Under Siege: Addressing the CEO Attacked by Shareholder Activists
CEOs have long had to look over their shoulders to their company’s shareholders with some fear of a revolt that could lead to the CEO’s removal. While typically seeking board representation, shareholder activists also often go after the CEO of their targets. It is the unfortunate circumstance that sometimes a board has to sacrifice the CEO to satisfy the activist.
While it is easy for a board to say during peacetime that it would never buckle to pressure from an activist in terms of selecting a CEO, when the pressure is on, the board may not be able to uphold its prior commitment to the CEO. The time to consider how to either protect the CEO or the company is when the board is hiring a CEO and negotiating that CEO’s employment agreement.
To provide some protection for the CEO against activists, a company should consider how it will draft any change of control provisions in the CEO’s employment agreement and equity awards. Often, what constitutes a change of control in such provisions receives only minimal attention. How a change of control is defined does matter. Consider for example, when a change of control occurs in the context of bankruptcy reorganization and triggers significant payouts at a time the company can least handle it. Failure to have addressed this contingency could be expensive.
Similarly, if there is the potential of a shareholder activist attack on the CEO, the company should consider adding to the definition of a change in control a situation where there is a turnover in the board that is either not approved by the incumbent board or approved only after a proxy contest has been threatened. This may make activists and shareholders more reluctant to seek the ouster of the CEO.
In every agreement with an executive, if the company is going to pay money or award stock to the executive upon the executive’s termination of employment, there should be requirement that the executive sign a release. While it is often best to wait to draft that release until the termination actually occurs, there may be a reason related to the shareholder activist issue to negotiate that release up front and have it as an attachment to the employment agreement itself. The provision that may need to be added is a standstill agreement. In effect, the standstill agreement would prohibit the CEO from turning back on the company and creating his own proxy fight. It is bad enough when companies forget to require a release from an executive, pay that executive a large amount of money as executive leaves the company, and then face a lawsuit from that same executive. It can be even more expensive and cause more turmoil if that executive is able to start a proxy fight or support an activist’s campaign. To avoid this pain, an agreed upon standstill provision in any release agreement may buy peace when the company most needs it.
When hiring a new CEO, it is sometimes hard to get the board to consider fully how the end of the company’s relationship with that CEO will happen. However, in our world of activist shareholders, there is more reason to carefully consider the issues than ever.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.