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April 01, 2009 (Vol. 29, No. 7)

Staying Ahead of Activist Stockholders

Six Steps Every Public Company Should Be Taking to Maintain Control This Year

  • Precautionary Steps

    The company’s proxy solicitor should be directed to institute a stock watch program that monitors daily trading activity in the company’s stock and provides a weekly report to the company. These programs can provide advance notice of share accumulations by activist holders and potential acquirers, among others. In addition, the company should closely monitor Schedule 13D and 13G filings with the SEC, which show changes in stock ownership for holders owning in excess of 5% of the outstanding shares.

    Finally, larger public companies should ensure that they monitor filings under the Hart-Scott-Rodino (or HSR) statute as these filings require disclosure in certain circumstances of acquisitions of voting securities in excess of approximately $63 million.

    An activist stockholder will research the composition of your board to determine which directors may be vulnerable to public pressure. By reviewing your annual meeting results (reported in the Form 10-Q after your annual meeting), the activist stockholder will be able to determine which directors have had high withhold vote totals at his or her last election.

    In addition, they will likely review past public disclosures to determine whether any directors have related party transactions with the company that can be criticized, approved controversial pay packages as compensation committee members, or have served as directors at a time when a poison pill or other antitakeover measure was implemented.

    For these reasons, the company should strive to maintain a unified board on key strategic decisions so that the board is not easily divided if opposed by an activist that focuses its public pressure on vulnerable members.

    In many states, a stockholder can present a proposal at or immediately prior to a meeting of stockholders unless a company’s bylaws restrict such an action. This means that, absent a bylaw restriction, stockholders with sufficient voting power could attend a company’s annual meeting and, with little or no advance notice to the company, nominate and elect an alternate slate of board members.

    To avoid such surprises, a company should consider instituting an advance-notice bylaw provision providing that a stockholder can only make a proposal (including one to nominate an alternative board slate) if timely and proper written advance notice is provided to the company. Typically, such a provision would provide that notice must be provided no more than 120 days and no less than 90 days prior to the anniversary date of the prior year’s annual meeting.

    The provision also would include requirements that such notice contain specified information, such as the specific business proposed and the identity of stockholders seeking to bring the matter to a vote. If the proposal involves an alternate slate of director nominees, the bylaw provision typically would provide that the stockholder must notify the company of all proposed nominees, including the professional background and company shareholdings of each such nominee.

    Because of recent litigation regarding the level of clarity required in these provisions, a public company should ensure that its advanced-notice provision be carefully crafted and reviewed by experienced legal counsel.

    In states such as Delaware, special meetings of stockholders may be called by a company’s board of directors or any person authorized by the company’s articles of incorporation or bylaws. If stockholders are permitted to call a special meeting, this can be a useful tool for activists.

    For example, an activist might call a special meeting during the year to remove certain directors and replace them with their own candidates, or to amend the company’s bylaws in a manner that empowers the activist. In each case, a proxy contest in connection with a special meeting can be an unneeded and costly distraction to a company’s board and management team, especially when these matters can be more efficiently raised at the company’s annual meeting.

    Moreover, the activist may provide, depending on the bylaws, little or no notice to the company when seeking to call the special meeting and may do so at a time when the company is temporarily weakened by poor operational performance or market, or economic conditions that are beyond its control.

    In Delaware, amending a company’s articles of incorporation requires board and stockholder approval; however, a board can amend the company’s bylaws unilaterally without any such stockholder approval. Therefore, if a Delaware company’s bylaws give stockholders the power to call special meetings, the board should consider amending the bylaws, either to eliminate this right or to fix the ownership threshold required for stockholders to call special meetings at a high level, such as 50%.

    Alternatively, the board might consider amending the bylaws to provide that stockholders are not permitted to call a special meeting if the proposed business (such as the election of directors) was already voted on at an annual or special meeting held during the prior 12-month period.