This article was first published on Activist Insight Online on November 11, 2019. For more information about the product, click here.
While some activists are happy to join companies’ boards through settlements, others want more. In addition to board representation, the activists want to be reassured that certain topics will be discussed at the board level with the creation of new committees.
Since 2013, 52 companies agreed to create new board committees as part of their truces with activists, according to Activist Insight Online. Last year saw a peak of 11 companies agreeing to create new committees through settlement agreements, while Activist Insight Online counted eight in 2019 so far.
Most recently, CBL & Associates Properties agreed to create a new capital allocation committee after inking a deal with Michael Ashner’s Exeter Capital Investors on November 1. Chaired by Ashner, the committee will review the company’s financial strategies, capital allocation plans, and other matters related to its capital structure.
For an activist, the benefit of sitting on a newly created committee is apparent. Instead of trying to convince the entire board of its plan, the activist can seek to persuade just a few directors.
“It’s extreme leverage on the activist side. The composition of the board is a very important thing,” a source familiar with the matter told Activist Insight Online.
Elliott Management and Starboard Value are the two activists that most often request settlements have this concession. Paul Singer’s fund signed nine such settlement agreements since 2013, while Jeff Smith’s fund signed seven.
“A lot of the board’s heavy lifting gets done at the committee level, so it just makes sense that an activist director is going to want to get on committees where they can play a deeper, more influential role in shaping policies and other changes they believe are required to drive value enhancement and better governance,” said Andrew Freedman, co-head of Olshan Frome Wolosky’s activist and equity investment group.
Indeed, the activist’s plan could come to fruition after it is evaluated by the committee. NRG Energy agreed in 2017 to form a committee to assess “broader strategic initiatives” after it settled with Elliott and Bluescape Energy Partners for two seats. Months later, the company announced a plan to sell assets worth up to $4 billion and cut costs by $1 billion, pleasing the activists.
But opponents of the committees note that closed discussions on essential topics can be debilitating to the board. “Usually, it’s such a fundamental issue that the whole board should be dealing with it,” said David A. Katz, a partner at Wachtell, Lipton, Rosen & Katz. “The board is a single entity. You don’t want to balkanize the board.”
Christopher Drewry, a partner in the corporate department of Latham & Watkins’ Chicago office and member of the firm’s activism practice, echoed that sentiment. “There is a loss of perspective of some of your directors by narrowing the review to a committee,” he said.
Indeed, board committees created after settlements sometimes focus on narrow topics like CEO succession or capital allocation. Others have a more general focus. According to Activist Insight Online, 19 committees formed since 2013 had to do with strategy, including at Yahoo, which formed a strategic review committee to explore a sale of the company’s core internet business after settling with Starboard Value in 2016.
Nonetheless, companies often believe the creation of new committees will not “change the direction of the board,” Drewry said. “Most boards are now being their own activists and they have often considered many of the change proposals that the activist advanced,” he said. “While companies generally prefer the perspective of all their directors on strategic matters, in the context of negotiating a settlement with the activist, companies sometimes agree to the demand because the committee will conduct a review the company has already been conducting in its regular course of operations.”