Fair elections have long been a major concern. When I started CorpGov.net in 1995, most directors were probably chosen by CEOs. Elections resembled those of North Korea. Vote for management’s slate or withhold your vote. Fair elections? I didn’t think so.
My friends toiled mostly in socially responsible investments, focused on double bottom line impacts and precatory proposals to address social and environmental issues. I concentrated on corporate governance. We needed at least some directors to be nominated and elected by shareholders, not hand-picked by the CEOs they were supposed to evaluate or by insulated board oligarchs.
Les Greenberg and I petitioned the SEC to allow shareholders access to the corporate proxy for their director nominees. CII said our petition “re-energized” the “debate over shareholder access.” After many iterations and eight years, proxy access became a legal reality. Soon companies put up barriers, such as bylaws limiting nominating groups of shareholders to 20 members which made the process impractical as a fair elections tool.
Fair Elections: An Implicit Promise of UPC
Enter universal proxy card (UPC) regulations, which also seemed to take forever to enact. UPC allows shareholders to split their votes between candidates solicited by either side. Unlike under proxy access, dissidents do not need to have held 3% for 3 years and are not limited as to number. Unrelated but relevant, contests can now be more economical using notice and access, the internet, and social media. Many expect individual directors will be more vulnerable. Fair elections, or at least fairer elections, may finally be on the horizon, especially for influence, not control, which will still require a heavy lift.
The clearest set of cases providing support for enjoining an advance notice bylaw involves a scenario where a board, aware of an imminent proxy contest, imposes or applies an advance notice bylaw so as to make compliance impossible or extremely difficult, thereby thwarting the challenger entirely.
Law firms are stumbling over one another, advising clients and potential clients on what advance notice they can safely enact without fear of being overturned. Initially, I intended to cite several of these but decided against providing an easy guide to erecting barriers.
Fair Elections: 2/6/23 Update
Masimo backed off. It said in a regulatory filing it has “adopted amended and restated bylaws” which revert to the Second Amended and Restated Bylaws of the Corporation, dated as of October 24, 2019.”
“Masimo apparently capitulated and completely undid its bylaw amendments to ‘moot’ the lawsuit, said Kai Liekefett, who defends corporations against activist investors as co-chair of law firm Sidley Austin’s shareholder activism and corporate defense practice.
But the lawsuit continues, with the two sides squaring off over Masimo chief executive Joe Kiani’s contract that would permit him to walk away with millions of dollars in compensation if there were a change of control and one third of the board is changed within 24 months. (Masimo backs off bylaw amendments requiring detailed information from activists)
While this development somewhat alleviates the immediate crisis in corporate governance, it does not take away the possibility of abuse by incumbent directors, who at most companies can amend the corporate bylaws in their favor without ratification required by shareholders. In fact, it makes these proposals more important since there was no ruling on the legality of Masimo’s contentious bylaws.
Fair Elections: 3/31 Update
We have reached many agreements for withdrawal with language such as the following:
Thank you for your engagement on your proposal. We would appreciate your affirmative response to this email confirming that you formally withdraw the shareholder proposal to XYZ contingent on XYZ’s inclusion of the following in its corporate governance guidelines and the inclusion of a statement in XYZ’s annual proxy statement that XYZ has recently revised its corporate governance guidelines in light of our commitment to providing a director nomination process that is fair and equitable to all nominating shareholders. We’ll send you a link to our corporate governance policy once posted to our website, reflecting the below wording.
The Board is committed to providing a director nomination process that is fair and equitable to all nominating shareholders, and as such the Board will not, without shareholder consent, adopt any amendments to the Bylaws of the Company that would expressly (1) require nominating stockholders that are investment funds or other investment vehicles to disclose the identities of less than five percent stockholders, members, limited partners or holders of similar economic interests solely on account of such holders’ economic interests (so long as such holders do not have or share control over the nominating stockholder and are not participating in the stockholder’s solicitation of proxies), (2) require nominating stockholders to disclose plans to nominate candidates to the board of directors of other public companies, or (3) require nominating stockholders to disclose prior stockholder proposals or director nominations that such a stockholder privately submitted to other public companies. If the Board, in its exercise of its fiduciary responsibilities, deems it to be in the best interests of the Company’s stockholders to adopt such provision without the delay that would come from the time reasonably anticipated to seek such a stockholder vote, the Board will either submit the advance notice bylaw to stockholders for ratification or cause the advance notice bylaw to expire within one year.
Fair Elections: Shareholder Proposals Filed
In an attempt to deter advance notice bylaw aimed at thwarting fair elections, I filed or intend to file shareholder proposals similar to the one below at a number of companies so far. ($TSCO $CMG $CVS $UNP $AMT $DFS $PRLB $RGEN $TDOC $UPWK $AMZN $WST $NVDA $AXON $CLDX $CTSH $PI $RDFN $UTHR $VEEV $YELP, $GOOGL, $SYNH $WMT $MA $WDAY $CRM $V $ILMN $PETS $NOW) My hope is not only to discourage companies from adopting bylaws that are likely to be litigated but also to encourage proxy advisors, institutional investors, and others to set guardrails. What bylaw amendments should boards be able to enact on their own and what should require a vote by shareholders?
After filing most of these proposals, I am somewhat encouraged by developments in the most prominent case so far.
Politan Capital Management LP has shut down an attempt by medical device maker Masimo Corp to use the litigation discovery process to unmask Politan’s investors.
Vice Chancellor Nathan Cook of Delaware Chancery Court ruled from the bench on Tuesday that Masimo cannot compel Politan to reveal its backers as the company and the hedge fund fight over the validity of Masimo’s controversial bylaw amendment. (Delaware judge rejects early unmasking of activist fund investors in proxy bylaw fight)
Much remains to be decided in that case, but at least that initial ruling is in the right direction. Proposals similar to the one below have been filed at Tractor Supply, Union Pacific, Chipotle Mexican Grill, CVS, Proto Labs, American Tower, Discover Financial Services, Axon Enterprise, Repligen, Syneos Health, Teladoc Health, Amazon.com, West Pharmaceutical Services, NVIDIA, Upwork, Walmart, Alphabet, Yelp, Cognizant Technology Solutions, Impinj, Veeva Systems, Salesforce, Redfin, Mastercard, Celldex Therapeutics, United Therapeutics, Workday, Visa, and Illumina (in order by filing deadline).
Fair Elections Proposal Example
James McRitchie and other shareholders request that directors of Workday, Inc. (“Company”) amend its bylaws to include the following language:
Shareholder approval is required for any advance notice bylaw amendments that:
- 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.
Under SEC Rule 14a-19, the universal proxy card must include all director nominees presented by management and shareholders for election. Although the Rule implies each side’s nominees must be grouped together and clearly identified as such in a fair and impartial manner, most rules for director elections are set in company bylaws.
For Rule 14a-19 to be implemented equitably, boards must not undertake bylaw amendments that deter legitimate efforts by shareholders to submit nominees. The bylaw amendments set forth in the proposed resolution would presumptively deter the legitimate use of Rule 14a-19 by deterring legitimate efforts by shareholders to seek board representation through a proxy contest.
The power to amend bylaws is shared by directors and shareholders. Although directors have the power to adopt bylaw amendments, shareholders have the power to check that authority by repealing board-adopted bylaws. Directors should not amend the bylaws in ways that inequitably restrict shareholders’ right to nominate directors. This resolution simply asks the board to commit not to amend the bylaws to deter legitimate efforts to seek board representation without submitting such amendments to shareholders. We urge the Board not to further amend its advance notice bylaws until shareholders have at least voted on this proposal.
Bloomberg’s Matt Levine speculates bylaws might require disclosure submissions “on paper woven from unicorns’ manes” with requirements waived for the board’s nominees. While Mr. Levine depicts humorous and exaggerated possibilities, some companies are adopting amendments clearly designed to discourage fair elections.
Directors of at least one company (Masimo Corp.) recently adopted bylaw amendments that could deter legitimate efforts by shareholders to seek board representation through a proxy contest. Masimo’s advance notice bylaws “resemble the ‘nuclear option’ and offers a case study in how rational governance devices can become unduly weaponized, writes Lawrence Cunningham. Directors of other companies are considering similar proposals.
To ensure shareholders can vote on any proposal that would impose inequitable restrictions, we urge a vote FOR Fair Elections.
To Enhance Shareholder Value, Vote FOR Fair Elections – Proposal [4*] *(number to be assigned by Company)
Fair Elections Proposal: Discussion Welcome
What exact guardrails should there be? How might they logically differ at different companies? I welcome insights from readers. Our recent forum with John Grau Glenn and Michael Levin on ESG via Universal Proxy Card demonstrated that most people are afraid to express their views on these and other issues surrounding UPC in public for fear of showing their hand (to use a card game analogy). Therefore, if you do not want to leave a comment below, consider emailing me.