Lee Harris posted a revised version of “Corporate Elections and Tactical Settlements” on SSRN a couple of weeks ago. It hit my inbox this week. Here is the abstract:
Once yearly, shareholders get an opportunity to vote on who shall serve on the board of directors. From time to time, these elections for board seats are contested. In a contested election the incumbent board is exposed to the risk that a challenger might succeed in winning a seat on the board and oust the incumbent. Once a contested corporate election begins, the board of directors has limited options. Their fate is sealed and in the hands of shareholder voters. Yet, before the voting begins, savvy boards are relatively adept at avoiding the challenge through tactical settlements. For instance, in 2008, Carl Icahn agreed to give up his challenge for control of Yahoo’s board of directors in exchange for three board seats on the company’s 11-member board. In the same year, Motorola’s board settled a potential fight over control with Icahn by giving up two board seats. Two years later, Genzyme, a large pharmaceutical concern, also agreed to give Mr. Icahn a couple of board seats if he would abandon his contest for control of the board. Shortly, when there is a challenge, the incumbent board is often clever enough to entice potential challengers to drop their bid in exchange for board seats, along with a negotiated payment to the challenger to purportedly reimburse the challengers’ expenses. Through these settlements, even when there is a potential corporate election that might give shareholders a meaningful choice about who will serve on the board of directors and, as important, the strategic direction of the firm, directors are able to sidestep a shareholder vote. Although not previously theorized or examined empirically, settlements allow boards of directors to effectively manage and avoid corporate elections and meaningful shareholder votes. This Article is the first to examine the theory and empirical evidence behind board decisions to settle with challengers in order to avoid a shareholder vote.