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Boards warned against rushing to settle with activists

By Jessica Tasman-Jones

This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards

UK boards should consider the pros and cons of reaching a settlement with activists as campaigns once again make headlines after the Covid-19 pandemic.

Public activism at UK companies rose by 92 per cent in the 12 months to August 2021, according to an analysis by SquareWell Partners. That figure is expected to remain high because of low stock prices caused by Brexit and the pandemic.

The Ukraine war could lead to greater activism because market volatility “tends to expose companies that are more vulnerable”, says Andrew Brady, a senior analyst at SquareWell.

Unilever, Vodafone and Rolls-Royce are among the FTSE 100 constituents with activists sitting on their share register.

In the US, boards are settling with activists more quickly. By the third quarter of 2021, 32 per cent of companies had settled less than a month after the activist announced the campaign, up from 19 per cent of settlements in 2020 and 13 per cent in 2019, according to law firm Sullivan & Cromwell.

Settlements are becoming more common in the UK, says Suren Gomtsian, associate professor in the school of law at the University of Leeds.

Proxy fights are rare in Britain, Gomtsian says, because shareholders need at least 5 per cent of voting shares or a coalition of at least 100 shareholders to nominate directors or propose other voting items.

About one third to half of activist demands are successful, he says, and most are reached through settlement.

In the UK, a settlement might include provisions for the activist to vote in favour of management at the annual meeting; to not publicly advocate against the board, usually for a certain period, and to refrain from increasing its shareholding, says Gomtsian.

A settlement can make sense for both the company and activist, with both sides avoiding the expense, time, distraction and uncertainty of a proxy contest, says Kurt Moeller, managing director in the activism and M&A solutions practice at FTI Consulting.

“The activist can claim a victory [and] the company can show that it considers shareholders’ views while in reality limiting the activist’s influence, at least in most cases,” he says.

Activism defence lawyers, however, argue that companies sometimes give up too much in these agreements.

“While companies are allured by the prospect of a quick end to the public side of an activist campaign, settlement agreements often invite new disruptions inside the boardroom,” wrote Kai Liekefett and Leonard Wood, lawyers with Sidley Austin, the international law firm, in a blog post in 2019. “[They can] interrupt a board’s ability to concentrate on executing a long-term strategy.”

They added: “Settlement agreements are of increasingly shorter duration, meaning the peace [that] boards bargained for often becomes merely a fleeting respite from what is in fact a multiyear campaign of the activist.”

If a company is approached by an activist, the board should try to determine the activist’s likely arguments to help decide how to proceed, says Moeller.

“There may be situations where the activist’s arguments and track record are weak enough that offering board seats would not be warranted,” he said.

Activists have won nine seats on UK boards in the year to date, according to Insightia. Four campaigns reached settlement, giving activist nominees six seats, and four went to a contested vote, which gave the activists three seats.

In recent years institutional investors have warned companies not to settle with an activist without talking to them first.

Some investors, such as State Street Global Advisors, worry that bending to a short-term activist could put long-term investors at risk. In 2016 SSGA wrote that a “recent rise” in rapid settlement agreements “without the voice of long-term shareholders concerns us”.

A board effectiveness review can help to highlight weaknesses that an activist campaign might target, according to the guide for boards about shareholder activism, published by Legal & General Investment Management.

Under the Companies Act, UK boards have to consider the interests of shareholders but it is in their best interests to engage, Gomtsian says.

“If the board knows the views of different investors then it’s not the management’s view against the activist, but the board acting as the voice of different shareholder groups,” he says.

This article is based on a piece written by Lindsay Frost for Agenda.

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