The new universal proxy card rules have driven a wave of bylaw amendments as companies moved in their droves to prepare their defenses against possible attacks on their board. A record 410 U.S.-listed companies amended their director nominee provisions last year, according to Insightia’s Governance module, compared to just 13 recorded in 2021.

The oft-controversial changes are increasingly being relied upon by companies shifting to a more aggressive position in a bid to shield themselves from an anticipated increase in proxy contests, with measures being leaned upon in courtroom battles as companies move to reject activist nominations.

However, with the relatively slow uptake to date in the number of contested elections since UPC was introduced, many in the industry have questioned the need for what are in many cases expansive changes. “Universal proxy was never going to bring a lot more proxy fights,” said Scott Barshay, chair of Paul, Weiss corporate department, while addressing Tulane’s recent Annual Corporate Law Institute conference. “Companies do need to amend their bylaws and I think it’s a good opportunity to look at and modernize bylaws. The goal is to win, and we’re seeing bylaws out there that are very measured but there are others.”

The barriers

Medtech company Masimo was one of the 400 U.S. companies to amend its bylaws last September after activist Politan Capital privately stated its interest in joining the company’s board. The amendments required Politan to disclose its limited partners, as well as details of any nominations it had made or planned for the previous three years or expected to make in the next 12 months, the names of any stockholders who had expressed any support for the nominations, and communications with bloggers and online commentators.

However, the company rolled back the controversial changes in February, opting not to risk a trial defeat after Politan landed a partial court win on the matter when the judge, in a first ruling, said the decision over whether Masimo is entitled to the contested information would have to wait until a full trial. “It’s extremely gratifying that the threat to nominating stockholders has been taken off the books,” Michael Swartz, a litigation partner at Schulte Roth & Zabel who had been arguing the case for Politan, told Insightia in a February interview.

With over 250 U.S.-listed companies amending their director nominee provisions in the 11-week period to March 22 alone, it’s a trend that continues to gather pace.

Ted White, co-founder at activist fund Legion Partners told Insightia that the use of bylaw amendments often provides an insight into the culture of a board and its substantive alignment with its shareholders. “When a board takes the opportunity to raise unnecessary barriers for its shareholders to have some role in the governance, it’s a blinking neon sign saying that ‘we have a governance problem’.”

White compared the move to dual class trading stocks which often make running a contest next to impossible. “If you took this to its natural end and you made it so complicated to nominate that shareholders don’t have the ability to have any input into the board when something has gone wrong, what does that do to overall governance, discipline, and capital allocation,” he questioned.

Primo Water, one of Legion’s recent targets, moved to invalidate the firm’s four-person slate earlier this month with an argument that the nominations contained “intentional misrepresentations and patently false information.” The activist refuted the claims describing the invalidation as “nothing more than transparent and aggressive entrenchment tactics.” Legion went on to file a lawsuit in a bid to revert the company’s decision and seek a declaration by the Ontario Superior Court of Justice that Primo Water’s actions to alter its advance notice bylaws in November were ‘‘oppressive and unfairly prejudicial.’’

In March, AmeriServ Financial took to the courts in its bid to prevent Driver Management from soliciting votes after nixing Abbott Cooper’s three-person slate, saying the activist’s nomination letter lacked key information related to one of the candidates. ‘‘The board believes allowing Driver to disregard AmeriServ’s bylaws and run a costly, distracting proxy contest to advance what appears to be its own short-term agenda runs counter to shareholders’ best interests,’’ the lender contended.

First Foundation has also taken issue with a nomination notice put forward by Driver, arguing the hedge fund failed to mention the present job of its director nominee Allison Ball, despite an obligation as set out under the company’s bylaws. Driver has taken the matter to court, accusing directors of having breached their fiduciary duties by rejecting the plaintiff’s nominations.

Alternative battlegrounds

Outside of bylaws, other creative toolsets are being used to mitigate against activist intervention. In February, mattress manufacturer Purple Innovation took an alternative defense approach by issuing preferred stock with cumulative voting rights to prevent a feared board sweep by Coliseum Capital Management.

Purple defended the move by arguing the proportional representation preferred linked stock (PRPLS) would be issued to all shareholders and allow for more proportional representation on the board. “The purpose of the PRPLS is to protect all shareholders and treat them equally,” said Purple Chairman Paul Zepf.

However, Coliseum, which already owns 45% of its share capital, has argued the move “violates the company’s charter and was not justified by any conceivable threat to corporate policy or effectiveness.” The disagreement is now also being played out in the courts with Coliseum arguing Purple’s non-executive directors have breached their fiduciary duties.

2022 also saw an over 40% rise in the number of poison pills adopted by U.S. boards with 31 recorded and a further five so far this year.

Whether companies opt to use such shareholder rights plans, amend their bylaws, or turn to the courts, industry experts have cautioned against a potential backlash that could harm investor relations overall.

“To the extent that investors perceive the use of these bylaws as prohibiting or chilling an activist from launching an otherwise viable campaign or harming the investor voting franchise rather than setting parameters for fair election campaigns, it is possible that these companies will have IR or PR issues that may ultimately impact the company’s value to investors,” Bruce Goldfarb, president and CEO of Okapi Partners told Insightia.

Barshay advocated for a measured approach to bylaws and warned against “a cottage industry of lawyers telling their clients to go over the top.” “My advice is, don’t go there. Adopt reasonable bylaws, so that if you find yourself in a fight, your shareholders will say, that’s reasonable.”