DealLawyers.com Blog

This recent HLS Blog from Kai H. E. Liekefett and Derek Zaba of Sidley Austin addresses what they characterize as an uptick in “half-truths and outright lies in proxy contests” by dissident shareholders. They at least partially attribute this issue to the fact that the proxy rules were “adopted decades ago and long before the advent of the digital age” and are “increasingly under stress.” Specifically, it says the application of 14a-9 has often “failed to rein in even clearly problematic behaviour in proxy contests” such as inaccurate “statements about proxy tallies prior to the closing of the polls.”

For instance, in one court case, an activist announced preliminary proxy voting results several weeks prior to the shareholder meeting, claiming that it was clearly leading with 80% of the shares voted. These numbers turned out to be false (only 55% of the shares had been voted). However, the court declined to issue a preliminary injunction, and the dissident proceeded to succeed in its proxy contest.

When a company is faced with this issue in a proxy contest, what can it do? The blog says, unfortunately, not much. As the blog explains, SEC review and litigation offer limited relief.

SEC Review. In the past, the SEC staff in the Division of Corporation Finance, through the comment letter process, strove to enhance compliance with these proxy rules. Whenever a party overstepped boundaries, the other party would send a private and confidential letter to the SEC, noting the violations. To the extent its staff agreed, the SEC would often react promptly to those letters by issuing comments to the offending party. …

In recent years, practitioners have observed a decline in the number and breadth of SEC comments in proxy contests. … The SEC’s packed agenda and limited resources have likely shifted attention towards other pressing matters.

Moreover, the SEC’s authority under the proxy rules has always been limited. The Division of Corporation Finance can only provide comments. If proxy rule violators do not comply with those comments, their staff can only refer a matter to the SEC’s Division of Enforcement. However, we are not aware of any enforcement action prior to a shareholder meeting in recent years.

Litigation. Companies waiting for SEC action can instead bring suit against proxy rule violators in federal court. However, litigation poses significant risks for a company.

… [T]here is typically no insurance available for companies to pursue litigation as plaintiffs. Moreover, proxy advisory firms and investors frequently criticise companies for initiating litigation against shareholders. This is certainly an important consideration in a proxy contest where a company needs to weigh any potential win in court against a loss at the ballot box.

More substantively, there is also the reality of condensed proxy fight timelines and the burden of proof [and …] preliminary injunction is an extraordinary remedy that generally will be granted only in limited circumstances. …

A further complicating factor is that many federal judges are not familiar with the intricacies of proxy contests because such cases are relatively rare. As a result, the case law originating from the federal courts has been uneven and inconsistent.

The post suggests the proxy rules be tweaked to give the SEC more authority to sanction violations, require proxy rule violators to publicly withdraw false statements, enjoin proxy contests and impose severe sanctions on repeat violators. But, for now, this is is still something companies are struggling with and likely will continue to.

– Meredith Ervine