View full article from Transaction Advisors, here.
With the evolution of shareholder activism, the number of activist campaigns resulting in board seats has almost doubled over the past five years. Companies need to develop strategies for dealing with not only activist funds, but also their extensions inside the boardroom.
The use by activists of “independent” outside candidates in their slates is a significant recent development. Companies often distinguish between an activist insider director and an activist outsider director, and take extra care to welcome the latter as true independents.
With respect to activist insider directors, fiduciary duties may be owed to the activist fund that appoints them. Nonetheless, an activist director’s fiduciary duties to the company and its shareholders are absolute and are not considered diluted by fiduciary duties owed to the activist fund.
Potential conflicting fiduciary duties present issues that boards are increasingly navigating. Potential conflicts will often be addressed by asking the activist insider director, but rarely the activist outsider director, to recuse himself from board deliberations and voting on these topics.
Recusal is sometimes also appropriate where the activist director needs to disclose a conflict, but cannot do so without breaching confidentiality obligations to the activist.
If a director opposes recusal, companies have sometimes formed committees to deliberate in the absence of the conflicted director. The use of committees is a powerful tool because a committee can retain independent legal and financial counsel, and can potentially withhold information from the board.
Companies should review their committee composition and mandates to ensure that an activist director is not able to hijack an important topic with an outsized influence on a committee
An additional challenge facing companies with activist directors is balancing increased pressures by these directors for access to information or personnel and requests for action with the obligation to treat directors equally and preserve the board as a collective decision-making body.
Companies need to develop a framework for dealing with the increased information and access to personnel requests that often come from activist directors and route all information requests through a central source, such as the general counsel.
Companies with activist directors should evaluate the risk of disclosing sensitive company information. Companies are increasingly adopting board confidentiality policies, either as standalone policies or as part of broader conduct or governance codes.