Universal Proxy Rules and Shareholder Activism: How a Company's Response to an Activist Investor Has Evolved in the Wake of the Universal Proxy Rules

Description

The introduction and adoption of the universal proxy rules initiated a significant shift in the shareholder activism landscape. These rules require companies in a contested election of directors to provide shareholders with a universal proxy card which enables shareholders to vote for their preferred combination of director nominees, including by mixing and matching among the company and the activist investor's nominees, regardless of which side is soliciting their vote.

Shareholder activism has rebounded significantly from its slowdown during the COVID-19 pandemic. The adoption of universal proxy rules and the additional leverage they provide activist investors may account for some of the increased activity as may the arrival of numerous first-time activists. As activism strategies are expected to continue to be central to many investors' efforts to unlock shareholder value, it is imperative that companies adopt strategies to effectively prepare for activist investors, including assessing and mitigating structural vulnerabilities such as those found in their charter and bylaw provisions, particularly the advance notice provisions.

From the company's perspective, the advance notice provisions play a valuable role in eliciting from the activist important and relevant information about the activist and its proposed nominees so that the company's board can make informed voting recommendations to shareholders and so that shareholders can make informed voting decisions. In contrast, an activist investor is more likely to view advance notice provisions, particularly those adopted after an activist investor arrived on the scene, as purely intended to block an activist's director nominations and, thereby, protect and entrench incumbent directors.

Since the adoption of the universal proxy rules, the number of rejections of advance notices of director nominations has significantly increased, which is likely due to the large number of companies that amended their bylaws to revise the advance notice bylaw provisions to not only require compliance with the universal proxy rules, but also to require additional disclosures relating to the activist investor and its proposed nominees. This increased rejection rate has prompted several lawsuits asserting that a company's advance notice provisions were facially invalid, or the rejection of an activist's advance notice of director nominations was not proper. These cases, some of which are still pending or are on appeal, provide valuable insights for companies when considering whether to reject an advance notice of nominations or amend bylaws to enhance advance notice provisions.

Listen as our authoritative panel reviews the latest developments relating to advance notice bylaws and shareholder activism preparedness and identifies key considerations for public companies seeking to enhance their preparedness in anticipation of the rising tide of shareholder activism in the wake of the required use of a universal proxy.