Jordan Schoenfeld is Assistant Professor of Accounting at the University of Utah Eccles School of Business. This post is based on his recent paper.
Activist investors often want managers to take specific actions, which they accomplish by methods such as installing their own person on the management team or the board or by writing explicit action-based contracts with management. These contracts have received far less research attention in the activist literature even though they are akin to the classical principal-agent model, where the principal knows exactly what actions the agent should take and will contract on those actions to the extent it is possible. This study examines binding bilateral contracts between shareholders and managers called shareholder agreements.
From 1996 to 2015, shareholders and managers executed over 4,400 binding bilateral shareholder agreement contracts. Using hand-collected data from 13D filings, I find that these contracts can specify rights and duties for both shareholders and managers, including director and management appointments, private information access, accounting procedures, dividends, capital structure, strategy, strategic alliances, private placements, and trading restrictions. I also find that these contracts are more prevalent in firms that are more volatile, less profitable, younger, and in firms with weaker information environments. Investors also react more positively to 13Ds that include these contracts, suggesting that these contracts do not arise at the expense of other shareholders.
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