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It’s Time to Review Your Bylaws and Anti-Takeover Protections
Tuesday, July 21, 2020

As part of their oversight duties, boards of directors are expected to periodically review their company’s organizational documents. Challenges posed by the COVID-19 pandemic and related economic stresses have exposed various opportunities to improve companies’ organizational documents. In light of the ongoing impacts of the current pandemic and the possibility of similar future shocks, we believe this is an opportune time for boards to take a fresh look at their organizational documents.[1] Specifically, we recommend that boards evaluate potential revisions to their bylaws to allow for greater flexibility and clarity relating to shareholder meetings and board actions. In addition, the board of any company that has recently experienced a significant decrease in its stock price (or any similar vulnerability) should review the company’s takeover defenses and preparedness in the event of shareholder activism or a hostile takeover attempt. For companies that have already held their 2020 annual meeting and do not face a pending threat, any near-term revisions to the company’s takeover defenses would have the benefit of being adopted on a “clear day,” as described further below.

This client alert discusses suggested areas of focus for the board in its review of the bylaws given the current climate.

Shareholder Meetings

In early 2020, due to the COVID-19 pandemic, most US companies faced difficulties with respect to holding shareholder meetings. Various quarantines, stay-at-home orders, and similar governmental mandates restricted travel and limited the number of people able to attend in-person gatherings. These and other related issues required companies to rethink and reorganize certain procedural aspects of their annual meetings.

Virtual Meetings

During the first part of 2020, many public companies addressed these challenges by electing to hold their annual shareholders meeting partly or wholly through a virtual format. As previously discussed here, in addition to confirming that state law permitted a virtual meeting format,[2] companies had to confirm that their organizational documents did not prohibit such a meeting format, and if their bylaws prohibited a virtual meeting format, boards had to quickly amend the company’s bylaws. To maximize future flexibility, a company’s bylaws should explicitly permit a virtual meeting format. In addition, we suggest that you review bylaws provisions relating to the location of meetings, notice of meetings, quorum, adjournment, and record holder lists to confirm that all such provisions either accommodate a virtual meeting format or at a minimum do not preclude such a format.

Meeting Procedures

Due to the COVID-19 pandemic, many companies had to consider certain adjustments to their long-standing meeting procedures. For example, companies that held in-person meetings had to consider whether to alter their meeting procedures to account for health screenings, personal protective equipment and social distancing guidance, and all companies, regardless of their meeting format, had to decide how to regulate guest attendance and shareholder input. Although state law frequently includes helpful guidance on these issues,[3] we recommend that boards consider including a bylaw provision clarifying that the board or presiding officer has full discretion to establish the protocols for the meeting including, for example: (i) determining when the polls will open and close on items submitted for shareholder action; (ii) establishing an agenda and procedures to maintain order at the meeting and ensure safety of attendees; (iii) fixing the time allotted for consideration of each agenda item and for questions and comments by attendees; (iv) adopting rules for determining who may pose questions and comments during the meeting and when; (v) adopting rules for determining who may attend the meeting; and (vi) adopting procedures requiring attendees (if any) to provide the company advance notice of their intent to attend the meeting. In addition, regardless of the format of the meeting, many boards considered how to properly delegate authority to another director or officer to preside over meetings in situations where the original presiding officer could not attend in case of an emergency. Boards should review their bylaws to ensure that the board is provided the greatest flexibility to designate who will preside over a meeting and the authority of such presiding officer.

Board Meetings

COVID-19 also has heightened the need for the board to be able to take action and conduct meetings remotely. Although the organizational documents of most public companies have expressly permitted telephonic meetings for years, boards should review their bylaws to confirm that it has maximum flexibility to conduct meetings in a wide variety of remote formats, including by telephone and other remote communications (such as the various videoconferencing services available online like Zoom and Microsoft Teams), as well as to provide approval by written consent, including approval via email or other similar forms of electronic communication. In addition, boards should review their bylaws relating to the form of notice in order to confirm all electronic means of communication are permissible, and any advance notice requirement (or waiver thereof) in the event a special meeting of directors is called or a previously scheduled regular meeting is rescheduled.

While these standard provisions are important for the normal conduct of the board, these means of taking action are effective only when a quorum is present or, in the case of action by written consent, all directors are available. But what if some directors are incapacitated due to a pandemic or otherwise, or are unavailable due to a natural disaster, terrorist attack, or social unrest? Many states, including Delaware, New York, and many of the states with corporation laws based on the Model Business Corporation Act (MBCA) (such as Louisiana, Mississippi, Georgia, Alabama, Arizona, and Texas, to name a few), have statutes granting certain powers to the board of directors during an emergency. Under these statutes, an emergency generally exists when a quorum of the board of directors cannot readily be assembled because of some catastrophic event.

Emergency Bylaws

In addition to these emergency statutory powers, the laws of many states, including the ones mentioned above, provide boards with fairly broad authority to adopt bylaws that govern in case of an emergency. These emergency bylaws typically grant boards additional powers beyond their statutory powers.[4] Additionally, persons who act in good faith in accordance with emergency bylaws generally are not subject to liability for those actions. However, note that emergency bylaws are generally subject to shareholder amendment or repeal.

Boards should consider adopting emergency bylaws to provide for more orderly management of the company in a time of crisis. Emergency bylaws may:

  • permit any director or officer to call a meeting of the board;

  • require notice only to directors who may feasibly be reached;

  • permit notice to be provided in any practicable manner under the circumstances, such as by email, text, or broad dissemination (such as a newspaper, social media, or the company’s website);

  • permit advance notice of the meeting to be as short as the circumstances may require;

  • clarify that any means of remote communication is permitted as long as the directors can hear each other;

  • permit any director(s) in attendance to count as a quorum (even if just one director), and provide that action by the board may be taken by such director(s) in attendance;

  • permit officers or other persons of authority to act as additional or substitute directors; and

  • permit directors to be appointed to any temporary or standing committee of the board.

Although we recommend that you carefully consider the breadth of any such emergency bylaws, there is little doubt that such bylaws afford boards an opportunity to operate with greater flexibility in times of emergency.

Anti-Takeover Measures

As noted above, if a company has recently experienced a significant decrease in its stock price, the board should consider reviewing the company’s current takeover defenses and its general takeover preparedness and determine whether any action needs to be taken. Common anti-takeover provisions include:

  • adoption of a rights plan, or “poison pill”;

  • multi-class capital structures;

  • preclusion of shareholders acting by unanimous consent;

  • advance notice requirements, pursuant to which a shareholder must provide notice of any proposals or director nominees in advance of an annual or special shareholder meeting;

  • authorization of blank-check preferred stock, which is generally necessary if the company wants to have the option of adopting a poison pill;

  • a meaningful ownership threshold for a shareholder (or group of shareholders) to call special meetings and detailed advance notice requirements for any special meeting request;

  • supermajority voting requirements for certain actions by the shareholders, including amendment of the bylaws;

  • limits on the ability of shareholders to fill board vacancies or increase the size of the board;

  • classified (or staggered) board of directors;

  • a “for-cause only” requirement for shareholders to remove directors;

  • preclusion of cumulative voting; and

  • corporate constituency provisions.

Boards should periodically review with their advisors the company’s organizational documents to determine what, if any, anti-takeover protections the company currently has in place. This will enable the board to assess whether to enhance existing protections or add new ones to address gaps in the company’s defenses. Please note, however, that several of these protective devices will require approval of the shareholders, which is difficult to obtain from non-affiliated shareholders in the current environment. For instance, existing public companies that are predominantly owned by unaffiliated shareholders will find it extremely difficult to receive shareholder approval of a new multi-class capital structure or staggered board. Moreover, several of the other devices that can be implemented unilaterally by boards, such as rights plans, will likely invite a negative reaction from shareholders and proxy advisory firms, unless accompanied by shareholder-friendly features that frequently undercut the devices’ utility to the company.

As noted above, the Delaware courts have held that they will grant greater deference to provisions that may inhibit changes of control if a company adopts such provisions on a “clear day,” when no specific takeover threat is looming. Company actions taken on a clear day will be more likely to be judged under the deferential business judgment rule rather than a more exacting standard.

In addition to anti-takeover protection, when reviewing the procedures for shareholder meetings, the board should consider proxy contests and other shareholder activism to confirm no additional clarity is needed relating to meeting notices, quorum, withdrawal of shareholders, adjournment, postponement, voting standards, treatment of abstentions and broker non-votes, and presiding officer protocols for the meeting (which are discussed above).

Exclusive Forum Provisions

Finally, in connection with any periodic bylaw reviews, boards should consider whether to adopt an exclusive forum provision if they have not already done so.

Traditional State Forum Provisions

Traditional exclusive forum provisions generally require derivative actions and other intra-corporate disputes of a company to be litigated exclusively in the state or federal courts of a specific state. Companies typically choose their state of incorporation or the state of their principal place of business as the exclusive forum to resolve such disputes. Exclusive forum provisions are intended to avoid multijurisdictional litigation over the same set of facts. These provisions seek to avoid the cost and uncertainty of parallel litigation, the risk of inconsistent outcomes, and the potential for one state’s law to be misinterpreted by other courts. Additionally, for Delaware corporations, exclusive forum provisions are intended to allow Delaware corporations to have intra-corporate disputes resolved by the courts most experienced in handling corporate law issues. Delaware corporations, as well as corporations in certain states that have adopted the MBCA, are permitted under state corporate law to include an exclusive forum provision in their governing documents.[5]

While the rate of adoption of exclusive forum bylaw provisions has increased, boards should be aware that some shareholders and proxy advisory firms view the right to select the forum in which to sue as an important shareholder right. Therefore, boards that unilaterally implement an exclusive forum bylaw without shareholder input may encounter an adverse reaction from investors.

Federal Forum Provision

Subject to the limitations noted below, a March 2020 ruling by the Delaware Supreme Court offers an opportunity for certain public companies to consider adopting a federal forum provision.[6] A federal forum provision is a type of exclusive forum provision that addresses jurisdiction over claims brought under the US Securities Act of 1933 (the Securities Act). In its March 2020 ruling, the Delaware Supreme Court found that companies incorporated in Delaware can require litigation under the Securities Act to be filed in federal courts rather than state courts, effectively permitting federal forum provisions in company charters or bylaws. The decision also potentially opens the door to charter or bylaw provisions that could go even further to rein in abusive shareholder litigation, such as provisions requiring arbitration of Securities Act claims. While the Delaware Supreme Court found that such federal forum provisions in bylaws are generally valid, the court declined to state that such provisions are valid in all circumstances (including, for example, if adopted or used for an inequitable purpose). In addition, the enforceability of federal forum provisions will need to be tested in other state and federal courts. Moreover, shareholders can be expected to object to the adoption of these provisions without their input or approval.

Federal forum provisions relate to Securities Act claims arising from offerings under registration statements, and therefore offer the greatest potential promise to pre-IPO companies or post-IPO companies that frequently sell registered debt or equity securities. Other public companies will receive less benefit from adopting federal forum provisions, and therefore may wish to defer adopting such provisions until they have become more widely accepted by courts and investors.

[1] This client alert focuses primarily on potential revisions to companies’ bylaws, which in most instances can be amended without shareholder approval. Revisions to articles or certificates of incorporation generally require shareholder approval and typically are addressed by most public companies in connection with their annual shareholder meetings. While most of the suggestions in this client alert are geared primarily toward public companies, some might be useful to larger private companies with diverse constituencies, including pre-IPO companies.

[2] For a summary of the laws of each of the 50 states with respect to permitting a virtual-only or hybrid shareholder meeting as of March 2018, see “Principles and Best Practices for Virtual Annual Shareholders Meetings,” Broadridge Financial Solutions, Inc. (2018).

[3] For example, the Louisiana Business Corporation Act (which is modeled after the MBCA) provides that the chair of the meeting determines the order of business and has the authority to establish the rules for the conduct of the shareholder meeting.

[4] For example, emergency bylaws for Delaware corporations may contain any provision that “may be practical and necessary for the circumstances of the emergency,” and emergency bylaws for Louisiana corporations (and other corporations governed by the MBCA) may contain all provisions “necessary for managing the corporation during an emergency.”

[5] Section 115 of the Delaware General Corporation Law (DGCL) allows a corporation’s governing documents to require that “any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in this State.” The 2015 amendment to the DGCL codified Delaware case law. Similar to the DGCL, in 2016, Section 2.08 was added to the MBCA, which allows a corporation’s governing documents to require that “any or all internal corporate claims shall be brought exclusively in any specified court or courts of this state and, if so specified, in any additional courts in this state or in any other jurisdictions with which the corporation has a reasonable relationship.”

[6] See Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020).

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