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Sometimes You Have to Know the Plays the Other Team Is Calling
Thursday, November 18, 2021

Fall is finally here, and for many of us, it is our favorite time of year. Cooler weather and glorious colors are obviously part of the reason we love it, but most will tell you that college football is the true source of our infatuation. This game, which oozes passion and tradition, has been woven into the fabric of our lives and is as inseparable from our nostalgic remembrances of falls gone by as are family Thanksgivings.

Football is often a very violent game that rewards physicality and athleticism, but people often forget its intellectual side. The team that is better prepared for a game can often sneak up on the team that is better physically equipped, and it is that element of battle preparation that separates the good coaches from the great ones. That is what motivates coaches and players alike to study hours and hours of film of opposing teams before games, and it is that skill that often separates players like Peyton Manning from the ones who don’t excel.

Anticipating what plays the opposing team will call is obviously helpful in football, but it is also critical if you ever get into a proxy contest with an experienced activist shareholder. Activists are not all the same, and they don’t necessarily follow the same playbook. However, their tactics are similar, and knowing their offense may help you anticipate their plays before they are run. This article identifies common tactics so that you will know how to defend against them without reacting too late.

The Shareholder List Request

Many companies obtain an updated list of record shareholders before they commence soliciting proxies for an annual meeting. Such a list contains names of all shareholders of record, the number of shares held by each record holder, and in most cases their addresses.

As we mentioned in our prior article, careful consideration should be given to a list of the company’s beneficial holders who hold their shares in “street name” with brokers or in other nominee accounts. With respect to lists disclosing their ownership, beneficial shareholders are divided into two categories — Objecting Beneficial Owners (OBOs) and Non-Objecting Beneficial Owners (NOBOs). A NOBO list discloses the beneficial owners who do not object to the company knowing their names, mailing addresses, and ownership. Email addresses and telephone numbers are not included.

Under Delaware corporate law, as well as the laws of most other states, any shareholder of record, including an activist shareholder, may request a record shareholder list at any time, and the company must deliver it if the shareholder discloses that the information will be used for a “proper purpose.” The shareholder request may include the NOBO list, but only if the company has obtained the NOBO list and has a copy of it in its possession. A company is not required to provide a NOBO list if it has not requested the list for its own use.

You can be certain that one of the first salvos from an activist shareholder will be the request for the shareholder lists of the corporation, including any NOBO list that may have been obtained. Therefore, it will be important for the corporation to consult with its legal team, proxy solicitor, and transfer agent beforehand to determine what information the corporation needs in order to successfully win the proxy contest, what must be surrendered to an activist once the request for a shareholder list is received, and what information may be more useful for the activist than for the corporation if both sides have access to it during the contest.

Shareholder Engagement

An activist shareholder’s most potent weapon is pressure, and their favorite mode of applying it is through direct communications, or “fight letters,” with the corporation’s shareholders. An activist pursuing a proxy contest with the corporation is likely to publish numerous such “open letters” to management and the board, and a corporation that has done a poor job of communicating with its shareholders beforehand may find these communications difficult to refute.

Therefore, the corporation should actively engage with its own shareholders well in advance of proxy season. Such communications could not only be an effective deterrent against shareholder activism but also could provide the corporation an opportunity to communicate with its shareholders and determine their views regarding the performance of the company and its management and address any weaknesses identified prior to the initiation of any proxy contest.

Many institutional investors want a dialogue with independent directors to discuss matters of corporate governance (e.g., board oversight, executive compensation strategy, audit issues, and risk mitigation). Developing a shareholder outreach program around these elements could go a long way toward securing the votes of those investors during a proxy contest. If such outreach is implemented by the corporation well in advance of proxy season, the corporation could take the opportunity to describe the program, summarize the interviews conducted and comments received, and announce the corporation’s planned responses in its proxy materials sent to shareholders prior to the annual meeting. Such proactive attention can go a long way in defending against competing fight letters sent by activist shareholders during a proxy contest claiming that the corporation’s management does not care about the interests of its shareholders.

Competing Proxies

Some corporations may be surprised to learn that, as of now, a typical proxy contest by an activist often involves pelting the corporation’s shareholders with numerous proxy cards in an effort to confuse shareholders and hope that the cards of the activist will be the last returned, in which case they would be counted in place of the corporation’s proxy cards. 

One element of confusion often utilized by activists is the color of the proxy cards. It is not uncommon for an activist to try to “claim” the traditional color (usually white) of the corporation’s proxy cards by being the first to file or publish a fight letter announcing the color of their proxy cards during the anticipated proxy contest. Once the traditional corporation proxy card color is claimed by the activist, the corporation may be forced to use a different color card, which risks the return of the activist’s proxy card by simple shareholder mistake. In order to avoid this confusion, it is important for the corporation to discuss very early on with its legal counsel and proxy solicitors what color should be utilized for the corporation’s proxy cards and how that color should be communicated to shareholders preemptively.

This aspect of a proxy contest will change next year. On November 17, 2021, the SEC voted to adopt final rules requiring parties in a contested election to use universal proxy cards that include all director nominees presented for election at a shareholder meeting. The final rule will be required for any shareholder meeting involving contested director elections after August 31, 2022.

Another tactic utilized by activist shareholders will be the sheer number of communications sent out to the corporation’s other shareholders, each enclosing a competing proxy card that they ask the shareholder to return. Many shareholders of the corporation, becoming frustrated by being inundated, may return the activist’s proxy card with a “no” vote against the competing nominees or proposals, thinking that they are helping rid the corporation of the troublesome activist. However, if that proxy card is returned by the shareholder after they have returned a card voting for the corporation’s nominees or proposals, then the return of the activist’s proxy card would replace the earlier positive vote for the corporation, making it harder for the corporation to receive the required number of positive votes. Therefore, developing with legal counsel and proxy solicitors a communication strategy for fight letters and proxy cards of the corporation to shareholders will be important to combat the shareholder confusion that may be created by these tactics of the activist shareholders.

Anticipating the opposing team’s plays will not guarantee victory, but it definitely helps a corporation get off on the right foot for the game. A proxy contest initiated by an activist shareholder is something that can definitely catch a community bank off guard if it is not prepared for the challenge. Like a football team, a community bank may be dealing with a larger, more battle-tested opponent that may not have a complicated plan but utilizes a play sheet that has been run numerous times to perfection. Identifying that plan early on and developing a strategy to defend against it with the corporation’s team (i.e., board, management, legal counsel, proxy solicitor, and transfer agent) could mean the difference between winning and losing the war over the corporation’s future.

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