Companies Using Deals With Activists to Protect Directors

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By Che Odom

June 10 — Corporations may be settling with activist shareholders and granting them board seats more quickly than in the past, in part because it helps entrench the company's directors.

According to a review by Bloomberg BNA, common provisions in recent settlement agreements include those that prevent the activist from acquiring or transferring shares for a period of time, require the activist's representative on the board to vote for board proposals, and prevent the activist and its nominee from making public comments about the company, its officers or the board.

While the company in question had to make concessions to the activist, the settlement's defensive clauses help it to secure the position of remaining board members and co-opt the activist's director nominee into voting with them.

Some companies are taking the opportunity to “load up a proposed settlement agreement with every defensive feature that can be found,” said Derek Bork, a partner and corporate attorney at Thompson Hine LLP.

“Attempts by companies to overreach in settlement agreements have been around as long as activism,” Bork told Bloomberg BNA. “I believe the trend is growing as more companies and their legal advisers become more aware of the defensive devices that are being used in the market.”

Recent Deals

Over the last few months, several companies, including Avon Products Inc. (60 CARE, 3/29/16), Team Health Holdings Inc. (57 CARE, 3/24/16), Sysco Corp., Yahoo Inc. (82 CARE, 4/28/16), Yum! Brands Inc. and Vaalco Energy Inc., have signed settlement pacts with shareholder activists.

For example, Yahoo agreed in April to grant hedge fund activist Starboard Value LP one board seat and appoint three “independent directors” to its 11-member board.

Also in the agreement was a standstill period during which Starboard may not solicit proxies on any matter, enter into voting agreements with other stockholders or encourage other investors to submit director nominees. The settlement also requires Starboard's director to follow the board's voting recommendations on certain matters and not disparage the company.

Vaalco Energy Inc. struck a similar deal with several shareholder activists, including the BLR Group and Group 42 Inc. Vaalco's pact includes provisions requiring limited tenure for the activists' nominee, an obligation to vote for board proposals and a cap on share ownership.

Little Peace

Attorneys say the provisions may backfire. Bork warned that the restrictive clauses may be seen as board entrenchment devices. Courts may take an unfavorable view of such arrangements, and proxy advisers such as Institutional Shareholder Services Inc. may take more of a “role against egregious settlement agreements,” he said.

On the other hand, settlements with activists remain “the exception rather than the rule,” said Richard J. Birns, a partner in the New York office of Gibson, Dunn & Crutcher LLP and a member of its private equity practice group.

Though companies do settle to protect directors and prevent a proxy fight over them, companies also settle to give themselves breathing room and avoid having to dissuade other shareholders from aligning with the activist, Birns said.

“In my experience, settlement agreements can make a lot of sense if you are a company and you want peace for some period of time,” he said. “Proxy campaigns are distracting. They take time and resources to deal with.”

However, Birns said that whatever peace the pacts bring to a company and its board may be short-lived.

“It is an agreement with Investor A, but that doesn't stop Investor B or Investor C,” he said. And whatever issue attracts one hedge fund to a company may very well draw others to it, he added.

Both Ways

Corporate boards don't always come out on top when such deals are reached, said an assistant general counsel of a technology company who asked to remain anonymous to avoid disclosure concerns and tension with investors.

The increased frequency of such deals may be emboldening activists, and shareholders themselves may be overreaching by demanding board representation, distracting the board with threats of a proxy fight and stirring investor dissent, she said.

“It is a compromise on both sides,” she said, adding that her company entered into such an agreement two years ago. “It is a contract that courts should not second-guess, and neither should ISS. That would cause even more uncertainty.”

To contact the reporter on this story: Che Odom in Washington at codom@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

Examples of Recent Settlement Provisions Company Date Industry Investor(s) Provisions Included Angie's List Inc. 2/29/16 Internet Eric Semler, TCS Capital Management LLC Standstill period, which includes solicitation of proxies, restrictions on stock ownership; vote in accordance with board recommendations; non-disparagement; execute an irrevocable resignation for activist's nominee. MYR Group Inc. 3/22/16 Engineering Engine Capital, related entities Make no proposal to acquire the company; cap share ownership; limit on shares that can be transferred to others; vote with board-backed nominees; make no public statement regarding any proposed sale or acquisition. Old Point Financial Corp. 3/16/16 Financial Financial Edge Fund, related entities, PL Capital Irrevocable activist nominee resignation; vote for all board proposals; cap on share ownership; limit on shares that can be transferred to others. PICO Holdings Inc. 3/18/16 Builders Central Square Capital LP, related entities Irrevocable director resignation; vote for board proposals (with exceptions); restriction on ability to “propose” any acquisition of company; cap on share ownership; limit on shares that can be transferred; restrictions on talking to other shareholders. TriMas Corp. 4/13/16 Metal Products Engaged Capital Cannot propose changes to the company’s anti-takeover provisions; vote for proposals by the board, except where ISS recommends otherwise; make no offer to acquire company; make no public comment on any proposed sale of company. Vaalco Energy Inc. 12/22/15 Energy BLR Partners LP, Group 42 Inc., Fondren Management LP Pre-delivered director resignation; vote for board proposals; cap on share ownership; limit on shares that can be transferred to others. Yahoo! Inc. 4/26/16 Internet Starboard Value LP Vote in accordance with board recommendations; standstill period, which includes proxy solicitation, stock ownership; non-disparagement. Bloomberg Law