The skirmish over special pay for activist nominees: what has been put in play and what the future may hold for a bylaw that restricts director nominee incentive payments.

• Author: Hughes, John K.
• Position: DIRECTOR RECRUITING

ON JULY 19, 2013, Halliburton Co. filed a Form 8-K with the SEC disclosing its board the previous day had amended Section 6 of the company's bylaws. That section governs director nomination matters. The change requires that any proposed director nominee must deliver to the company a signed representation and agreement that he or she:

"... is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification, and has not received any such compensation or other payment from any person or entity other than the Corporation, in each case in connection with candidacy or service as a Director of the Corporation."

The bylaw permits indemnification and/or reimbursement for out-of-pocket expenses a nominee may incur in seeking to be a director (but not service as a director). Also permitted is any pre-existing employment agreement the candidate has with his or her employer (not entered into in contemplation of an investment in the company or the nominee's candidacy). Permitted arrangements must still be disclosed to the company in writing. The provision looks in all directions temporally: past, present, and future. In its filing, the company didn't elaborate or provide commentary on why it adopted the amendment when it did.

So, it raises the question: Why adopt such an amendment?

The backdrop

Hostile takeover attempts have been trending down for a number of years. The drivers behind that have been reported and explored elsewhere. Meanwhile, broader forces have converged to make conditions favorable for activists. Campaigns have been increasing. Different moniker and maneuvers; same goal: Create Change, Enhance Value.

And activists have been winning. In contests for board seats, they've scored success rates (whether through settlements or elections) of 44%, 49%, and 41% in 2013, 2012, and 2011, respectively, according to data from FactSet Shark Repellant. These are higher success rates than in hostile contests.

To make their case more persuasively, and try to get shareholders to look and vote their way, activists have sought to pull from their talent banks experienced people with targeted knowledge to serve as director nominees standing behind the activists' value propositions. Finding talented people willing to climb in the ring and subject themselves to proxy contest gyrations for the rewards involved, however, can be challenging.

During the 2013 proxy season, in separate contests, two funds sought to deal with this challenge by turning to a newer page in the playbook: They offered incentive compensation...