TheCorporateCounsel.net

In response to the SEC’s newly effective “universal proxy card” rules, some companies have been tightening up their bylaws (as explained in this 12-minute podcast that John taped with Hunton Andrews Kurth’s Steve Haas). We also discussed the need for bylaw amendments at our recent “Proxy Disclosure Conference” with Davis Polk’s Ning Chiu, Okapi Partners’ Bruce Goldfarb, SGP’s Rob Main and Wachtell’s Sabastian Niles – the consensus there was that bylaw amendments aren’t necessary for every company at this time, but many companies are using this as an opportunity to conduct a review.

A new case shows the risk in being too aggressive. In late October, an activist hedge fund sued a company in the Delaware Court of Chancery over a series of allegedly “draconian” advance bylaw amendments – which require an activist to provide extra disclosures about the hedge fund’s holdings as well as the fund’s limited partners’ holdings. The activist is asking the court to invalidate those provisions, which would reveal the identity of investors that are supporting activists. We don’t know the outcome yet of this case, and it will be worth watching.

Michael Levin at The Activist Investor shared this analysis of the provisions from an activist’s perspective – along with other examples that may go too far, such as requiring activist-appointed directors to resign from the board if they violate a company policy. He lays out activist-perspective concerns with how these provisions could be applied:

Also, we’re talking about duly-elected directors here. We can accept (but don’t like) that a director agrees to these terms as part of a settlement of a proxy contest, or otherwise accepts an invitation to join a BoD. These terms become part of the negotiation between the company and an activist.

Consider a director that wins an election, though. A company with these bylaw terms can pretty much remove directors at its will. It would approve a new policy that the director would violate, then accept the resignation that it required as a condition to even stand for election.

Sure, unnecessary and intrusive disclosure is an expensive hassle. We find limits on what a duly-elected director can do to represent shareholder interests, including automatic enforcement at the discretion of company leadership, much worse.

– Liz Dunshee