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Company Bylaw Updates Respond (Weakly) to Universal Proxy

What do companies think of the new universal proxy card (UPC)? Based on one BoD attorney's comments, it's dire:

The universal proxy is the most dramatic rule change for proxy contests in a generation. It is also a disaster for Corporate America. Activists popped champagne when the SEC adopted the new rules. There will be a personalization of proxy contests like never seen before.

What can they do about this? Not much, so far. It looks like bylaw amendments, but these don't pose any threat to a careful activist.

  • At least one company appeared to move an ASM so it would not need to use UPC. Since the effective date has passed, that's it for that.
  • It's too early for litigation; we saw the first UPC only a couple of weeks ago. Lawsuits have already started to fly in that situation, so the parties might add interpretation of the UPC rule to their grievances.
  • Business lobbyists have not (yet) challenged the rule, as with proxy access in 2011. Then, the US Chamber of Commerce and Business Roundtable questioned the SEC economic analysis. The SEC strengthened that analysis considerably in the UPC rule. It could happen, but hasn't yet, and the SEC issued the rule almost a year ago.

Thus, companies amend their bylaws. So far about twenty companies have done so.

These amendments involve two changes, neither of which seem to present any challenge to a diligent activist investor. One imposes a new notification obligation on an activist, while the other means more litigation  nly for an activist that fails to comply with the SEC rule.

SEC enforcement and state court

For the latter, companies amend bylaws to include the specifics of the UPC rule in the advance notice requirement for director amendments. Some copy the specific terms, such as for 67% solicitation and 60-day notice. Others merely refer to the regulation, and make complying with it a condition of nominating director candidates.

This change allows a company to litigate UPC compliance in Delaware (or wherever they are domiciled), in addition to filing a complaint with the SEC. So, an activist that skirts one or another term of the UPC rule can look forward to Delaware Chancery Court, in addition to an SEC enforcement action.

Evidence of 67% solicitation

For the former, these companies now impose a new notification requirement. An activist will need to show that it actually solicited shareholders holding 67% of the shares.

Most bylaws that do this now require the activist to provide "reasonable evidence" that it has so solicited. In addition, they must do so at least five days before the ASM. Here's how the United Airlines Holdings bylaw puts it:

Upon request by the Corporation, if any Proposing Person provides notice pursuant to Rule 14a-19(b) ... such Stockholder shall deliver to the Secretary, no later than five business days prior to the applicable meeting date, reasonable evidence that the requirements of Rule 14a-19(a)(3) ... have been satisfied.

(Art II., Sec. 2.10(c)(3) - United Airlines Amended and Restated Bylaws, 9/22/22)

Some bylaws require this notice seven business days before the ASM. Some condition it on a company request, while others just require it.

Note the SEC rule requires an activist to solicit 67%, and to notify the company in the 60-day notice that it intends to do that. The SEC rule does not require an activist prove to anyone that it solicited those proxies.

Now, the company requires that evidence. It also wants it least five (or seven) days before the ASM. Of course, that evidence could amount to list of the shareholders to which the activist sent a simple postcard.

We hope a company would say in advance what evidence will satisfy this requirement. An activist could ask the company what they expect, and proceed accordingly.

At companies with this notification requirement, activists will need to work with their proxy solicitor to compile proper records of the solicitation. This seems straightforward and easy, especially if the company states what it wants to see.

We'll leave it to a securities attorney (which we are not) to interpret "reasonable evidence", both before the SEC and in Delaware Chancery Court.


Still, it's early! Companies that agree with the dire prediction from the BoD attorney have ample opportunity to think of other bylaw amendments, and indeed other ways, to try to thwart the intent of UPC.

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You can find other useful resources at the TAI website, including our research on "Effective Activism", our white paper with the basics on activist investing, and our guides on exempt solicitationconsent solicitation, and special shareholder meetings.
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Michael R. Levin