘Companies are being advised to settle with activists at an early stage’ or else make wholesale changes to ‘get ahead of the activists’ agenda,’ says Freedman.

In this instance, Engaged didn’t go away; a settlement was reached only after the company agreed to completely reconstitute its board.

Sotheby’s and Third Point

When Third Point launched a proxy contest at Sotheby’s  in February 2014, the auction house’s board of directors responded by approving a poison pill. Michael Levin, founder of the Activist Investor website, cites this situation, which was ultimately resolved through a proxy settlement, as  an illustration of just how expensive disagreements can become. ‘Cost used to be something no one cared much about,’ he says, ‘but now investors are asking, Why did Sotheby’s spend $21 million to oppose Dan Loeb when  in that case the company later decided to settle?’

McCormick points out that the Sotheby’s settlement  was interesting because the board increased its size to accommodate additional board members without displacing its own board selections.

Mondelez International and Trian Partners

In early 2014 Trian Partners CEO Nelson Peltz was added to the board at Mondelez, a confectionery, food and beverage company spun off from Kraft Foods in 2012. Peltz pushed for a merger between Mondelez and PepsiCo, and his inclusion on the board was a clear response to Trian’s demands, which were laid out in a white paper issued in July 2013.

McCormick finds this settlement noteworthy because ‘Mondelez was not a company people would think was in need of a significant overhaul.’ Just as more well-known companies are being targeted by activists, so are those with strong performance and desirable governance practices.