DealLawyers.com Blog

Here’s the latest set of league tables from MergerMarket listing the law firms that most often represent companies in deals, broken out on a global and regional basis…

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Here’s news from Steve Haas of Hunton & Williams: In Hill International v. Opportunity Partners, No. 305 (Del. July 2, 2015), the Delaware Supreme Court affirmed a lower court ruling that refused to block a dissident stockholder’s director nominations from being considered at an annual meeting. Specifically, the court held that the corporation’s advance notice bylaw did not bar the nominations. The decision is based on the court’s interpretation of the bylaw. For that reason, many corporations should review their advance notice bylaws to determine whether changes might be advisable. Hill is also a reminder that advance notice bylaws tend to be construed rather strictly under Delaware law.

Background

In Hill, the corporation’s advance notice bylaw provided as follows:

To be timely, a stockholder’s notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the meeting; provided however, that in the event that less than seventy (70) days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder, to be timely, must be received no later than the close of business on the tenth (10th) day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs (emphasis added).

The corporation’s 2014 proxy statement stated that the 2015 annual meeting would be held “on or about June 10, 2015.” Ultimately, the 2015 annual meeting was scheduled for June 9, 2015. The corporation did not announce that date, however, however, until it filed its proxy statement with the SEC on April 30, 2015—less than 70 days before the annual meeting date. On May 7, 2015 – less than ten days after the proxy statement was filed – an activist investor (an affiliate of Bulldog Investors) gave notice of its intent to (i) nominate two directors and (ii) submit two other proposals recommending that the board engage an investment banker and rescind the corporation’s stockholder rights plan.

Arguments & Lower Court’s Order

The corporation argued that the nominations and proposals were not timely made under the advance notice bylaw because they were not received at least 60 days prior to the meeting date. The stockholder argued that the 2014 proxy statement did not specifically announce the date of the annual meeting and, therefore, the nominations and proposals fell within the proviso in the bylaw. Vice Chancellor J. Travis Laster ruled in favor of the stockholder and entered an order (i) enjoining the corporation from conducting any business at its annual meeting other than to adjourn it for a minimum of 21 days and (ii) allowing the stockholder to present its nominations and proposals when the meeting was reconvened. The Vice Chancellor observed that the 70 days’ notice in the bylaw had to be different than the corporation’s formal notice of the meeting, which cannot be given more than 60 days in advance pursuant to Section 222 of the DGCL.

Supreme Court’s Decision

The Delaware Supreme Court affirmed the Court of Chancery’s decision, finding that the advance notice bylaw was “clear and unambiguous.” The court held that the disclosure in the proxy statement that the meeting would be held “on or about June 10, 2015” did not constitute a “prior public disclosure of the date of the meeting” as set forth in the bylaw. The court reasoned that, under the plain text of the bylaw, the corporation had to announce the “actual” date – not the “anticipated date” – of the annual meeting in order for the 60-90 day window to apply.

Take-Aways

Corporations should periodically review their advance notice bylaws to make sure they remain “state-of-the-art.” From time to time, Delaware courts have ruled on technical issues that sometimes warrant changes. See, e.g., Levitt Corp. v. Office Depot, C.A. No. 3622-VCN (Del. Ch. Apr. 14, 2008) (holding that a stockholder could submit a nomination because the election of directors was an item specified in the notice of the meeting). Advance notice bylaws serve important purposes and will generally be upheld. But, as evidenced in Hill, Delaware courts often construe ambiguities and technical arguments in favor of stockholders.

The construct of the advance notice bylaw in Hill raised issues because it imposed a deadline based on date of the meeting at issue – which would not be known to a stockholder absent a formal disclosure by the corporation. A corporation with this type of bylaw thus needs to make a definitive announcement of the meeting date at least 70 days beforehand. Unless the corporation knows a proxy contest is imminent, it is easy to see how this technical point could be overlooked.

A corporation with a bylaw similar to the one in Hill might amend it to impose the deadline based on the announcement of an “approximate” date, perhaps with an exception if the actual meeting date differs significantly. Hill will not be an issue for most companies, however, because it is more common for advance notice bylaws to impose deadlines based on the anniversary of the prior year’s annual meeting (or, in some cases, the anniversary of the mailing of the prior year’s proxy statement). Under that construct, stockholders have clear notice of the deadline and do not face the uncertainty associated with the construct in Hill. Thus, this approach is probably the more desirable “fix” for the Hill construct. Still, even these more common advance notice bylaws typically have an exception where the meeting date is more than 30 or 60 days from such anniversary. In that case, the corporation should try, if possible, to give sufficient notice of the meeting date so as not to reopen the advance notice window.

The Delaware Governor has signed the latest Delaware amendments into law, taking effect on August 1st. We’re posting memos in our “Exclusive Forum Bylaws” Practice Area (also see this blog about whether the new law impacts federal class actions). And here’s the intro from this Cooley blog:

On June 24, 2015, the Governor of Delaware signed into law amendments to the Delaware General Corporation Law proposed by the Delaware Bar’s Corporation Law Council and overwhelmingly passed by the Legislature regarding fee-shifting and forum selection provisions in Delaware governing documents. (See this post and this post.) More specifically, the amendments invalidate, in Delaware charters and bylaws, fee-shifting provisions in connection with internal corporate claims. “Internal corporate claims” are claims, including derivative claims, that are based on a violation of a duty by a current or former director or officer or stockholder or as to which the corporation law confers jurisdiction on the Court of Chancery. These claims include claims arising under the DGCL and claims of breach of fiduciary duty by current or former directors or officers or controlling stockholders of the corporation, or persons who aid and abet those breaches. However, as discussed in this post, federal securities class actions are not included. In addition, the new provision is not intended to prevent these types of provisions in a stockholders agreement or other writing signed by the stockholder against whom the provision is to be enforced.

The amendments also expressly authorize the adoption of exclusive forum provisions for internal corporate claims, as long as the exclusive forum is in Delaware. Although the amendment does not address the validity of a provision that selects, as an additional forum, a forum other than Delaware, the synopsis indicates that it “invalidates such a provision selecting the courts in a different State, or an arbitral forum, if it would preclude litigating such claims in the Delaware courts.” A different result is possible where there is a provision in a stockholders’ agreement or other writing signed by the stockholder against whom the provision is to be enforced. In addition, an exclusive forum may not be “enforceable if the Delaware courts lack jurisdiction over indispensable parties or core elements of the subject matter of the litigation,” and the amendment in not intended to preclude evaluation of whether the terms or manner of adoption of the exclusive forum provisions “comport with any relevant fiduciary obligation or operate reasonably in the circumstances presented.” Deputy Secretary of State Richard J. Geisenberger said 99.6% of companies that have a forum-selection bylaw choose Delaware as the preferred venue. And, no surprise, Delaware wants cases involving Delaware corporations to be tried in Delaware.

As reported by this WSJ article, SEC Chair White delivered this speech yesterday at the Society’s National Conference. In her speech – which focused on proxy-related matters – Chair White advised that she “asked the staff to bring appropriate rulemaking recommendations before the Commission on universal proxy ballots.” A universal proxy ballot provides security holders a means to vote for management & proponent nominees on a single ballot in an election contest. This allows a security holder to mix & match votes between nominees of the company & the proponent – without attending & voting in person at the meeting. Chair White also encouraged companies & proponents to voluntarily use “some form” of universal proxy ballot while the SEC Staff prepares its rulemaking recommendation. Here’s an excerpt from her speech:

All of the participants [of a roundtable held on ways to improve the proxy voting process] agreed that if the Commission were to revise the proxy rules to implement a universal proxy ballot, the “devil would be in the details.” Questions include when a universal ballot could be used, whether it would be optional or mandatory and under what circumstances, whether any eligibility requirements should be imposed on shareholders to use universal ballots, what the ballot would look like, and whether both sides must use identical universal ballots.

Chair White’s speech also covered the topics of preliminary voting results & “unelected” directors and called for “more thoughtful treatment of shareholder proposals” by companies & proponents.

According to this analysis by FactSet, proxy fight statistics so far for 2015 reveals an ongoing increase in activist influence. While the company win rate for proxy contests is up, so are settlements and non-proxy fight campaigns resulting in board seats, including:

– Company win rate for board seat proxy contests that went to a shareholder vote is approximately 62% – a 57% increase over 2014’s win rate of only 39%.
– Of the proxy contests that went to a shareholder vote where vote results have been disclosed, activist candidates have received support from approximately 33% of the votes outstanding – compared to an average of 42% in 2014.
– The number of proxy fight settlements or withdrawals after the company has made material concessions is the highest in any year since FactSet began tracking proxy fights in 2001.
– The number of non-proxy fight activist campaigns that have resulted in a board seat is the most in any comparable period – 46 as June 1, compared to 34 and 11 such campaigns resulting in board seats in the same periods in 2014 and 2013, respectively.

Here’s survey results from Thomson Reuters about fee-shifting bylaws adopted by Delaware companies since the ATP Tour decision. Two weeks ago, the Delaware House joined the Senate in passing changes to the DGCL that invalidate fee-shifting provisions – and it’s expected that the Delaware Governor will soon sign that into law. But according to the survey results, this amendment may not have as wide a peacemaking effect as anticipated…

Here’s an excerpt of this blog by “The Activist Investor”:

Especially around this time of the year, portfolio managers sometimes wonder about the impact of all this proxy stuff. Reading proxy materials, meeting with companies and investors, paying for and reviewing ISS and Glass Lewis reports, researching and tracking votes – does it make a difference?

One investor set out to understand this question. The Florida State Board of Administration (SBA) manages $185 billion of pension funds and other state investments. It has long advocated for good corp gov as a leading member of the Council of Institutional Investors. It helped found the Shareholder Rights Project, and supports the Boardroom Accountability Project. Among pension funds, it also has a sophisticated strategy and organization. It has dedicated research, direct equity investment, and alternative investment units. It also allocates funds to activist investors such as Starboard Value. While it supports and votes for activist investors, it does not initiate or lead proxy contests.

Like other large pension funds that must vote every single proxy, its Investment Programs and Governance (IPG) group researches, tracks, and votes on thousands of proxy statements each year. With a typically small staff, IPG retains proxy advisor ISS for proxy vote research support and administration. IPG sought to understand the impact that its work has on the SBA portfolio. The result, Valuing the Vote, shows how proxy research and voting can improve investment returns. We worked with SBA on designing the research, compiling the needed data, and executing the analyses.

We helped SBA put together a sample of 107 proxy contests for SBA portfolio companies from 2006-2014. FactSet provided data on proxy outcomes and financial performance, while ISS provided ISS voting records. We limited the sample to companies with a market cap of over $100 million at the time the proxy contest began, since IPG researches larger cap situations much more often than small cap ones. Overall, the analysis shows that for the sample, the aggregate value of the SBA investment increased $572 million in the five years following a portfolio company proxy contest. SBA had aggregate investment of $1.9 billion in these companies at the announcement of a proxy contest, so the portfolio return was approximately 25%. Returns depended critically on whether SBA supports investors or management, and whether investors or management prevail in the proxy contest. In proxy contests, SBA supported investors about two-thirds of the time. And, SBA supported the prevailing side (investor or management) about two-thirds of the time. Returns improved when SBA supported investors and investors prevailed, or when SBA supported management and management prevailed.

The report also features a cool data visualization that helps illustrate the key findings.

Here’s the abstract from this new study entitled “Are Companies Impermissibly Bundling Proposals for Shareholder Votes?”:

The integrity of shareholder voting is critical to the legitimacy of corporate law. To help protect investors’ rights, since 1992, SEC rules clearly prohibit corporate management from distorting shareholders’ choices by the artifice of joining in a single resolution multiple items. SEC rules require corporate management to make individual management proposals on “separate” items.

In this paper, we provide the first comprehensive evaluation of the SEC bundling rules. We begin with a careful dissection of the rules themselves as well as the courts’ interpretation of them. We provide an analysis of the contrasting, less vigorous, interpretation of the rule by the SEC itself. We find that while the courts have carefully developed several useful approaches to the rules scope and proper application, the SEC’s efforts have been in stark contrast with the rules’ mission. In fact, we find that the most recent SEC interpretive guidance has undercut the effectiveness of the existing rules and created unnecessary ambiguity about their proper application.

Here’s an excerpt from this blog by Cooley’s Cydney Posner:

The WSJ reports that the SEC is investigating whether some hedge fund activists formed 13D “groups” but failed to make appropriate disclosure of their alliances. Under Rule 13d-5, when two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities, all of those persons together form a “group,” and are deemed to beneficially own all of securities owned by persons in the group. If the group together owns 5% or more of a company’s shares, all of the persons in the group may be required to make filings with the SEC. According to the WSJ report, SEC Enforcement has opened multiple investigations, sending requests for information to a number of hedge funds. The issue is whether, in targeting companies, they coordinated their efforts, or “acted in concert,” to target companies in a way that led to the formation of “groups,” but failed to make appropriate filings.