What Settlement Data Says About the Evolution of Activism

Since the introduction of Universal Proxy in August 2022, one of the most notable changes in shareholder activism has been the significant increase in settlements between Boards and activists. With heightened risks for individual directors in proxy fights, Boards have been more inclined to settle, and settle quickly. Counter intuitively, this has also corresponded with a time where management teams are winning decisively in proxy contests – seven of eight proxy contests held in the U.S. so far in 2024 resulted in full victories for management.

As we close out the 2024 proxy season, those in the activism defense world are starting to ask: are Boards settling too quickly?

Settlements have been generally on the rise for a decade in large part due to a Board’s recognition of the risks both for themselves and for the enterprise in pursuing the uncertain path of a proxy contest. There is no escaping the notion that a proxy contest is a high risk, low reward endeavor for incumbent Boards and management teams.

However, the increase in both speed of settlement and the private nature of the engagements suggests activists are benefiting more on historical successes then current market dynamics. Activism as a strategy is fundamentally predicated on the threat of disruption. The glaring eye of the bully on the playground quickly collects the milk money. The bully’s reputation is well earned. Inevitably, though, the bully loses its fear factor over time, and the other kids on the playground change their behavior. A closer look at the data suggests boards should start questioning if now is the time to start changing their behavior.

Fact 1: Activists are winning without public threats

The nature by which Boards and activists reach settlements has changed. Since Universal Proxy’s implementation, “private” settlements between Boards and activists have soared in prevalence. Such settlements are struck before an activist goes public with its position through a 13-D filing, public letter, leak of its position to the media, or other announcement. In the past two proxy seasons, nearly two-thirds of settlement agreements have been reached privately, prior to the launch of a public campaign. In many cases, this could be a board determining the relative risk of an activist with minimal input from the external market.

This is a notable increase when evaluated against the past decade of settlement activity. In recent years, outside of the first full proxy season after the COVID-19 pandemic, the breakdown between public and private settlements had typically been closer to an even split. The predominance of private settlements represents a reversal from settlement activity in 2015, when over two-thirds of settlements were reached publicly, after an activist campaign went public.

Fact 2: Activists are winning just as many seats privately as they are publicly

Comparing the number of seats won in private and public settlements tells a similar story. In the proxy seasons prior to Universal Proxy’s implementation, settlements reached after an activist’s demands were made public typically yielded more seats than settlements reached privately. In 2022, for example, public settlements resulted in activists winning 3.2 seats on average, versus 1.4 seats in private settlements. However, in the past two years, this gap has closed. In both the 2023 and 2024 proxy seasons, the average number of seats won by activists in private and public settlements has been the same: 1.9 for 2023 and 1.8 for 2024.

In 2023 and 2024, with the ability to target specific Board members under Universal Proxy, activists requested – and subsequently received – fewer seats in their public campaigns. Out of public activist campaigns that did end up settling during the 2024 proxy season, activists on average asked for fewer than three Board seats – the first time below that level since 2017 – and on average received one fewer Board seat than they requested. This compares to a peak 2.5-seat discrepancy in the 2019 proxy season and even a 1.7-seat discrepancy in the 2023 proxy season.

The parity in seats awarded between public and private settlements – and the tighter gap between seats publicly demanded and awarded – indicates that activists may now have similar leverage in negotiating with Boards when their stake is private as when their demands are public.

Fact 3: Activists are increasing their relative influence over corporate strategy

Activists are looking to create change to unlock value. Gaining Board representation helps them on a path to change, but it does not guarantee change. As a result, the relative decline in number of board seats requested by an activist is not a result of their declining leverage, but instead their increasing focus on a new point of leverage.

Where activist investors have increasingly exacted a toll on Boards is demanding formation of special committees to evaluate items like strategic alternatives, operating portfolios, and capital allocation policies – particularly in private negotiations. In 2024, 10 special committees were formed as part of settlements – the largest number in the past decade. Eight of these were part of private settlements, and special committee formation was a criterion in over 30% of private pacts. When a settlement does include a special committee and new board directors, activists will often seek to have the new directors be placed on that committee specifically. This is how fewer seats can translate to increasing influence over corporate strategy.

Fact 4: Activists are winning faster than ever before

Ultimately, when activists do go public with demands for seats and settlements are subsequently reached, the length of time in between has markedly decreased. With greater impetus for Boards to settle – combined with demands from activists frequently being for fewer seats – the average span between public demand and settlement for the 2024 proxy season plunged to 34 days, falling by half vs. 2023 and down from 77 days in 2022, prior to the introduction of Universal Proxy.

Moreover, in 2024, there was a spike in cases of Boards settling in a week or less from when an activist’s demands were made public, such as jetBlue settling with Carl Icahn for two seats just four days after Icahn’s position was made public in February. Even excluding such settlements reached in under a week, 2024’s public settlements still averaged a lower number of days (49) from public announcement to settlement than any proxy season of the past decade.

Takeaways for Boards

As activists continue to apply pressure for private, expeditious, and favorable settlements, Boards should keep the following principals in mind.

1. Activists are return-driven, not seat-driven. Activists want to force change to unlock value. Special committees are arguably among the most efficient means to create that change – especially if the activist has representation on that committee. Universal Proxy may have made the threat of Board seats a more valuable bargaining chip when activists are negotiating a settlement, but Board seats are purely a means to an end for activist, not the end goal.
2. Preempt the special committee demand. Boards should regularly and thoroughly assess portfolio, capital allocation, and overall strategic direction proactively, and seek candid shareholder input on these items before an activist shows up. Thoughtful shareholder engagement is a useful platform for this, though negative feedback can often be watered down by shareholders in face-to-face engagements. Periodically conducting blinded investor perception studies can be a more fruitful platform to receive candid feedback from the market.
3. Be wary around investor days. Activists are increasingly showing up – either publicly or privately – as a company prepares for an investor day. Investor days are often a signal to the market the company will be presenting new financial targets and potentially even changing strategy. The months leading up to an investor day are an attractive moment in time for activists to present its own views on a change in strategy and take credit for any stock price appreciation after the investor day.
4. Upgrade the Board evaluation process. The implementation of universal proxy has presumably made Boards more eager to settle with activists – as there is a notion that “weak link” individual directors are more vulnerable. Boards should regularly conduct an independent assessment of their skillsets and experiences to identify any gaps that an activist could press on. This assessment should go beyond a “check-the-box” exercise of a skills matrix and should include independent analysis and shareholder feedback received during engagement.
5. Settling quickly could be perceived as too quick. Despite management seeing success in proxy fights that went to a vote in 2024, Boards are settling with activists at record rates. In the past proxy season, Crown Castle and jetBlue rankled some shareholders and spectators by publicly settling in relatively quick fashion with Elliott Management and Icahn, respectively. Crown Castle, in particular, faced litigation from its former CEO as he felt like entering the agreement with Elliott without requiring the fund to maintain ownership in the company limited the Board’s authority. Litigation aside, ultra-fast public settlements could potentially raise questions from other investors or leave them to perceive the Board as being on the “back foot”.