DealLawyers.com Blog

Here’s some analysis from Cliff Neimeth of Greenberg Traurig:

As widely anticipated, in an open session of the SEC’s Commissioners last week, they approved (in a 3-2 split-vote) the elimination of NYSE Rule 452. This will end the long-standing practice of broker-dealer discretionary authority to vote “uninstructed client shares” in uncontested director elections.

Under Rule 452, uncontested director elections historically were classified as a “routine matter” enabling brokers to vote as they deemed appropriate in respect of shares for which they did not receive specific client voting instructions prior to the 10th day next preceding the stockholder meeting. Statistically, such shares overwhelmingly were voted “for” director candidates nominated by the issuer.

For many issuers who, in the past few years, have adopted “majority voting” bylaw standards for uncontested director elections (or, at a minimum, have adopted so-called “plurality plus” director resignation requirements), the elimination of Rule 452 adds significant fuel to “withhold authority” campaigns initiated by activist hedge funds and other dissident stockholders to advance agendas not necessarily in the best interests of all stockholders.

Moreover, in view of (i) new Sections 112 and 113 of the DGCL – effective August 1, 2009 – which enable the adoption of binding bylaw provisions permitting direct insurgent access to the issuer’s proxy materials and, in certain circumstances, reimbursement of expenses incurred by dissidents in opposition election contests; (ii) proposed SEC Rule 14a-11 which, if adopted substantially as proposed in time for the 2010 proxy season, will mandate the inclusion in issuer proxy materials of insugent (short-slate) nominees, provided that certain minimum ownership and other procedural requisites are satisfied; (iii) recent Delaware decisions strictly construing the validity and use of certain organic takeover defenses; and (iv) the SEC’s recently adopted “e-proxy” rules and exempt solicitation “stockholder forum” rules, dissident boardroom access is being made increasingly more available to activists and far less less costly.

In turn, unsuspecting (or unprepared) issuers are becoming increasingly vulnerable.

What to Do Now

As you’ve no doubt read on all of these subjects, it is very important to review with your clients their existing advance notice bylaws and other organic and structural takeover defenses (including rights plans, etc.). This is further compounded by the current macroeconomic environment which has been an impetus for operating and financial performance shortfalls across myriad industries, and the sharp decline in straight buyside and sellside deal activity, in each case further giving rise to alternative “liquidity event” agendas and other management displacement and corporate change-in-control campaigns.

Of course, shark repellents that only can be implemented by means of charter amendment (under applicable state law) would require both director approval and stockholder adoption – which may be impractical or untimely in many circumstances.

The need to assess client “targetability” tends to be more pronounced in the case of small cap issuers who tend to be disproportionately more vulnerable to unsolicited assault for a variety of economic, structural, and other reasons.

The SEC also announced yesterday that, in addition to pending Rule 14a-11, it intends to undertake a comprehensive review of all current proxy regulations with a view to “overhaul” them as may be necessary.