DealLawyers.com Blog

A few weeks ago, Pat McGurn, Special Counsel of RiskMetrics’ ISS Division, participated in a TheCorporateCounsel.net webcast: “Forecast for 2009 Proxy Season: Wild and Woolly.” The excerpt below was culled from the webcast transcript and it deals with mergers & acquisitions (Pat also discussed a number of other “hot” proxy season issues):

Moving on to number seven and leaving the compensation realm is M&A. I think we are going to see probably less so in the first half of the year but more as the year goes on some reignition of fears about M&A activities, especially with many company stocks at historically low price levels. This should bring into sharp focus the shareholder resolutions and other activism on this particular topic that occurs at annual meetings.

This year, I think the runaway hit on the M&A front – as far as shareholder proposals go – is going to be the resolution looking to restore shareholder rights to call special meetings. I think we’re going to see a bumper crop of those proposals. Notably the support for those actually dropped in 2008 as the numbers also rose last year. But we could see given market concerns and accountability concerns more support for those resolutions pushing them back above the 50% on average support level that they got two years ago.

I think one reason for the increase in special meeting proposals is actually a potential decrease in proposals related to the repeal of classified board structures. I think support for the resolutions on the ballot in 2008 actually increased, but the fact of the matter remains that the activists are actually running out of targets in the S&P 500 or large cap universe today, where use of classified board structures is definitely minority practice at this point in time.

Notably, 2008 actually marked the time when we saw the change-over for the entire corporate universe. If you look at the S&P 1500 universe only 50% now have classified board structures in place, which is down nearly 20 percentage points from a number of years ago. So clearly we’re seeing an exodus away from that structure.

One interesting new proposal this year calls for the companies to remember Bismarck and that’s Bismarck, North Dakota. I didn’t check weather.com for the temperature there today but some activist institutions would like to send corporate counsel and other executives there if they want to do their corporate litigation.

As you may be aware, North Dakota adopted a while back one of the most shareholder-friendly statutes in the United States, if not the world, related to corporate governance practices. These resolutions seek to urge boards of directors to reincorporate in that and to make themselves subject to this shareholder-friendly legislation. So an interesting one to watch.

We also expect to see a significant number of proposals asking boards to eliminate their super majority vote requirements as the perennial that does quite well.

One resolution not likely to show up much at all this year are calls for shareholder votes on poison pills. The number of resolutions on this topic has dwindled in recent years as the usage of rights plans has dropped.

The stage at which this issue plays out has really shifted to the board of directors. Last year we saw in a significant number of cases where boards had very large “no” votes that the unilateral non-shareholder approved adoption of a plan by a board of directors was quite often a catalyst for those majority or near majority “no” votes coming in again for the directors.

Given the fact that we’ve seen in recent weeks really a run on pill adoptions especially by small cap and middle market firms, we’re expecting to see some very strong “no” votes show up at annual meetings for those firms this year, although many of them still don’t have majority voting rules in place.

Another ancillary issue here that is picking up some momentum is the notion of revising the advance notice requirement. Some of the changes being made right now are simply housekeeping changes that are being put into place in order to address some concerns raised by some litigation in Delaware last year. But there are a number of boards that have been advised and have gone ahead and adopted even stronger advance notice language that really seeks to enhance disclosure by investors of “synthetic voting rights” and derivative holdings.

This was a big issue in a couple of proxy fights over the last couple of years. But I will issue a note of caution here that some of the language that’s being adopted by some firms seems to be very restrictive and ultimately could serve as a take over defense in and of itself. So boards should probably be wary of adopting advice without viewing it critically, otherwise they may find themselves subject to a no vote campaign.