| Small & micro cap project / Activism insight

An insightful read about the settlement agreements

by | May 12, 2020

https://www.sidley.com/en/insights/newsupdates/2019/06/help-i-settled-with-an-activist

This is a must-read article for anyone interested in activism.

The article was written by Kai H.E. Liekefett, an activism defense lawyer, meaning he is frequently hired by companies to defend activist investors. He is a top lawyer who has overseen more than 50 proxy campaigns

The article details practical pros and cons in a settlement agreement. Moreover, it shows the “typical mindset” of the incumbent directors when they enter into settlement agreements.

Nevertheless, I don’t agree with many of the statements. For example, the article argues that most of the activist designees don’t have industry experience. It gives an impression that all public company directors have strong industry backgrounds, and activist investors got it all wrong. We all know the answer – this is not the case. Incumbent directors’ lack of industry knowledge is one of the most frequently used arguments by activist investors.

Takeaways for investors

  • The activist designee is allowed to share information with the shareholder who nominated him/her. This is legal in many jurisdictions, including Delaware. At the same time, activist investors are not allowed to trade the stock based on the information.
  • Don’t get carried away when an activist investor settles with the company. Investors should not assume that “settlement agreements” are insurance for generating “alpha”. Some companies settle with activists to “buy” some time and to keep the activist away from shareholders.

On a different note, activist investors who increase their stake after securing a board seat is a good sign. Snowball Research database has a dedicated screen that captures this. It is one of the many idea generation screens that we run on a regular basis.

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