Dancing With Activists

Abstract

An important milestone often reached in the life of an activist engagement is entering into a "settlement" agreement between the activist and the target's board. Using a comprehensive handcollected data set, we analyze the drivers, nature, and consequences of such settlement agreements. Settlements are more likely when the activist has a credible threat to win board seats in a proxy fight and when incumbents' reputation concerns are stronger. Consistent with incomplete contracting, face-saving benefits and private information considerations, settlements commonly do not contract directly on operational or leadership changes sought by the activist but rather on board composition changes. Settlements are accompanied by positive stock price reactions, and they are subsequently followed by changes of the type sought by activists, including CEO turnover, higher shareholder payouts, and improved operating performance. We find no evidence to support concerns that settlements enable activists to extract rents at the expense of other investors. Our analysis provides a look into the "black box" of activist engagements and contributes to understanding how activism brings about changes in target companies.

Picking Friends Before Picking (Proxy) Fights: How Mutual Fund Voting Shapes Proxy Contests

“…Had this not been the case, management would choose to settle or the dissident shareholder would withdraw (Bebchuk, Brav, Jiang, and Keusch (2017)). Indeed, the statistics support such tradeoffs.…”

“…Bebchuk, Brav, Jiang, and Keusch (2017) analyze the drivers, nature, and consequences of settlement agreements. 5 According to ISS, between fiscal years 2004 and 2006, ISS collected voting records by the top 100 families.…”

Not all threats are taken equally: Evidence from proxy fights

“…We also consider settlement as a dissident victory, because invariably settlements occur only when then‐incumbents make concessions to the dissident group. As documented by Bebchuk, Brav, Jiang, and Keusch (), settlements also achieve operational changes similar to the dissident victory election. Specifically, “while settlement agreements generally do not specify operational changes, such changes do follow in subsequent years” (Bebchuk et al., , p. 5).…”

“…As documented by Bebchuk, Brav, Jiang, and Keusch (), settlements also achieve operational changes similar to the dissident victory election. Specifically, “while settlement agreements generally do not specify operational changes, such changes do follow in subsequent years” (Bebchuk et al., , p. 5). For example, in the proxy fight initiated by LCV Capital Management and Raging Capital Management against ModusLink, the dissidents nominated three board members and proposed a $50 million to $57 million repurchase.…”

“…Studies such as Bebchuk et al. (), Brav et al. (), DeAngelo (), Duvall and Austin (), and Fos () suggest that the above factors can have significant explanatory power to affect the probability of being targeted in shareholder activism events including proxy fights.…”