How do companies defend against activist investors?

Key takeaway: When activist investors push for change, companies can respond through negotiation, shareholder engagement, proxy contests, and governance defenses. Ultimately, the success or failure of an activist campaign usually depends on which side wins shareholder support.

This is the latest article in a series covering everything you need to know about shareholder activism. Previous articles explored exactly what shareholder activism is, and how activist investors make money.

Shareholder activism is often portrayed as a battle between investors seeking change and management teams trying to preserve the status quo. However, activist campaigns are rarely decided by the activist or the company alone.

When an activist acquires a stake in a publicly listed company and pushes for changes, the board of directors and management team have several options available. They may engage privately with the activist, negotiate a settlement, seek support from other shareholders, and defend their strategy through a public campaign.

In more contentious situations, companies may face proxy fights or rely on governance mechanisms designed to protect against unwanted influence.

The ultimate objective for both sides is to convince shareholders that their approach offers the best opportunity to create long-term value.

This makes activist investing not simply a battle for control, but a competition of ideas about how a company should be managed.

A useful example is the campaign launched by Trian Partners at Disney in 2023 and 2024.

Led by activist investor Nelson Peltz, Trian sought board representation and argued that Disney needed stronger oversight and improved financial performance.

Disney ultimately defeated Trian's board challenge, but the campaign illustrates many of the ways companies typically seek to defend themselves against activist pressure.

Why do companies resist activist investors?

Despite intentions, not every activist proposal is automatically in the best interests of a company or its shareholders.

Management teams and boards may genuinely believe that an activist’s recommendations would undermine long-term value creation.

For example, Disney disagreed with Trian’s assessment that it had underperformed peers, struggled with succession planning, and failed to deliver adequate returns for shareholders.

The company argued that management was already executing a turnaround plan and improving streaming profitability, and that the activist’s proposed changes would not create additional shareholder value.

In other cases, executives may argue that activists are focusing too heavily on short-term financial performance at the expense of long-term strategic objectives.

Importantly, resistance to activists is not necessarily evidence of poor governance. Many companies engage seriously with activist concerns while still disagreeing with the specific solutions being proposed.

How companies respond to activist investors

After disclosing a stake, activist investors will often begin their campaigns by meeting with the company’s directors and executives to discuss their concerns and proposed changes.

Sometimes, companies listen to these recommendations and, in some cases, implement certain suggestions without the need for a public campaign. This is known as a negotiated settlement.

The details of a settlement will vary case-by-case, and companies may agree to certain activist proposals while rejecting others.

A recent example was Elliott Investment Management's campaign at Southwest Airlines, where the activist publicly criticized Southwest’s leadership and operational performance while calling for significant changes.

Although the dispute initially appeared headed toward a proxy fight, the two sides ultimately reached a negotiated settlement.

Southwest agreed to appoint several new directors and make governance changes, while Elliott abandoned plans for a shareholder vote.

In some situations, both parties ultimately agree on a path forward that avoids a costly shareholder vote. This is usually the preferred outcome of an activist campaign because companies want to avoid prolonged disputes, while activists generally seek changes that can increase shareholder value without necessarily taking control of the business.

As a result, the most effective defense against activism is often engagement rather than confrontation.

Winning shareholder support

When negotiations fail, disputes may escalate into public campaigns where both the activist investor and the company attempt to win over support from other shareholders.

Because most activists only own a minority stake, they rarely have the voting power to force change on their own. Instead, they must persuade other investors that their proposals will create more value than management’s existing strategy.

They often do this by publishing public letters, presentations, and reports, as well as appearing in media interviews.

Because of this, one of the most important defensive strategies available to a company is convincing investors that its existing strategy is superior to the activist’s proposals.

Companies therefore often devote significant resources of their own to winning shareholder support; meeting directly with institutional investors, conducting investor roadshows, and holding conference calls.

During Disney's battle with Trian Partners, both sides actively sought to win over shareholders.

Trian argued that Disney required stronger oversight and improved financial performance, while Disney maintained that its existing turnaround plan was already delivering results and that the activist's proposals would not create additional value.

It was up to shareholders to pick the side that they thought offered the best path to value creation, and vote accordingly.

What is a proxy fight?

A proxy fight occurs when an activist seeks to replace some or all of a company’s directors and asks shareholders to vote for its nominees rather than those supported by management.

Because most shareholders do not attend annual meetings in person, votes are typically cast through proxy forms, which allow investors to vote remotely. During a proxy contest, both the company and the activist campaign for these votes, seeking support from shareholders ahead of the meeting.

These contests can be expensive and time-consuming, with both sides often hiring legal advisers, public relations firms, investment bankers, and specialist proxy solicitors to help communicate their case to investors.

While proxy contests attract significant media attention, they are relatively uncommon compared with negotiated settlements.

Many campaigns are resolved before a vote takes place because both sides recognize the costs and uncertainty associated with a prolonged battle.

The Disney-Trian campaign ultimately culminated in a proxy contest, with shareholders asked to choose between Disney's board nominees and those backed by Trian. After months of campaigning by both sides, Disney's nominees prevailed, allowing the company to retain control of the board.

Although activists do not always win proxy fights, the threat of a contest can itself be a powerful negotiating tool. Companies may choose to engage more seriously with activist demands in order to avoid the expense and distraction of a shareholder vote.

Poison pills and other activist defenses

In addition to shareholder outreach and proxy contests, some companies have governance structures and defensive mechanisms that can make it more difficult for activists or potential acquirers to influence the business.

One of the best-known examples is the poison pill, formally known as a shareholder rights plan. A poison pill is designed to prevent a single investor from rapidly acquiring a large ownership stake without board approval.

If an investor exceeds a predetermined ownership threshold, typically around 10% to 20%, existing shareholders may gain the right to purchase additional shares at a discount, diluting the would-be acquirer's position.

Companies may also employ other governance provisions that can affect activist campaigns.

One common example is an advance notice bylaw, which requires shareholders to notify the company well in advance if they intend to nominate directors or submit proposals at an annual meeting.

These rules often require extensive disclosures and strict filing deadlines, making it more difficult for activists to launch last-minute campaigns.

Another example is a staggered board structure, where only a portion of directors stand for election each year. This means an activist needs to win multiple elections over several years before gaining meaningful influence over the board.

Companies may also adopt supermajority voting requirements, which require a higher-than-normal level of shareholder support to approve certain actions, often 66% to 75% support. This can make activist campaigns more difficult because proposals that attract majority support may still fail if they do not meet the higher voting threshold.

Some companies further restrict shareholders’ ability to call special meetings or take action through written consent, requiring investors to wait until scheduled shareholder meetings before pursuing certain initiatives. These provisions can slow activist campaigns and provide management with additional time to respond.

Supporters argue that these mechanisms allow boards to focus on long-term value creation and protect companies from opportunistic bidders.

Critics, however, contend that they can reduce accountability and make it more difficult for shareholders to influence management when change is warranted.

In recent years, many public companies have moved away from some of the more aggressive takeover defenses due to pressure from institutional investors and governance advocates.

Nevertheless, these structures remain an important part of the corporate governance landscape and can still play a role when companies face activist pressure or unsolicited takeover approaches.

Do activist investor defenses work?

The success of a defense against an activist campaign ultimately depends on whether a company can convince shareholders that its strategy will create more value than the activist’s proposals.

This was the outcome of Trian Partners’ campaign against Disney, where shareholders ultimately voted in favor of Disney’s director nominees and rejected Trian’s proposed board candidates.

In many cases, a successful defense involves demonstrating that management has a credible plan, addressing legitimate shareholder concerns, or reaching a compromise that avoids a prolonged dispute.

However, defeating an activist campaign does not necessarily mean the activist had no impact. The process itself can be enough to pressure companies to improve governance, adjust strategy, return capital to shareholders, or provide greater transparency around their plans.

For investors, this highlights an important reality of shareholder activism: the goal is not simply for activists to win and companies to lose.

The process is ultimately a contest of ideas, where shareholders decide which approach offers the greatest potential to create long-term value.

Key takeaway

Companies are not passive participants when faced with shareholder activism.

Boards and management teams have a range of tools available, from private negotiations and shareholder engagement to proxy contests and governance defenses.

While public battles often attract headlines, most campaigns are ultimately resolved through engagement and compromise in a negotiated settlement.

Companies may adopt certain activist recommendations, refresh their boards, adjust their strategy, or make changes to capital allocation while maintaining overall control.

However, defensive measures alone are rarely enough to overcome shareholder concerns. Ultimately, investors decide the outcome of activist campaigns by determining which side presents the most convincing argument for creating long-term shareholder value.

Whether activists succeed or companies successfully defend themselves, shareholder activism plays an important role in corporate governance by encouraging boards and management teams to justify their decisions and remain accountable to investors.