Should you serve on an activist's slate? Will you be viewed as a renegade? Quite to the contrary.

AuthorSeiden, Steven
PositionDIRECTOR RECRUITMENT

The phone rings. It's a leading hedge fund activist asking if you would be willing to be nominated for election to the board of a company in which he has a position. You're caught off guard because usually you're being asked by the head of the nominating committee in an uncontested situation.

Why would you accept this kind of an invitation from an activist?

What runs through your mind is that you'll be an active participant in a knock-down dragged out fight, the newspapers will write bad things about you, your reputation will be sullied, and you'll never be invited on another board.

But wait. Let's look realistically at what actually happens in such situations.

First, you'll need to determine if the activist is after a quick buck or has he really thought out why a proxy contest is necessary. Many of today's activists have exhaustively studied the target company in which they already have an investment. Let's remember that though their approaches will likely differ, both management and the activist are pursuing the same objective: enhancing shareholder value. What really separates the two is that the activist perceives a better and speedier way to do so.

It's very possible that when you carefully consider the activist's strategy, you may indeed find yourself in agreement with his thesis and that, absent a meeting of the minds, a proxy contest is required. In fact, the mere commencement of it becomes a catalyst for change which eventually benefits the stakeholders. The bottom line: you must weigh both sides, management's and the activist's. Then decide whether to accept the invitation to be on his slate.

Assuming you say yes, here's what happens next. The activist may offer you a financial incentive to agree to be nominated, which shouldn't compromise your independence once on the target company's board but will compensate you for the use of your name and for later being questioned by the proxy advisers (ISS, Glass Lewis, et al.). This is separate from the directors' compensation you will receive from the company. The activist also may ask you to visit some of the larger stockholders to help him make his case and to showcase you and the other nominees.

The activist may indemnify you in a written agreement, which will also reference the aforementioned incentive, and bind you...

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