Against Activist Cooperation Agreements

Abstract

Shareholder activism is at record levels. In a typical campaign, the activist threatens to launch a proxy fight unless the board of directors agrees to take certain actions to increase shareholder value, such as selling off company assets or replacing the CEO. However, increasingly, there are no proxy fights. Instead, the activist and the board, behind closed doors, quickly agree to settle. The activist withdraws the proxy fight threat, and, in return, the board appoints individuals designated by the activist to sit on the company board. This "Cooperation Agreement" allows the incumbent directors to keep their positions and allows the activist to claim victory. It profoundly interferes, however, with the voting interests of the non-activist shareholders-who are not given the opportunity to vote on the designated directors and who lose the chance to vote in a contested election. Cooperation Agreements, therefore, raise serious issues of board entrenchment and shareholder disenfranchisement. Yet, despite these concerns, there are no scholarly articles addressing whether a board's approval of a Cooperation Agreement comports with its fiduciary duties. This question is especially important today given the Delaware Supreme Court's recent decision in Coster v. UIP Cos., Inc., which adopted a new approach to reviewing board actions that interfere with the shareholder franchise. This article is one of the first to address the new standard and is the first to address Cooperation Agreements through the fiduciary lens. This article demonstrates that, following Coster, Cooperation Agreements that permit activists to designate directors are a violation of the board's fiduciary duties and are therefore invalid. This conclusion will radically change the landscape of shareholder activism.

Keywords: Cooperation Agreement, Nominating Agreement, proxy fight, activist shareholder, activist investor, fiduciary duties, Coster v. UIP, coporate governance