Lessons From the CBS-NAI Dispute: The Applicability of Rule 14c-2 and the 20-day Waiting Period to Stockholder Actions by Written Consent

Victor Lewkow and Paul M. Tiger are partners and Gloria B. Ho is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary Gottlieb memorandum, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here) and The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here). 

Introduction

  • National Amusements, Inc. (“NAI”) owns approximately 80% of the voting shares of CBS Corporation and Viacom Inc., and in early 2018, NAI proposed that CBS and Viacom consider a merger. Each of the boards of CBS and Viacom formed a special committee of independent directors unaffiliated with NAI to consider and potentially negotiate such a merger. [1]
  • On Sunday, May 13, 2018, the CBS special committee met and took steps:
    • to call a special meeting of the full CBS board on May 17 to consider and vote on a dividend of a fraction of a Class A (voting) share to be paid to holders of both CBS’s Class A (voting) common stock and Class B (nonvoting) common stock for the express purpose of diluting—very substantially—NAI’s voting interest in CBS; and
    • to commence litigation against NAI in the Chancery Court of Delaware seeking approval of the proposed dilutive dividend and moving for a temporary restraining order to block NAI from taking certain steps as the controlling stockholder of CBS, including any actions prior to the special board meeting that would interfere with the proposed dilutive dividend.

  • On May 16, prior to the special board meeting (and prior to a scheduled court hearing on the directors’ motion for a TRO), NAI exercised its right as the holder of a majority of CBS’s voting shares to act by written consent to adopt amendments to the CBS bylaws (the “Bylaw Amendments”). [2] These Bylaw Amendments imposed a 90% supermajority voting requirement on any Board declaration of dividends or any board adoption of bylaw amendments, and also imposed certain procedural requirements for any such actions. Since three of the fourteen CBS directors were individuals with ties to NAI, the Bylaw Amendments, if valid and in effect, would effectively preclude the declaration and payment of the proposed dilutive dividend.
  • The CBS board met the next day as scheduled (and following the court’s decision not to grant the TRO) and purported to approve the dilutive stock dividend by a majority vote of less than 90% of the directors, which would dilute the voting power of NAI to about 20% (and also dilute the voting rights of other Class A stockholders), the payment of such dividend conditioned on Delaware court approval.
  • On September 9 (after several months of motion practice and discovery), CBS and NAI entered into a settlement agreement providing for the rescission of the dividend, a reconstitution of the CBS board and dismissal of the litigation.

Stockholder Action by Written Consent and Rule 14c-2

In the Delaware litigation, CBS challenged the Bylaw Amendments adopted by written consent by NAI on a number of grounds, including by contending that the Bylaw Amendments could not become effective until 20 calendar days after CBS prepared, filed and sent to stockholders an information statement pursuant to SEC Rule 14c-2 under the Securities Exchange Act of 1934, as amended (the “1934 Act”). The following week CBS filed a preliminary information statement with the SEC that stated that under Rule 14c-2 the Bylaw Amendments would not become effective until 20 calendar days after the information statement was sent to stockholders and, therefore, that the Board’s contingent declaration of the dilutive dividend had been duly approved prior to the effectiveness of the Bylaw Amendments.

NAI argued in a letter to the SEC staff [3] that Rule 14c-2 was inapplicable to the Bylaw Amendments and that, even if it were applicable, it would not delay the effectiveness of the Bylaw Amendments because Section 14(c) of the 1934 Act and Rule 14c-2 do not preempt Section 228 of the Delaware General Corporation Law (“DGCL”).

The SEC staff, in its initial comment letter to CBS regarding the preliminary proxy statement asked for the basis of the statement in the preliminary information statement that the Bylaw Amendments could not become effective under SEC rules until 20 calendar days after distribution of the information statement to stockholders. [4]

The staff also requested CBS’s analysis as to whether and how Section 14(c) and Rule 14c-2 preempt Delaware law with respect to the effectiveness of the Bylaw Amendments. Following receipt of CBS’s response, [5] the staff stated in a subsequent comment letter that they had no further comments but they concluded that “we are unable to agree with the legal conclusions” set forth in CBS’s response. [6]

While the staff did not explain its analysis, we believe it may have reflected agreement with one or more of the arguments NAI had made as summarized below.

14C only applies to corporate (and not unilateral stockholder) action. NAI’s principal argument was that, under the plain language of Section 14(c) [7] and Rule 14c-2, [8] the requirement to file an information statement on Schedule 14C and the obligation to then wait 20 calendar days for effectiveness of the action taken by consent are limited to “corporate action.” NAI asserted that action taken by stockholders with no involvement or encouragement by the issuer does not qualify as “corporate action” and pointed to an SEC Release that drew that distinction. [9]

In this case, CBS had absolutely no involvement in the adoption of the Bylaw Amendments—in fact, it had not been aware of such action or proposed action until NAI delivered the executed written consents to CBS’s corporate secretary. [10]

Prior no-action positions. NAI also noted that the SEC staff had previously taken the view that Section 14(c) and Rule 14c-2 are inapplicable to actions by written consent of stockholders in which the registrant is not involved. In a letter with respect to Burlington Northern, Inc. (publicly available February 3, 1983), the staff granted no-action relief that, upon consummation of Burlington Northern’s hostile tender offer for El Paso Co., Burlington Northern could act by written consent to elect directors of El Paso without any need to comply with Section 14(c). [11]

Policy considerations supported NAI’s view. NAI argued that application of Rule 14c-2 to actions taken by a stockholder without any involvement by the registrant would be inconsistent with the underlying principles of the proxy rules. For example, Rule 14a-2(b)(2) permits solicitations of stockholders without having to comply with specified proxy rules when solicitations are “made otherwise than on behalf of the registrant” provided that not more than ten persons are solicited. It would be odd if, in the absence of involvement by the registrant, a stockholder could solicit proxies from up to ten other stockholders collectively owning a majority of the outstanding shares without any disclosure document being sent to stockholders, yet that same stockholder could not solicit even one consent (or, if a majority stockholder, act unilaterally by consent), without the need for the registrant to prepare and mail an information statement and then start a 20-calendar day waiting period, even though the issuer was similarly not involved in the stockholder’s activities. [12]

State law considerations. Under DGCL 228, stockholders of a Delaware corporation may take action by written consent and such action is effective immediately upon delivery of the consents to the company. Long-standing Delaware jurisprudence emphasizes that the ability to act by written consent is a fundamental right under Delaware corporate law that can only be restricted by the certificate of incorporation. NAI also argued that, under CBS’s interpretation, Section 14(c) and Rule 14c-2 would effectively override this fundamental aspect of state law by making stockholder action legally ineffective until after the registrant had taken action to prepare, file, clear SEC comments on, and disseminate, an information statement and the 20-calendar day period had elapsed. If Congress or the SEC truly intended for Regulation 14C of the 1934 Act to supersede a fundamental state law right by preventing stockholders from taking immediate action by written consent, one or both of Congress and the SEC would have clearly stated its intent to preempt state law. No such indication is evident in either the legislative or regulatory history.

As noted above, [13] the SEC staff advised CBS that it was unable to agree with CBS’s legal analysis that under Rule 14c-2 the Bylaw Amendments would not become effective until an information statement was distributed and 20 calendar days then elapsed. This does not mean, of course, that the staff would reach the same conclusion in a situation where the issuer’s management or board played a role in the adoption of consents or the actions being effected by the consents.

Endnotes

1Cleary Gottlieb was litigation and corporate counsel for NAI in the matters discussed herein.(go back)

2CBS’s certificate of incorporation did not prohibit or limit stockholder actions by written consent.(go back)

3https://www.clearymawatch.com/wp-content/uploads/sites/106/2018/10/400394747_18- Letter-sent-to-SEC.pdf(go back)

4https://www.sec.gov/Archives/edgar/data/813828/000000000018017587/filename1.pdf(go back)

5https://www.sec.gov/Archives/edgar/data/813828/000089882218000041/filename1.htm(go back)

6https://www.sec.gov/Archives/edgar/data/813828/000000000018018332/filename1.pdf(go back)

7“Unless proxies, consents, or authorizations in respect of a [registered security] are solicited by or on behalf of the management of the issuer [in accordance with the proxy rules], such issuer shall, in accordance with rules and regulations prescribed by the Commission, file… and transmit to all holders…of such security information substantially equivalent to the information which would be required to be transmitted if a solicitation were made…” (emphasis added)(go back)

8Rule 14c-2(a)(i) provides: “In connection with every annual or other meeting of [the holders of a class of registered securities], including the taking of corporate action by the written authorization or consent of security holders, the registrant shall transmit to every security holder of the class that is entitled to vote or give an authorization or consent in regard to any matter to be acted upon and from whom proxy authorization or consent is not solicited on behalf of the registrant pursuant to Section 14(a) of the [1934 Act]…[a] written information statement containing the information specified in Schedule 14C….” (emphasis added)

Rule 14c-2(b) then provides: “The information statement shall be sent or given at least 20 calendar days prior to the meeting date or, in the case of corporate action taken pursuant to the consents or authorizations of security holders, at least 20 calendar days prior to the earliest date on which the corporate action may be taken.” (emphasis added) (go back)

9See Exchange Act Release No. 34-52926, (December 8, 2005): “(s)oliciting persons other than the issuer are not subject to the requirements of Section 14(c). . . .unlike the issuer, they have no obligation to furnish an information statement to persons from whom no proxy authority is sought.” See also Exchange Act Release No. 34-23789, (November 10, 1986): an amendment to Rule 14c-2 was intended to “make clear that if the registrant solicits consents from a few security holders who have enough shares to approve the transaction, the registrant must furnish information statements to the remaining security holders as required by Rule 14c-2.” (emphasis added)(go back)

10As part of the settlement, NAI amended the CBS bylaws again, to reverse the Bylaw Amendments and make certain other changes. Since these amendments were adopted pursuant to an agreement with CBS, the parties provided that CBS was obligated to promptly prepare and file such information statement. This was consistent with actions taken in connection with a consent delivered by NAI in 2016, as the controlling stockholder of Viacom, pursuant to the terms of a settlement agreement that NAI had entered into with Viacom.(go back)

11More recently, on April 30, 2013 MatlinPatterson FA Acquisition LLC (“MatlinPatterson”), a stockholder in Gleacher & Company (“Gleacher”), amended Gleacher’s bylaws by delivering written consents executed by holders of a majority of Gleacher’s outstanding shares of common stock. When commenting on a proxy statement that MatlinPatterson subsequently filed, the staff asked, in a letter dated May 3, 2013, counsel to MatlinPatterson to explain why adoption of the bylaw amendments was effective as of their date of delivery, noting that Gleacher had not delivered an information statement pursuant to Rule 14c-2. Counsel responded that the provisions of Rule 14c-2 were inapplicable when the registrant had no involvement with the action and noted a number of prior instances in which stockholder action by written consent was effective immediately and without compliance with Rule 14c-2. Although the staff continued to comment on MatlinPatterson’s filings, including its amended proxy statement, the staff did not raise any further questions concerning the applicability of Rule 14c-2. On May 17, 2013, Gleacher filed an information statement with respect to the April 30, 2013 bylaw amendments but its information statement did not contest the effectiveness of the amendments. Rather, Gleacher acknowledged that it did not participate in the consent solicitation that resulted in adoption of those amendments and that it was furnishing an information statement to “comply with the technical requirements of Regulation 14C [under the 1934 Act].” In fact, Gleacher had earlier filed a Form 8-K on May 6, 2013 stating that the bylaw amendments were effective when delivered on April 30, 2013.(go back)

12NAI also pointed out that if effectiveness of action by stockholder consent over the objection of the company required the company to prepare, file and mail an information statement; companies could frustrate stockholder action simply by failing to do so, or by doing so in a dilatory manner.(go back)

13See footnote 6 and the accompanying text.(go back)

Both comments and trackbacks are currently closed.
  • Subscribe or Follow

  • Supported By:

  • Program on Corporate Governance Advisory Board

  • Programs Faculty & Senior Fellows