With the 2023 proxy season now over for most companies, we took a fresh look at recent bylaw and charter amendments at the Silicon Valley 150 (the SV150) to better understand how companies are addressing i) new Rule 14a-19, which mandates the use of a universal proxy card in contested elections; and ii) the recent amendment to Section 102(b)(7) of the Delaware General Corporation Law (DGCL) to permit the adoption of officer exculpation charter provisions.
I. Bylaw Amendments Following the Adoption of Universal Proxy
As discussed in our prior Client Alert, the 2023 proxy season was the first following the adoption of Rule 14a-19. Generally speaking, these rules require proxy cards distributed in connection with a contested director election to include all director candidates, whether nominated by the company or by shareholders. In this way, shareholders can “mix and match” between the members of competing director slates.
Following the adoption of Rule 14a-19, many companies amended their advance notice bylaws to account for the universal proxy rules. More specifically, of the 70 companies in the SV150 that amended their bylaws between November 1, 2021, and July 31, 2023, 50 amended their bylaws explicitly to address Rule 14a-19, with 90 percent of those amendments occurring after the August 31, 2022, effective date of Rule 14a-19. We refer to these 50 companies as the “Specifically Address Group.” In examining these amendments, a few trends stood out.
A. Bylaw Amendments Specifically Addressing Rule 14a-19
In the Specifically Address Group, we found that:
- 98 percent added a requirement that a nominating shareholder must include in or with its nomination notice a specific representation of its intent to comply with Rule 14a-19, including the requirement under Rule 14a-19(a)(3) to solicit the holders of shares representing at least 67 percent of the voting power of the company’s outstanding shares;
- 90 percent added a requirement that a nominating shareholder must provide the company with reasonable evidence of its compliance with Rule 14a-19, including satisfaction of the solicitation requirement under Rule 14a-19(a)(3), before the shareholder meeting (typically at least five business days in advance of the meeting); and
- 88 percent added language providing that, if a nominating shareholder fails to comply with Rule 14a-19 in connection with its nomination of directors, then the company will deem the nomination proposal invalid and will not include the shareholder’s nominees on the company’s proxy card.
B. Amendments to Enhance and Modernize Advance Notice Disclosures
In addition to addressing Rule 14a-19, 54 percent of the Specifically Address Group bolstered their advance notice bylaws by requiring additional disclosures in director nomination notices concerning the nominating shareholder, its director nominees, and any other affiliates and participants in the nominating shareholder’s solicitation of proxies. These include, among other things, additional disclosures regarding i) their ownership of the company’s securities (including derivatives); ii) any material litigation in which they are involved related to the company; iii) any contracts related to the company or the proxy contest that they are a party to or have a material interest in; and iv) other relationships and background information that could give rise to a conflict of interest.
Two evolving provisions that are increasingly found in advance notice bylaws are requirements that i) nominees complete a “director questionnaire” provided by the company, which must be submitted with the nomination notice; and ii) nominating shareholders update and supplement their disclosures in the days prior to the shareholder meeting. Many of the Specifically Address Group implemented these changes. Companies who do not have these requirements in their advance notice bylaws should strongly consider adding them in advance of the 2024 proxy season.
C. Other Advance Notice and Activism-Related Bylaw Amendments
Several SV150 companies that amended their bylaws in our survey period made other procedural and technical changes to their advance notice bylaws. For instance, of the Specifically Address Group:
- 32 percent limited the number of candidates that a shareholder may nominate at a meeting to the number of directorships up for election at the meeting; and
- 14 percent added a requirement that director nominees sit for interviews with the company’s board of directors or one of its committees.
Finally, a few of the Specifically Address Group adopted other procedural changes to bring their advance notice bylaws in line with the latest practice. These amendments include i) requiring that nominating shareholders maintain record ownership of the company’s shares through the record date for the meeting and the meeting date; ii) ensuring that the advance notice deadline is at least 90 days before the one-year anniversary of the prior annual meeting;1 and iii) requiring that a nominee provide its written consent to be named as a nominee in the company’s proxy statement.2
D. Recent Developments in Delaware Law Concerning Advance Notice Bylaws
Recent cases from the Delaware Court of Chancery involving challenges to the adoption and enforcement of advance notice bylaws provide valuable insight for corporations faced with an activist threat or otherwise considering amending their advance notice bylaws. These cases highlight that, while the court will generally afford directors broad discretion in the adoption and enforcement of advance notice bylaws, companies may come under fire for adopting bylaws that are perceived to be preclusive, particularly when adopted in response to an activist threat.
In three recent decisions, the court has strictly construed advance notice bylaws and ruled in favor of the defendant company’s enforcement of its bylaws to invalidate a shareholder’s nomination of directors. In Rosenbaum v. CytoDyn Inc.,3 the court upheld a company’s rejection of a director nomination notice for failing to comply with certain bylaws mandating, among other things, the disclosure of individuals or entities supporting the nomination and information regarding any material interest that a nominee had in any transaction related to the company. In so holding, the court strictly construed the plain letter of the bylaws and determined that they were unambiguous and reasonable in scope.
Similarly, in Strategic Investment Opportunities LLC v. Lee Enterprises, Inc.,4 the court upheld a company’s rejection of a director nomination notice because it failed to comply with a bylaw requiring that notices be submitted by record shareholders and accompanied by a nominee questionnaire on the company’s form (which the company had refused to provide to a non-recordholder). As in Rosenbaum, the court strictly construed the plain language of the bylaws and blessed the board’s stringent enforcement thereof, even though the nominating shareholder had submitted with its notice evidence that it was in the process of transferring its shares to record position and provided a nominee questionnaire similar in scope to those typically required by companies in this context. Notably, although the court in both cases applied heightened scrutiny to the board’s enforcement of the challenged bylaws, it found that the board’s actions were equitable, emphasizing, among other things, that the challenged bylaws were adopted on a “clear day” with no threat of activism and that the nominating shareholder had waited until the eve of the advance notice deadline to submit the nomination notices, leaving no time to cure deficiencies.
Although in a different context, the court’s recent decision in Sternlicht v. Hernandez5 reinforces similar principles. There, a shareholder claimed that the company’s board was obligated to reopen the director nomination window because of a “radical shift” in the company’s circumstances following the advance notice deadline. The court rejected this claim and upheld the company’s enforcement of the advance notice deadline, finding that the plaintiffs had not met the high bar for reopening a nomination window imposed by an otherwise valid and unambiguous advance notice bylaw.
Although these cases demonstrate the broad discretion generally afforded to directors when adopting and enforcing advance notice bylaws, in at least one recent case, Politan Capital L.P. v. Kiani,6 a company came under scrutiny for its adoption of certain bespoke advance notice bylaws in response to threats from a shareholder. The bylaws adopted by that company required, among other things, that investment funds seeking to nominate directors disclose all investors holding a five percent or greater stake in the fund. The company ultimately rescinded the challenged bylaws before the court ruled on their validity.
As these cases show, the court generally will defer to the business judgment of directors when it comes to adopting and enforcing bylaws that are aimed at enhancing transparency about information, such as ownership of company securities and potential conflicts of interest. Companies should be mindful, however, that the court will likely apply enhanced scrutiny to a board’s adoption and enforcement of advance notice bylaws if a shareholder challenges such actions, given the inherently defensive nature of these bylaws. As such, we encourage companies, as a general matter, to i) be reasonable and measured in their approach to amending their advance notice bylaws; ii) be proactive about amending bylaws before an activist is on the scene; and iii) ensure that the board’s consideration of amendments is robust and appropriately documented.7
E. Takeaways
Advance notice bylaws represent a critical tool for an orderly annual meeting and proxy solicitation process; they are one of the primary structural measures that companies have to deal with activist shareholders. We encourage all companies to regularly review their advance notice bylaws to ensure that they are state-of-the-art. To the extent that a company was waiting to amend its bylaws until after the initial learnings from the adoption of Rule 14a-19 have occurred, we believe that time has come. The fall represents an ideal time to thoughtfully approach bylaw amendments in advance of the 2024 proxy season.
II. Charter Amendments to Adopt Officer Exculpation Provisions
As discussed in our prior Client Alert, a recent amendment to Section 102(b)(7) of the DGCL authorizes Delaware corporations to adopt charter provisions to eliminate or limit the personal liability of certain officers for direct claims for breaches of their fiduciary duty of care. The amendment, which was adopted following a rise in the number of officers being named as defendants in fiduciary duty litigation, allows a corporation to extend to its officers certain exculpatory protections long-afforded to directors.
A. Adoption of Officer Exculpation Provisions by the SV150
Thus far, companies in the SV150 have been relatively slow to adopt officer exculpation charter provisions. As explained in our recent Blog Post, as of July 24, 2023, of the 143 SV150 companies incorporated in Delaware, only nine, or approximately 6.3 percent, included a proposal to adopt an officer exculpation charter amendment in their proxy statements for meetings held on or after the August 1, 2022 (the effective date of amended Section 102(b)(7)). Of those nine proposals, five required the affirmative vote of a majority of the voting power of the outstanding stock entitled to vote on the proposal (the default voting requirement under the DGCL for a charter amendment), and four required the affirmative vote of a supermajority (generally, 66 2/3 percent) of the voting power of the outstanding stock entitled to vote on the proposal. Seven of the nine proposals, or approximately 78 percent, were approved by shareholders. The two failed proposals were among those that required supermajority approval. For comparison, and looking more generally across all public companies, nearly 300 public companies have adopted officer exculpation provisions.
Notwithstanding its benefits, we believe that there are a few potential reasons why so few companies in the SV150 have proposed an officer exculpation charter amendment. For one, amending a corporate charter comes with certain procedural hurdles, such as i) obtaining the requisite shareholder approval; and ii) the need, generally speaking, to file a preliminary proxy statement (which, on the whole, accelerates the timeline for the overall preparation of the proxy statement). In addition, ISS’s voting guidelines indicate that ISS will review and make recommendations on officer exculpation proposals on a case-by-case basis, adding to the uncertainty of how such proposals will be received by shareholders.8 Glass Lewis’s voting guidelines similarly indicate that Glass Lewis will review and make recommendations on officer exculpation proposals on a case-by-case basis but that Glass Lewis will “generally recommend against” the adoption of such provisions absent a “compelling rationale” provided by the board.9 Given these factors, we believe that many companies took a “wait-and-see” approach to officer exculpation in 2023.
Moreover, some multiclass companies in the SV150 may have held off on proposing officer exculpation amendments pending the outcome of challenges in the Delaware Court of Chancery by shareholders of two multiclass corporations claiming that the DGCL requires separate class votes to adopt an officer exculpation provision. As discussed in our previous Client Alert, the Court of Chancery recently ruled that both corporations were not required, under Section 242(b)(2) of the DGCL, to obtain separate class votes to amend their charters to adopt officer exculpation provisions because the amendment did not adversely affect the powers, preferences, or special rights of the shares of any class. That decision is currently on appeal to the Delaware Supreme Court. Our firm is representing one of the defendant corporations.
B. Takeaways
The protections afforded by an officer exculpation provision should help corporations mitigate certain types of shareholder litigation and the corresponding expenses, as well as attract prospective officer candidates. For these reasons, particularly if officer exculpation provisions continue to largely be approved by shareholders among the SV150, companies should consider the benefits of proposing an officer exculpation charter amendment at their annual meetings in 2024. Although there are challenges to amending a corporation’s charter to provide for officer exculpation—and companies should approach that process with their eyes open—the benefits could be tangible. The 2023 proxy season should give companies confidence that, with appropriate articulation of the rationale for the amendment, a proposed amendment is reasonably likely to be supported by shareholders.
[1] With respect to nomination deadlines, the U.S. Securities and Exchange Commission clarified in its adopting release for Rule 14a-19 that the 60-day minimum advance notice deadline set forth in Rule 14a-19(b)(1) is “a minimum period that does not override or supersede a longer period established in the registrant’s governing documents.” Thus, companies remain free to set earlier advance notice windows in their bylaws within reason—typically between 90 and 120 days prior to the one-year anniversary of the prior year’s annual meeting.
[2] During the 2023 proxy season, over 30 companies received Rule 14a-8 shareholder proposals seeking a bylaw amendment that would prohibit amendments to advance notice bylaws without shareholder approval. Shareholders soundly rejected these proposals at the 15 companies where they went to a vote, with support for these proposals averaging only 13 percent.
[3] 2021 WL 4775140 (Del. Ch. Oct. 13, 2021).
[4] 2022 WL 453607 (Del. Ch. Feb. 14, 2022).
[5] 2023 WL 3991642 (Del. Ch. June 14, 2023).
[6] C.A. No. 2022-0948-NAC (Del. Ch.).
[7] Our focus throughout this discussion has been on Delaware law, as that is where almost all of the SV150 companies are incorporated.
[8] ISS US Proxy Voting Guidelines (Dec. 13, 2022) at 20, available at: www.issgovernance.com/file/policy/active/americas/US-Voting-Guidelines.pdf?v=1.
[9] Glass Lewis US Proxy Voting Guidelines (2023) at 72, available at: https://www.glasslewis.com/wp-content/uploads/2022/11/US-Voting-Guidelines-2023-GL.pdf.
