The State of Company Bylaw Amendments for Universal Proxy

As activists consider opportunities to win BoD seats with universal proxy card (UPC), companies create even more obstacles to activists. In September, we explained the range of company response to UPC, with a brief look at how they amend bylaws to reflect the new UPC rule.

Now, a few months later, we know more about these bylaw amendments. Here we review in detail the specific ones that respond to UPC. Elsewhere we critique their cousins, onerous advance notice terms.

We've seen a lot of them. Deal Point Data reports 113 companies amended bylaws to reflect UPC in November 2022, with approximately 150 more in December 2022. Before that, perhaps 100 or so made these amendments, based on our count of SEC filings.

We've also seen four types of these bylaw amendments, with another rumored but not (yet) incorporated in bylaws:

• We explained the first two, conforming bylaws with the SEC rule and providing evidence of soliciting 67% of voting power, in our earlier post
• The third creates a possibly ambiguous enforcement mechanism
• Another pertains to proxy card color(!).

The rumored one also pertains to enforcement, by compelling activists to pay for a failed UPC effort.

We commented earlier that the first two amendments don't represent a threat to a careful, prepared activist. This entire set of bylaw terms don't concern us any more than the first two did. Still, an astute activist should know about them.

Conform Bylaws to Rule

These amendments are basic and straightforward. Earlier we noted:

...[C]ompanies 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 ... allows a company to litigate UPC compliance in Delaware (or wherever they are domiciled), in addition to filing a complaint with the SEC.

Below, we explain one element of this that might not strictly conform with the SEC rule, though.

Evidence of 67% Solicitation

This one extends on the new requirement to solicit 67% of the voting power at the company. We wrote:

An activist will need to show that it actually solicited shareholders holding 67% of the shares... Most bylaws ... 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. 

See our earlier post for further detail.

Penalties for Failing to Comply

Now it gets a little more interesting. This amendment allows a company to disqualify an activist from a proxy contest if the activist fails to comply with the SEC rule or with the similar terms incorporated into the bylaws in the conforming amendments (above). While this penalty applies to any failure to so comply, the specific bylaw terms typically focus on two aspects: failure to solicit the required 67% of voting power, or to file a timely proxy statement.

The bylaw amendment at United Airlines Holdings illustrates this. If an activist fails to either solicit 67% or file a timely proxy statement:

the nomination of such Proposed Nominee shall be disregarded and no vote on the election of such Proposed Nominee shall occur (notwithstanding that proxies in respect of such vote may have been received by the Corporation)

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

The SEC rule is vague, and may not provide for that specific penalty. It may require only the company and the activist revert to the earlier system of separate proxy cards listing only their respective nominees, a significant difference.

You see, the SEC rule is mostly silent as to penalties for failing to comply. The actual rule does not provide for any specific penalties. The staff discussion indicates other SEC proxy solicitation rules provide for any needed penalties. Yet, that discussion does not set forth clearly those penalties.

Discussion of the 67% solicitation requirement:

We have not adopted a special mechanism for ensuring compliance with the minimum solicitation requirement because existing proxy rules are adequate... If a dissident fails to meet the 67% minimum solicitation threshold, that failure would constitute a violation of Rule 14a-19 and the dissident would face the same liability as if it had violated any other proxy rules. (Sec II.D.3, p.41)

Discussion of the proxy statement filing deadline:

If...a dissident failed to file its definitive proxy statement [on time]...the registrant could elect to disseminate a new, non-universal proxy card including only the names of the registrant’s nominees. Where a dissident fails to comply with Rule 14a-19, the new rules will not permit the dissident to continue with its solicitation...

[F]or dissidents who fail to file a definitive proxy statement [on time], we believe that existing proxy rules serve as an adequate deterrent, in a similar manner to that explained above in the context of a potential violation of the new minimum solicitation requirement. If a dissident fails to file its definitive proxy statement [on time], that failure would constitute a violation of Rule 14a-19 and the dissident would face the same liability as if it had violated any other proxy rules. (Sec II.E.3, p.46-7)

This discussion sets forth different consequences: same liability as for other proxy rule violations, or not allow the activist to continue. It's also not clear what that "same liability" would involve. It might depend on the nature of the violation. Failure to solicit 67% might mean reverting to different proxy cards, rather than complete exclusion of the activist. Under the filing deadline discussion, staff refers to "new rules", but those rules are silent as to penalties.

There's a big difference between ending the contest and re-doing it. The former is fatal, while the latter means the activist and the company re-start their individual solicitations. This adds cost for each, but allows the proxy contest to proceed.

Proxy Card Colors

Seriously? Are we really doing this? Did large public companies actually pay expensive attorneys to draft a bylaw amendment that assures the company has the white proxy card, and discuss and vote on this at a BoD meeting? Don't we have better things to think about?

Proxy Cost Reimbursement

We've heard from a couple of attorneys about another potential bylaw term. If an activist fails to solicit the needed 67% (or otherwise violates these various rules), then the company would disqualify it. The company will find out about that failure later in the process, say if the activist fails to submit the required evidence five days before the ASM.

At that point the company would have solicited proxies pursuant to UPC. Presumably the company would re-do the solicitation, without the activist's candidates. At that point the company would seek the cost of re-doing the proxy solicitation from the activist.

We haven't seen this in any bylaw amendments so far. We also don't know how a company would enforce it. Could it demand a deposit from the activist? What would Delaware Chancery Court say about that?

Much remains to learn about all of these bylaw terms. No activist has challenged any of these, so no court has weighed in. A diligent activist that complies with the UPC rule should have no worries. Still, we are not attorneys, so consult your own securities attorney for interpretations and advice about the best way to comply.