Companies should consider whether to amend their bylaws in connection with the SEC’s new universal proxy rule, which will be effective for shareholder meetings to be held after August 31, 2022. Although new Rule 14a-19 contains certain requirements for a dissident shareholder to conduct a proxy contest, the rule also reinforces the importance of complying with the corporation’s organizational documents. In addition, most commentators expect that the universal proxy rule will lead to more proxy contests both from traditional activist hedge funds and potentially a new breed of activists who have not previously pursued board representation. It will be important, therefore, for public companies to maintain state-of-the-art advance notice bylaws to ensure an orderly nomination and election process, and to make sure that a dissident’s interests are fully disclosed to the corporation and its other stockholders.
In light of Rule 14a-19 and recently issued staff interpretive guidance, companies should review their bylaws now and consider the following:
- Ensure that the bylaws are not inconsistent with the universal proxy rule.
- Proxy access bylaws often state that they are the sole method by which a shareholder can include a nominee in the company’s proxy materials. In addition, some bylaws of companies without proxy access expressly disclaim any right for a shareholder nominee to be included in the company’s proxy materials. Depending on the text, these bylaws may not be accurate in light of Rule 14a-19, and should be amended.1
- Review the nomination and advance notice procedure bylaws for universal proxy-specific updates.
- Require the nominating shareholder to state whether it intends to solicit proxies for director nominees and to comply with Rule 14a-19.2
- Provide that the proxies solicited by the shareholder will be disregarded if the shareholder does not comply with federal securities laws, including Rule 14a-19.3 In addition, be clear that, in order to be properly submitted at the meeting, all nominations and proposals must comply with applicable law and the company’s organizational documents.4
- Consider requiring the shareholder update the company promptly if the shareholder fails to satisfy Rule 14a-19 (e.g., because the shareholder did not timely file its definitive proxy statement or decided not to solicit the requisite 67% of the voting power entitled to vote in the election of directors).
- Consider requiring the shareholder to provide a certification or evidence prior to the meeting that it has satisfied Rule 14a-19.5
- Review the deadline in the bylaws for giving notice of a nomination, which deadline can be (and usually is) earlier than the minimum date in Rule 14a-19(b)(1) (i.e., 60 calendar days prior to the anniversary of the prior year’s meeting, subject to certain exceptions).
- Consider whether to expressly prohibit “placeholder nominees.” Of note, the SEC staff recently issued guidance that a shareholder could name “alternate nominees who, in accordance with the registrant’s governing documents and state law, would be presented for election in the event of a need to change the [dissident’s] original slate.”
- Make sure no other technical conforming changes need to be made in the bylaws, such as conforming to amended Rule 14a-4(d)(1) regarding the bona fide nominee rule.6
- Make sure the provisions relating to universal proxies also apply to special meetings, if applicable.
In addition, this is an opportunity for reviewing advance notice and other bylaws generally. As noted above, many companies and advisors expect an uptick in proxy contests under the new rule.
There have also been several noteworthy legal changes that may warrant bylaw changes. Among other things, companies may want to update their bylaws to reflect recent amendments to the Delaware General Corporation Law (the “DGCL”), including:
- Stockholder lists. Section 219 of the DGCL was amended in 2022 to eliminate the requirement that a corporation make available its stockholder list during a stockholder meeting, though the corporation is still required to make the list available for inspection during the 10 days before the meeting. Many bylaws may track the prior statute requiring the list to be made available during the meeting and should be amended accordingly.
- Section 222 of the DGCL was amended in 2022 to provide greater flexibility for adjourning and reconvening a stockholders meeting. It now provides that, unless the bylaws otherwise require, when a meeting is adjourned, including due to a technical failure to convene or continue the meeting by remote communication, notice need not be given if the time, date and place of the meeting (and the means of remote communication, as applicable) are announced at the meeting, displayed during the time scheduled for the meeting on the electronic network used for the virtual meeting or set forth in the notice of meeting. Some corporations may want to update their adjournment-related bylaws to ensure they are not inconsistent with the amended statute.
The following examples of potential bylaw changes are merely illustrative and not intended to be used in their exact form. No legal advice is being given.
1 Example: “Except for a nomination made in accordance with Section [X] and Rule 14a-19 promulgated under the Exchange Act, this Section [Y] is the sole and exclusive manner for stockholders to include nominees for director election in the Corporation’s proxy materials.”
2 Example: The stockholder’s notice shall include “a representation as to whether or not the stockholder or beneficial owner, if any, or any of their respective affiliates, associates or others acting in concert therewith intend to solicit proxies in support of director nominees other than the Corporation’s nominees in accordance with Rule 14a-19 promulgated under the Exchange Act.”
3 Example: “Unless otherwise required by law, if any stockholder (i) provides notice pursuant to Rule 14a-19(b) promulgated under the Exchange Act and (ii) subsequently fails to comply with any requirements of Rule 14a-19 promulgated under the Exchange Act or any other rules or regulations thereunder, then the Corporation shall disregard any proxies or votes solicited for such nominees and such nomination shall be disregarded.”
4 Example: “Notwithstanding the foregoing provisions of this Section [X], a stockholder shall also comply with all applicable requirements of state and federal law, including the Exchange Act, the Certificate of Incorporation and these Bylaws with respect to any nomination, proposal or other matter set forth in this Section [X].”
5 Example: “Upon request by the Corporation, if a stockholder provides notice pursuant to Rule 14a-19(b) promulgated under the Exchange Act, such stockholder shall deliver to the Corporation, no later than five (5) business days prior to the applicable meeting of stockholders, reasonable evidence that it has met the requirements of Rule 14a-19(a)(3) promulgated under the Exchange Act.”
6 Example: The stockholder’s notice shall “include such person’s consent to be named in a proxy statement relating to such meeting of stockholders.”