Considerations for Director Engagement, Cooperation and Settlement With Activists and Other Concerned Investors
January 16, 2019
At some point during any effort by an investor, whether a brand name activist or a dissatisfied institutional investor, to influence the company, the shareholder will likely ask to meet with the full board or at least some of the non-management directors. Rejection of these requests frustrates these investors and increases the risks of a more public and aggressive campaign. Although we often advise that the initial meeting with difficult investors be only with management, we have increasingly found that granting an investor’s request to present to the board or meet with some non-management directors actually turns out to be a harmless way for the investor, including potentially nasty activists, to communicate without creating disruption. Thus, we will typically advise that the company, including in many cases non-management directors, “take the meeting” with the activists or other investors, subject to appropriate preparation and a number of “Dos and Don’ts” to assure compliance with Regulation FD and to avoid permitting these interactions to turn into negotiating sessions, forums for the company to make any kinds of commitments, or opportunities for the representatives of the company to make statements that they will later regret, for example, when published by an activist in an open letter. As we have detailed in a popular recent post, the downsides of a weak session by a director with an investor are much more significant than the upside of a successful session.
We have found that the directors who do best at these meetings with activists and other investors are those who have engaged in the board room regularly with management about what the investor relations (“IR”) function of the company is hearing. These directors understand not only the strategic plan of the company, but also what aspects of the strategic plan are best and least understood and most and least popular among institutional investors. In addition, they understand where the company stands on growth prospects, performance, and ESG matters relative to its peers and other companies that are in the portfolio of its largest institutional investors. Too often, the briefing on IR for the board is that “everybody loves us” and there is an absence of either benchmarking against other companies or candor about the focus of questions and the lingering misunderstandings about and challenges to existing strategy. We often work with management and the board to interpret the significance of the feedback received by IR and to outline proactive steps to improve disclosure, enhance investor engagement and take steps internally at the company in response. The board exercise of digesting what IR has been hearing and then figuring out next steps is the best way to prepare boards for future direct interaction with activists and other engaged investors.
Another aspect of activism and shareholder engagement for which directors need to be prepared are cooperation and settlement agreements where the company makes concessions to an activist or other investor in exchange for soft or contractual assurances of support. The concessions in these agreements often directly impact the board. Commonly, settlements require boards to agree to add and/or subtract directors, form special committees, hire consultants or other advisors, and/or adhere to age or tenure limitations. We have found that companies are able to negotiate these agreements most efficiently and with the least degree of lingering resentment by directors when the board is briefed about what a settlement agreement would look like either on a “clear day” or at the first signs of an activist campaign, as opposed to hearing only machismo about how the activist is ignorant and the company will crush any opposition. Sometimes a fight is the right way to go, but we have found, and the statistics bear out, that directors overwhelmingly choose settlement at the end of the day and that a board that is sophisticated about how settlements work will be likely to obtain a superior settlement and minimize disruption.