Dancing with Activists

Abstract

An important milestone often reached in the life of an activist engagement is entering into a “settlement” agreement between the activist and the target’s board. Using a comprehensive hand-collected data set, we analyze the drivers, nature, and consequences of such settlement agreements. We identify the determinants of settlements, showing that settlements are more likely when the activist has a credible threat to win board seats in a proxy fight. Consistent with incomplete contracting, settlements do not usually contract directly on operational or leadership changes but rather on board composition changes that can facilitate the changes activists seek, including CEO turnover, increased payout to shareholders, and a sale or a going-private transaction. We find no evidence to support concerns that settlements enable activists to extract significant rents at the expense of other investors by introducing directors not supported by other investors or by facilitating “greenmail.” Our analysis provides a look into the “black box” of activist engagements and contributes to understanding how activism brings about changes in its targets.

Keywords: Corporate governance, hedge fund activism, activist settlements

JEL Classification: G12, G23, G32, G34, G35, G38, K22