Quick Settlement Times Show Power of Activist Investors

Stay current on changes and developments in corporate law with a wide variety of resources and tools.

By Che Odom

June 17 — Public companies are continuing to quickly settle with shareholder activists, indicating that such investors hold the upper hand in negotiations.

Attorneys who represent corporations and shareholders told Bloomberg BNA that settlements over board seats are being reached as quickly as they were last year, if not more so.

One recent example is QLik Technologies Inc. In March, the Pennsylvania-based software company agreed to settle with activist hedge fund Elliott Management Corp. after just eight days of talks, according to Activist Insight, which tracks proxy campaigns.

Corporations “think it's more prudent to settle than to go through the distraction and expense of a proxy fight they're likely to lose anyway,” Marc Weingarten, a partner and corporate attorney in the New York office of Schulte Roth & Zabel LLP, told Bloomberg BNA.

QLik's deal was just one of many this year. Other companies, including Avon Products Inc., Team Health Holdings Inc., Sysco Corp., Yahoo Inc., Yum! Brands Inc. and Vaalco Energy Inc., have reached pacts with shareholder activists over the last few months, granting changes to their boards (113 CARE, 6/13/16).

Settlement Speed

Last year, the average time between when the activist mounted its campaign and when the company reached a settlement with the shareholder was 56 days, down from 74 in 2013, according to Activist Insight (62 CARE 62, 11/5/15).

The organization doesn't yet have numbers for this year.

“It is the new normal, at least for now,” said an in-house counsel at an energy firm that reached such a settlement with a hedge fund in the last few years. “I think the average time it takes to settle will continue to shorten. Giving up seats for some peace sometimes is the only viable option.”

Companies are motivated to settle ahead of the annual meeting to protect themselves and the board, save time and resources involved in a proxy fight and, “most importantly, gain some certainty over the outcome,” said the in-house counsel, who wanted his name withheld to prevent running afoul of disclosure rules.

“You don't want this to go to a vote, and the hedge fund knows that,” he said. “Neither side really wants it to go to a vote, but an activist” with 5 percent ownership and “possibly working with others has the leverage.”

Upper Hand

Activists have “most of the leverage in settlement discussions due to the set of reasons that attracted the activist investor to the company in the first place,” Andrew M. Freedman, partner and co-head of the activist and equity investment group at Olshan Frome Wolosky LLP in New York, told Bloomberg BNA.

The company may be under-performing or have poor corporate governance structures, which may prevent proper oversight and accountability and serve to entrench the board and management, Freedman said. He added that misalignment of compensation plans and poor capital allocation also attract activists.

Overall, activists look to bring changes to improve struggling companies and unlock shareholder value “that has been trapped,” Freedman said.

Any activist in settlement talks “is going to push for the most changes possible in terms of board representation and otherwise,” he said. “It's their one bite at the apple, so to speak, for such changes until at least the following year's annual meeting.”

In a related story, a Bloomberg analysis found that activists are on track to win a record 62 board seats this year (see related story in this issue).

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

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Corporate on Bloomberg Law