In the first half of 2023, activists managed to reach settlements with U.S.-based companies at a faster pace than that recorded in the same period last year, with the introduction of the universal proxy card (UPC) cited by many in the industry as a key influencing factor.

According to Diligent Market Intelligence (DMI) Activism data, the average time that lapsed between an activist making a public demand and reaching a formal settlement with a company decreased by over 8%, from a 73-day process in the first half of 2022 to a 67-day engagement during the same period this year.

In one of the most notable instances this proxy season, Engaged Capital etched out a settlement with burger chain Shake Shack, two days after its campaign for board seats was made public. Under the May 16 deal, the company averted a proxy contest with the 6.6% shareholder by offering a single board seat and agreeing to hire a consultant to improve operating efficiency.

Scalpel versus sledgehammer

Since the advent of UPC, activists have been able to list director nominees on the company’s card, making boards with vulnerable directors more open to the possibility of settling.

Lauren Gojkovich, founder and managing member of LDG Advisory, described the new ability to target specific directors as akin to arming investors with “scalpels” rather than “sledgehammers.”

“In cases where there are clearly vulnerable directors on a board, it is much easier for activists to garner support across the shareholder base because UPC helps other shareholders avoid the historic fear that voting on the activist card would enable a level of change on the board that was misaligned with the strategic change needed,” she observed.?

This, she argued, means it’s often easier for clear-eyed parties to see the endgame and settle earlier. “The UPC has allowed activists to win broader shareholder support because their solution – board refreshment – can be right-sized more easily to their strategic case for change.”

This is echoed by Sean Donahue, partner at law firm Paul Hastings.

“I think issuers are more fearful that they will lose one or two board seats as it is more challenging for either side to get a clean sweep in the universal proxy era,” he said.

Bath & Body Works avoided a proxy contest after it reached an agreement with Third Point Partners on March 6 which saw the appointment of Thomas Kuhn to its board. This deal was hammered out over 12 days.

Caligan Partners’ bid to secure two board seats and return cash to shareholders at biotech Anika Therapeutics ended with a cooperation agreement made public on April 13, 17 days after its demands were made public. The 4% holder settled for one board seat and a commitment to launch an expanded stock buyback program.

At 93 days, RumbleOn had one of the most drawn-out settlements in the period inking an agreement with activist duo Mark Tkach and William Coulter to make several changes to its board and pay the dissident shareholders $2.5 million to cover their proxy contest expenses.

Recalculating the odds

One consequence of the rule change has been the growing importance for proxy advisor recommendations from Institutional Shareholder Services (ISS) and Glass Lewis, a make-or-break moment in a contest that typically comes just a few weeks before the vote and raises the stakes for boards. The increased complexity of such recommendations may lead the proxy advisors to suggest different combinations from the rival slates, further increasing the unpredictability of contested votes.

“The risk of a split decision, which is a real possibility given the number of split ticket recommendations from proxy advisors and the ability of investors to mix-and-match under universal proxy, has led to earlier settlements,” Donahue told DMI.

“Some 29 of the 32 directors recommended by ISS have been elected, a staggering number,” said Donahue. So far, 10 proxy contests using UPC have gone to a vote under the new regime with activists claiming victory in six.

As boards recalculate the odds of losing one or more directors, activists are pushing the line further.

“Many activists have been asking for more board seats in initial settlement discussions which has impacted the engagement dynamic with the activist throughout the campaign,” said Donahue.

That may lead to more tough calls for boards on whether to push back against demands at a time when focusing on business fundamentals is critically important.

“Not only does a settlement typically result in the company losing less seats, it also allows them to focus on running the business rather than being distracted by a proxy contest,” Donahue concluded.