Developments With Universal Proxy Cards and Advance-Notice Bylaws

The 2024 proxy season is the second year with universal proxy cards and has produced incremental evidence of the effect that universal proxy has had on proxy fights and on advance notice bylaws with respect to shareholder nominations.

Universal Proxy Cards

On November 17, 2021, the Securities and Exchange Commission (SEC) adopted rules that require the use of a single “universal” proxy card (UPC) in connection with most contested elections of directors. These came into effect for contested director elections occurring after August 31, 2022. The primary impact of the new rules is to allow shareholders to “mix and match” nominees from the company’s and dissident’s slates, rather than having to vote on a slate-by-slate basis.

A frequent pre-adoption critique of UPC was the prospect of a material increase in the frequency of proxy fights. Although 2022 and 2023 marked the busiest two-year span on record, with 235 campaigns launched in 2022 followed by 229 in 2023, the number of campaigns in the United States remained consistent with historical averages.[1] Accordingly, it does not appear that UPC has caused an increase in proxy fights in the United States. Moreover, there does not appear to be a correlation between the use of UPC and the average number of seats won in the United States.[2]

An additional consideration with UPC was the fear that dissident nominees appearing on the company’s proxy card would make it more likely that shareholders would elect at least one of the dissident nominees. For example, in the US for 2024 year-to-date, activists demanded 30% fewer seats, yet won nearly 80% of the seats demanded.[3] Similarly, in 2023, 79% of the total board seats won occurred at companies located in the United States.[4] However, at least in 2023, the vast majority of those seats were won through the settlement process, not a stockholder election, making it difficult to conclude whether stockholders were in fact more prone to electing dissident nominees with UPC.[5]

An early trend after the adoption of UPC was companies settling quickly with activists. In 2024, campaigns in the United States are settling 29% faster than in 2022, with a median time from public launch to settlement of 61 days, consistent with 55 days in 2023, and compared with 86 days in 2022.[6] The reasons for faster settlements may vary, and correlation does not prove causation. However, it remains possible that a lasting impact of UPC—with its greater ability for shareholders to pick and choose between director candidates—is that it will drive settlement acceleration.

Advance Notice Bylaws

Following UPC adoption, many public companies amended their bylaws to ensure consistency with the UPC rules and to make other updates to correspond with market practice. Those updates have resulted in two additional developments: litigation in Delaware Chancery Court about advance notice bylaws; and Rule 14a-8 shareholder proposals seeking to limit changes to advance notice bylaws.

Delaware Litigation

Two recent decisions from the Delaware Court of Chancery reinforce that, although the court generally affords directors broad discretion in the adoption and enforcement of advance notice bylaws, companies may face litigation risk if they adopt bylaws that are perceived to be overly broad or preclusive, particularly when adopted on a “cloudy day” in the face of a pending or threatened proxy contest.

In Paragon Technologies, Inc. v. Cryan,[7] the defendant company adopted new advance notice bylaws in the midst of a proxy contest with the stockholder plaintiff, and then rejected the stockholder’s nomination notice for failure to comply with certain of those bylaws. The stockholder sued, seeking a mandatory preliminary injunction to halt the company’s annual meeting and permit its nominees to be included on the company’s proxy card.  The court denied the request, finding that the stockholder failed to demonstrate that the board breached its fiduciary duties under the “Unocal” test as a matter of law—the requisite standard for obtaining a mandatory injunction here. The court emphasized, however, that there were significant fact issues to be resolved at trial and that the court was skeptical of certain of the board’s actions—in particular, its adoption of advance notice bylaws in the middle of a proxy contest, and the company’s  and its obscure and unclear communications with the stockholder regarding the stockholder’s notice deficiencies.

In Kellner v. AIM ImmunoTech Inc.,[8] decided roughly one month after Paragon, the court went further and held that certain advance notice bylaw provisions adopted by the defendant company in the face of an impending proxy contest were unenforceable under Unocal. Among other things, the court concluded that a bylaw requiring disclosure of agreements, arrangements and understandings involving “stockholder associated persons” was “unworkable” due to the breadth of the bylaws’ definition of “stockholder associated persons,” which the court said resulted in an “ill-defined web of disclosure requirements” with “unending permutations.” The court similarly concluded that certain bylaw provisions requiring disclosures about derivatives and economic interests held by “stockholder associated persons” were overbroad and preclusive. Importantly, the court’s analysis was informed by the defensive posture in which the bylaws were adopted, which, in addition to triggering enhanced scrutiny under Unocal, suggested to the court that the bylaws “seem designed to thwart an approaching proxy contest.” The case is currently on appeal to the Delaware Supreme Court.

The Kellner decision has raised some questions among public companies, as many forms of public company bylaws advance notice provisions that could arguably be deemed to implicate the concerns espoused by the court. Indeed, since Kellner, there has been an increase in the number of complaints and books and records demands brought by stockholders challenging “acting in concert” provisions in advance notice bylaws, especially those that require disclosures not only about parties with whom a stockholder is acting in concert but parties with whom those parties are acting in concert (a so-called “daisy-chain” provision). To date, none of these challenges has yielded a written decision on the merits, as defendant companies have typically opted to amend their bylaws to moot the claims. Other companies have also proactively amended their bylaws in response to Kellner to preempt such claims and demands.

It remains to be seen what the lasting effects of Kellner will be, particularly given the pending appeal. But the litigation activity in the wake of the decision, as well as the court’s commentary in Paragon and Kellner, reaffirm that companies should be reasonable in their approach to amending their advance notice bylaws, be proactive about amending their bylaws on a “clear day” to the extent possible, and ensure that the board’s consideration of any bylaw amendments is thoughtful and appropriately documented.

Rule 14a-8 Shareholder Proposals

The advance notice bylaw amendments made by many companies in the wake of UPC also spawned a variety of Rule 14a-8 proposals seeking to impose limits on these amendments.  At least 30 companies received a proposal in 2023 seeking to require the company to obtain stockholder approval before the board could amend the company’s advance notice bylaws to:

• require the nomination of candidates more than 90 days before the annual meeting,
• impose new disclosure requirements for director nominees, including disclosures related to past and future plans, or
• require nominating shareholders to disclose limited partners or business associates, except to the extent such investors own more than 5% of the Company’s shares.

Although some companies negotiated solutions with the proponents in exchange for the proposal being withdrawn, 16 of these Rule 14a-8 proposals went to a vote, with all of them failing to achieve a majority vote; in fact, the average vote was just over 14% in favor.

In 2024, shareholder proponents changed tactics and instead focused their attention on Rule 14a-8 proposals seeking the adoption of company policies that would describe how the board will exercise its discretion to treat a shareholder nominee equitably in relation to the board’s own nominees. The intent of these proposals appears to be the adoption of policies that would prevent a board from disqualifying a shareholder nominee on pretextual grounds. In short, proponents argue, the board’s role should not be to vet shareholder nominees for suitability.

As with the proposals in 2023, some companies sought negotiated resolutions in exchange for the withdrawal of these proposals. At those companies where these proposals have gone to a vote, shareholders have not been supportive.

Based on experience in 2023 and thus far in 2024, it appears shareholder attempts to limit a board’s authority to adopt advance notice bylaws through Rule 14a-8 proposals may bear little fruit absent negotiated settlements.

Endnotes