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Companies settling faster with activists as truces under scrutiny

Apr 1, 2024
Data: Barclays; Note: Includes companies with more than $500 million in market cap at time of campaign announcement or in prior twelve months; Chart: Axios Visuals
Data: Barclays; Note: Includes companies with more than $500 million in market cap at time of campaign announcement or in prior twelve months; Chart: Axios Visuals

U.S. companies are settling with activist investors faster than ever, at a time when board director deals are under heightened scrutiny.

Why it matters: Shareholders have raised concerns that these truces are too favorable to activists.

How it works: Companies that don't want to fight usually forge a legal settlement with an activist fund rather than take it to a shareholder vote.

  • These so-called cooperation agreements typically place a hedge fund-backed director or two on the board and force the fund to be supportive of the company and stay quiet for a year. Press releases spell out the deal.

Between the lines: Part of what is pushing more companies to settle is the proxy voting rule change that puts all board coordinates on a single ballot — a change from when an activist needed their own, separate ballot to get directors elected.

Zoom in: Barclays data shows that the average time between an activist approaching a company and the two sides signing a settlement has fallen to around two months. That's a nearly 30% drop from the settlement lag that existed before the new proxy rules.

  • That kind of speed is what led Ted Miller to sue Crown Castle when the telecoms company signed a truce with Elliott Management last year.
  • Miller, a company co-founder and major shareholder, said the cooperation agreement was too favorable to Elliott and forced Crown Castle to change its board before it even took nominations ahead of its annual meeting.
  • The case went to a Delaware Court of Chancery judge and forced Crown Castle and Elliott to change their agreement, a move that has now put board directors on watch when it comes to inking a settlement too soon.

The intrigue: Some companies making nice with activists have taken the extraordinary step of signing no settlement at all.

Case in point: On Feb. 13, Phillips 66 said it appointed Robert Pease to its board, touting his 38 years in the energy industry.

  • The press release announcing the move included support for Pease from two senior members of Elliott Management, which was waging a campaign against the company. The statement also said Elliott and Phillips would coordinate appointing another director in the coming months.
  • Unmentioned in the release was any sign of a cooperation agreement.
  • That same day, VF Corp. said — also without mention of a cooperation agreement — it appointed industry veteran Caroline Brown to the board, in an announcement that highlighted the support of Engaged Capital, the activist fighting the company, and noted that the company and hedge fund would agree on another director.

Zoom out: Activist peace deals that come without a legal settlement signify that, in the end, these truces can be pointless, as hedge funds have shown that staying quiet for a year is hardly a deterrent.

  • More to the point, they show that the company and hedge fund are actually cooperating, and engaging, and showing support right out front.

Reality check: Fights like Disney and Trian are becoming rarer, and most companies and their activist agitators look to settle before it gets ugly, and costly.

  • Barclays' global head of shareholder advisory, Jim Rossman, said that boards are moving faster in assessing their vulnerability.
  • "And I think the conclusion has been, for many companies, that I'd rather collaborate than fight," he said.
  • Barclays data shows that the usual two-thirds of activist nominees who manage to get on corporate boards during the average proxy season jumped to 79% this year.

What we're watching: Based on the Crown Castle case, activist investors and companies may wait until after the director nomination period to strike a board deal, with or without a cooperation agreement.

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