DealLawyers.com Blog

Here’s the intro from a recent Milbank General Counsel Blog:

Public companies would be well advised, on a lovely, clear day (in the Delaware sense), to update their advance notice bylaws. In the normal course these bylaws receive little attention, but in the event of an activist campaign they are critical to the board’s ability to discharge its fiduciary duties.

Since recent cases have addressed the enforceability of advance notice bylaws, Milbank prepared a model that the blog says is focused on gathering information on the activist’s plans and proposals, the degree of alignment between the activist and the company’s other stockholders and the qualifications and independence of the activist’s nominees, all of which are intended to ensure that the company’s other stockholders receive accurate and timely disclosure and the board has the necessary information to discharge its fiduciary duties in connection with settlement discussions and its recommendation for or against the activist’s nominee. The blog highlights a number of “key features” of the model, some of which are excerpted below:

Clarity. The Alignment ANB is drafted in a clear and direct manner, without setting up potential foot faults and boobytraps for activists seeking to nominate directors. The information sought, while comprehensive, is only what is necessary to provide boards and stockholders with a proper foundation for their decision-making.  The bylaw heeds the Delaware Supreme Court warning in Kellner v. AIM Immunotech, Inc. that “[a]n unintelligible bylaw is invalid under ‘any circumstances.’”

Voting Borrowed Shares. While lending shares of the corporation to cover short sales may provide income for large fund complexes, it is unlikely that these fund complexes (or other long-term holders) wish to promote empty voting in a contested corporate election.  Permitting the voting of borrowed shares by an activist – amplifying the activist’s voting power when there is no meaningful economic stake in the shares being voted – misaligns voting power with the economic consequences of the vote and does not promote good long-term decision making. The Alignment ANB accordingly requires the nominating stockholder and allied participants in the solicitation to waive their right to vote shares in excess of their collective net long position – in other words, to waive the right to vote shares that were borrowed or otherwise subject to an offsetting sale or delivery obligation.

Independence of Nominees.  In some cases, activists will nominate their own employees as directors, in a clear bid to drive their platform (which platform, as noted above, should be made transparent to voting stockholders). In other situations, activists will nominate “independent” directors, with the apparent intention of bringing independent expertise to the problems faced by the corporation.  At times, however, the term “independent” is applied rather liberally, making it less clear whether the nominee was put forth in order to drive the activist’s platform, or to serve as an independent technocrat. The Alignment ANB seeks to make the connections between nominees and the activist clearer, requiring disclosure of whether the nominee and activist have had discussions to align on a shared agenda for the corporation (and if so, the result of such discussions), on financial, social and family ties, and finally, on whether the nominee is expected to share confidential board information with the activist going forward. The degree of independence of any given nominee will matter acutely to voting stockholders, particularly if they are not fully on board with the activist’s platform or if their financial interests do not clearly align with the activist’s.

Take a look at our “Advance Notice Bylaws” Practice Area for more!

– Meredith Ervine