No Holds Barred: The Proxy Contest
You’re the general counsel of a public company and you find out that one of your company’s stockholders intends to wage a proxy contest. Your board of directors and CEO are going to want some answers right away. How prepared are you and how do you respond?
The average annual number of proxy contests has nearly doubled from 60 in 2001-2005 to 112 in 2006-2010. In 2009, activist shareholders were able to successfully gain board seats approximately 43 percent of the time. Proxy contests are generally intense not only because of time pressure, but also because in a proxy contest, the directors and management typically face personal and very public attacks similar to those in a political campaign. Therefore, it is increasingly important for the general counsel of a public company to have answers and be ready to act when the company finds out it may be subject to a proxy contest.
A company can find out about a proxy contest in one of two ways:
- a stockholder may announce (in a Schedule 13D filing, in a letter to the board of directors or through the media) that it will commence a proxy contest in connection with the upcoming annual meeting of stockholders or a special meeting of stockholders at which directors will be elected; or
- a stockholder may notify the company in writing in accordance with the advance notification provisions of the company’s bylaws of the stockholder’s intention to nominate and solicit proxies to elect a slate of directors at the annual meeting.
In addition, the company should expect to receive a demand for a stockholder list under the relevant state’s corporate laws.
Check the company’s charter and bylaws. The general counsel needs to first know what requirements the stockholder must meet to nominate a director for election. Are there advance notice requirements, providing for notification of any proposed solicitation during a certain window before the annual meeting? What information must the stockholder provide and what representations to the company must the stockholder make? Can the stockholders act by written consent? Do the charter and bylaws impose any specific director qualifications? Is the stockholder seeking any amendments to the charter documents in connection with the proxy contest to facilitate its success?1
Assemble a team. If you determine that the threat is real, the company will need to assemble its team of investment bankers, proxy solicitors, public relations experts and outside legal counsel to help navigate the waters. Outside counsel will work with you to assess whether the activist has complied with new and evolving legal requirements or whether the nominations are defective, assist with drafting investor communications, ensure compliance with state law and federal proxy rules, and prepare for possible litigation. Public relations and proxy solicitation firms can help draft “fight letters” with effective arguments for the company’s nominees and against the activist’s. Investment bankers can gather and process data to combat the activist’s claims and support the current board’s short- and long-term strategies. The company should also hire a private investigator to research in detail the backgrounds of all persons/companies affiliated with the dissident stockholder and nominees.
Develop a strategy. As a general matter, the company needs to develop its campaign—the story that explains why the stockholders should not elect the activist’s nominees and how the current board is acting in the best interests of the stockholders. Each proxy contest is unique and there are several different strategies that may be useful, depending on the particular facts. For example, the dissident stockholder may miss an important timing deadline or have a fatal defect in its notice to nominate. The investigation may turn up some unflattering facts about the nominees. After assessing your stockholder base, you may realize that you have or don’t have significant support and this can affect the outcome. Litigation can also be a helpful tool to the extent there are violations of the corporate or securities laws. Delaying the dissident stockholder at each step of the process is helpful. It’s also important to consider direct communication with the activist stockholder to see if there is a compromise available.
The steps taken when the company finds out that it could be subject to a proxy contest are important, but many of the steps outlined above can also be taken now in preparation for any future proxy contest. You should make sure that the company has up to date charter and bylaw provisions,2 including advance notice provisions and specific director qualifications, if applicable. Monitoring your stockholder base to understand who owns how many shares (5 percent or more owners must file a Schedule 13D or 13G and any owner that has crossed the reportable thresholds under the Hart-Scott-Rodino Act will have to make a filing but the transfer agent will have additional records) and for how long is critical for both anticipating proxy contests, especially if you can determine ahead of time that a known activist stockholder is accumulating shares in your company, and assessing their likely outcomes. Honest and critical self-evaluation can help a company identify and address activist concerns before proxy contests materialize. Common areas of concern are share price and financial performance; corporate governance structure; and value-enhancing options such as divestitures, acquisitions, or operational changes when the share price and financial performance has suffered. Following industry best practices, where possible and productive, may decrease the likelihood of successful activist nominations and will definitely prepare the company to meet proxy contests head on.
Although the SEC’s proposed “proxy access” rules would have significantly changed the proxy contest landscape and made it much easier for stockholders to obtain board representation, these rules have currently been abandoned. However, certain amendments to Rule 14a-8 of the Securities Exchange Act of 1934 have become effective and will permit a stockholder to propose amendments to the company’s charter documents, which could allow stockholders to nominate directors directly through stockholder proposals at future stockholder meetings.
Proxy contests are more prevalent than ever and even unsuccessful proxy contests can take their toll on a company, its board and its management. The information above can help you analyze and determine if you should be taking action now, because to have a chance to survive a proxy contest unscathed, you need to consider taking steps before it even begins.
For more information, please contact any of the attorneys below. You may also view the alert in the PDF linked below.
PDF - DealThink_The_Proxy_Contest.pdf
See the note on Rule 14a-8 of the Securities Exchange Act of 1934 below.2
Two recent Delaware cases, Levitt Corp. v. Office Depot, Inc.
and Jana Master Fund, Ltd. v. CNET Networks, Inc.,
allowed activist nominations over company objections because of imprecise drafting of the advance notice bylaws.