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E-MailCamila Panama is a Partner, and Alexander Dussault is an Associate at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Ms. Panama, Mr. Dussault, William Kucera, Martha McGarry, Andrew Noreuil, and Jodi Simala. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch; and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System (discussed on the Forum here) by Leo E. Strine, Jr.
2023 marks the first full year in which the universal proxy rules have been in effect. As most know by now, a key change brought about by the rules is the required use of the universal proxy card in a contested director election—which enables stockholders to vote for their preferred combination of directors, including by mixing and matching among the company and dissident nominees, regardless of which side solicited their vote. Many practitioners predicted that the implementation of the universal proxy rules would have a substantial impact, resulting in increased US activist activity, decreased spending by dissidents on proxy contests, and larger slates of director nominees, among other changes. However, year-end numbers show that such predictions generally missed the mark—by most metrics, there were few notable year-over-year changes. Despite this, there is one key development that emerged in 2023 that merits attention: companies rejected dissident director nomination notices for non-compliance with advance notice bylaws at record rates. This has caused an increasing number of dissidents to challenge such rejections in court. Below, we recap the 2023 numbers and provide key takeaways in light of court guidance on advance notice bylaw provisions and nomination notice rejections.
2023 Recap:[1] Predictions on Impact of Universal Proxy Rules Largely Fell Flat
| Significant Increase in Activist Activity? No. | 2023 saw 60 US activist campaigns where the dissident sought board representation, compared to 61 campaigns in 2022. While these levels are higher compared to 2020 and 2021—which saw 15 and 23, respectively—the prediction that 2023 would be a much more active year than 2022 proved to be incorrect. |
| More Proxy Contests Going to a Stockholder Vote? No. | Out of the 60 US activist campaigns where a dissident sought board representation in 2023, 14 campaigns (~23%) went to a proxy contest and all the way to a stockholder vote, which is the same rate as in 2022. |
| Larger Slates of Dissident Director Nominees? No. | The proportion of US proxy contests seeking minority board representation, including single-seat nominations (out of all US proxy contests seeking board representation), was 80% in both 2023 and 2022. Some had predicted that the universal proxy rules would encourage dissidents to put up larger slates of director nominees; however, that was not the case. |
| Dissidents Spending Less on Campaigns? No. | Contrary to many predictions, the universal proxy rules generally have not reduced the amount of money activists spend on their campaigns. Out of 26 US proxy contests in 2023 where costs were disclosed, activists reported an average estimated cost of $2.5 million and median estimated cost of $1 million, as compared to an estimated average cost of $1.16 million and median estimated cost of $1 million among the 24 US proxy contests in 2022 where costs were disclosed. |
| Significant Impact on Settlements? No, but There Were Marginal Impacts. | There was an uptick in the number of US activist campaigns that resulted in public settlements (42% in 2023 compared to 34% in 2022) and in the number of US proxy contests that settled prior to the dissident filing their preliminary proxy statement (68% in 2023 compared to 57% in 2022). This could indicate a trend of more campaigns resulting in a settlement, and settling earlier on, prior to dissidents spending on preliminary proxy filings—we will see if these rates increase further in 2024. |
| Dissidents Winning More Board Seats? No. | Of the US campaigns that resulted in a public settlement, dissidents won board seats at about the same rate—84% of settlements in 2023 resulted in the dissident gaining board representation, as compared to 86% in 2022. |
Director Nomination Notice Rejections: On the Rise and Being Challenged
In 2023, 10% of dissident director nomination notices were rejected by US companies. This is a five-fold increase as compared to 2022’s 2% rejection rate. This change is rooted in the fact that an overwhelming number of companies amended their bylaws in the wake of the universal proxy rules—over the course of 2022 and 2023, over 1,800 companies filed bylaw amendments, and a majority of those amendments included revisions or additions to advance notice bylaw provisions.[2] Examples of such amendments include expanding the scope of disclosing parties, granting the company an express right to reject a nomination notice that does not include all information required by the universal proxy rules, company bylaws and any specified questionnaires, and requiring the nominating stockholder to make detailed representations, including with respect to the 67% solicitation threshold required by the universal proxy rules.
Companies have increasingly focused on advance notice bylaws in recent years—in Deal Point Data’s study tracking takeover defense tools[3] implemented by S&P 1500 and Russell 3000 companies, changes to add or modify advance notice disclosure or eligibility requirements represented approximately 46% of all defense changes implemented by such companies in 2023. Whereas, in this same study in 2018, such changes to advance notice bylaws represented only 10% of the defense tools implemented. Now that more companies have revised their advance notice bylaws, they are also more focused on scrutinizing nomination notices for compliance with those provisions and are less open to waiving non-compliance.
This increased rejection rate, however, has prompted dissidents to fight back in court. In 2023, there were at least five instances[4] where dissidents asserted in court that a company’s advance notice bylaws were overreaching or rejection of the dissident’s director nomination notice was invalid. Two of these instances, Paragon Technologies, Inc.’s (“Paragon”) challenge of its nomination notice rejection by the Ocean Power Technologies, Inc. (“Ocean Power”) board and Ted Kellner and Todd Deutsch’s (together, “Kellner & Deutsch”) challenge of their nomination notice rejection by the AIM ImmunoTech Inc. (“AIM”) board, landed in the Delaware Court of Chancery (the “Court”). The Court’s remarks in these cases can offer valuable insights for companies with respect to making valid rejections of a stockholder nomination notice and considering amendments to bylaws in the context of the universal proxy rules, including:
|
Key Takeaways: Apply Bylaw Requirements Equitably and Avoid Subjectivity |
The Court stated in AIM that bylaws that “are applied inequitably” will be struck down and that certain of AIM’s bylaws were “ripe for subjective interpretation by the Board” and therefore overreaching.
In Ocean Power, the Court stated that “if a board could call a nomination notice deficient simply because it disagreed with opinions voiced by the nominating stockholder, rejection would be a foregone conclusion” and noted that, irrespective of any good intentions in ensuring that notices are accurate, dismissal of a notice based on perceived inaccuracy of opinion statements may be preclusive. |
| Limitations on Stockholder Voting Power Must Be Reasonable and Proportional to a Legitimate Corporate Purpose | The Court in AIM placed limits on the company’s advance notice bylaw disclosure requirements, stating that broad sweeping information hooks can be disproportional to the company’s objective of obtaining transparency from a nominating stockholder when they potentially trigger disclosure requirements that become “overbroad” and “unworkable.”
The Court in Ocean Power suggested that information hooks can also be too narrow and applied in a preclusive fashion. There, the company’s advance notice bylaws required nominating stockholders to disclose any barriers nominees would have to obtaining security clearances from the U.S. government. By contrast, however, incumbent directors never made such a disclosure, and further, the company had no government-related contracts or apparent business reason for requesting such disclosure. The Court questioned the intention of Ocean Power’s board in amending the bylaws to include this disclosure as the amendment did not occur until after Paragon launched its campaign at the company and the board had reason to believe that the nominees would indeed have barriers to disclose. |
| Omission of Required Disclosure is Not Necessarily Grounds for Valid Rejection | The Court stated in AIM that it will examine whether a rejection of a nomination notice is fair by assessing whether any of the missing information is something directors and stockholders would justifiably want to know. The Court indicated that there could be instances where a nomination notice omits required disclosure and is therefore not compliant with the bylaws, but such omission might not be a valid basis for rejection if directors and stockholders would not justifiably want to know such omitted information. |
| Depending on Timing, Companies Might Have to Provide a Complete List of Deficiencies and an Opportunity to Remedy | The Court noted in AIM that the dissident’s night-of nomination notice submission left no chance for the dissident to remedy any deficiencies pertaining to omitted information that a sensible director or stockholder would reasonably want to know. This suggests that if a dissident submits a non-compliant nomination notice with ample time prior to the nomination deadline, the Court might expect the company to identify such deficiencies to the dissident and provide them with the opportunity to re-submit rather than rejecting the nomination notice outright.
This view is further supported by the Court’s remarks in Ocean Power, wherein the dissident submitted a non-compliant nomination notice three weeks prior to the nomination deadline. There, the company continuously declined to provide the dissident with a complete list of deficiencies, which the Court indicated was akin to moving the goalposts and could be the board’s way of “sifting through the notice to dig up deficiencies,” including ones the Court considered to be “nitpicky.” |
While it turned out that the universal proxy rules did not have the significant impact that many predicted, 2023 made clear that more companies are leaning on their advance notice bylaws as a defense tool, and are more often rejecting director nomination notices for non-compliance. We expect this to continue throughout 2024, and also expect dissidents to continue challenging the rejections and advance notice bylaw provisions in court. It will be critical for boards to stay current on court rulings regarding what types of disclosure requirements and rejections are considered “going too far” in connection with shareholder nomination notices, and whether any further amendments to bylaws would be prudent for companies to make.
Endnotes
1Data provided by Deal Point Data for US proxy contests where the dissident sought board representation and announced at SEC reporting companies based on annual meeting date year, excluding proxy contests at regulated funds (e.g., close-end funds), business development companies and foreign private issuers.(go back)
2Deal Point Data.(go back)
3For illustration, examples of other types of takeover defense tools tracked in the study include board classification, supermajority vote requirements and rights to call special meetings.(go back)
4(1) Kellner v. AIM ImmunoTech Inc., No. 2023 0879-LWW, 2023 WL 9002424 (Del. Ch. Dec. 28. 2023); (2) Paragon Techs., Inc. v. Cryan, No. 2023-1013-LWW, 2023 WL 8269200 (Del. Ch. Nov. 30, 2023); (3) BT Brands, Inc. v. Noble Roman’s Inc., No. 123CV01352JRSMJD, 2023 WL 5095605 (S.D. Ind. Aug. 9, 2023); (4) Driver Opportunity Partners I, LP v. Ameriserv Fin., Inc., No. 3:22-CV-00237-SLH, 2023 WL 4711158 (W.D. Pa. July 24, 2023); (5) Lifeway Foods v. Edward Smolyansky, 2023-L-003702.(go back)
