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Shareholder Primacy
Challenging advance notice bylaws, precatory proposal proxy solicitation
00:41:29
Challenging advance notice bylaws, precatory proposal proxy solicitation
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- [00:04]
A
Welcome to Shareholder Primacy from Free Float Media, a podcast about activist investing, securities law, and all the ways the financial and legal worlds intersect and collide in real life. Ann Lipton and me, Mike Levin, have returned. Ann is a law professor at the University of Colorado who teaches and researches securities and business law. She holds up the legal end of the podcast.
- [00:27]
B
And that's Mike Levin, an activist investor who lives and works in Chicago. He covers the financial side of our podcast.
- [00:33]
A
Yes, we do. Hey, we haven't talked about advance notice bylaws in quite a while now, have we, Ann?
- [00:41]
B
Yeah, it's been a really long time.
- [00:43]
A
It's been many months. I checked the last time we, I mean, we mentioned the phrase advance notice bylaws with a little bit of frequency here, but the last time we actually looked hard was, was well over a year ago. I don't know if you realize that. So let's, let's. There's a case that just developed that illustrates some really interesting truths and realities about what's going on there. So let's, let's talk about that in a minute.
- [01:07]
B
Yeah, absolutely. And we can, we've talked a couple times about new creative strategies for shareholders to offer proposals. And this week there's kind of a doozy. So we'll talk about that as well.
- [01:18]
A
Yes, we can. Another, another proxy solicitation for precatory proposals. So, yeah, we'll handle that, too. But first, mailbag.
- [01:28]
B
Yes. Don't forget, you can email us if you want to complain or suggest topics or ask questions. You can reach us at shareholderPrimacy1WordreeFloat LLC.
- [01:39]
A
All right, let's hopefully hear from some people. It's been a little while. So. Yeah, keep those cards and letters coming, as they used to say when there were cards and letters. Keep those emails and DMs coming. Anyway, advanced notice bylaws. There was an interesting case that just got decided by the Delaware Supreme Court probably like two weeks ago, I think.
- [02:02]
B
Yeah.
- [02:03]
A
Is when it came out. Yeah. Quite recently. So let's plunge into that now. Let's first, may I quickly summarize advance notice bylaws for the three people here that haven't figured that out yet? So in bylaws, in US Corporate bylaws, constitutive. How do you call it? Constitutive documents.
- [02:27]
B
Constitutive documents.
- [02:28]
A
Constitutive documents. In the bylaws, companies are allowed to put in terms that allow them to require shareholders to provide notice well in advance of an AGM notice of intent to present business at an agm.
- [02:48]
B
Yeah. Although I'm going to say not just like companies. I hate when people say it's companies, not companies, it's boards.
- [02:54]
A
It's boards that's doing it. The boards adopt the. Yes, exactly. There's humans that in fact do this. And there's two salient attributes of them which I will mention. The first is the notice, which is the time period. So essentially, companies are allowed to require a shareholder to provide this notice. I'm going to nominate a director, I'm going to submit a proposal, I'm going to do something several months before the agm. And the second attribute of this is the content of the notice. The. The things that you have to describe or provide to the company, to the board when you're the shareholder that's providing the notice. And there's a. There's a lot more controversy and debate about the latter than the former. The time, the timing is, you know, you really. You can't do a year, but there's usually four or five months. And then the content gets to be all over the place. You know, there's some basics like who the shareholders and how many shares you own. But then you get to all sorts of delicious detail. But what kind of shares are they derivative shares? Are they net long, are they not short? Is your, Is your wife involved? Yeah, who else? What other activist stuff have you done? There's a whole. And we don't necessarily, at least at this moment, need to. We'll talk about that a little while. But. But there's a whole long list of things that companies have started to, or allowed to, or whatever to include in the notice.
- [04:39]
B
Yeah, so that. Yeah, so. Yeah, exactly. So like these boards, they're demanding this information and there could be good reasons for it in the corporate sense. Like it gives boards time to prepare a defense and inform shareholders about the contest. Maybe the nominate. No, maybe the nominating shareholder or the candidate has real conflicts of interest or issues that need to be pointed out. I mean, one of the big cases on this, last time we discussed this, Kellner versus aim. In that case, the nominating shareholder was a convicted felon.
- [05:07]
A
Oh, yeah, There was all sorts of stuff. Absolutely. So I'll mention two other things that we can talk about this case. The first is that the rationale stated for providing these is generally twofold so that a company can assure an orderly board meeting. That's where the timing comes forth. So they, they really get a lot, a decent notice and they know what's kind of coming. So they can, you know, have Security there if needed or something. I don't know. And then the second rationale is. Has to do with kind of lip service to fiduciary duty that we, you know, the. The board needs to kind of vet and thoroughly look at all. And this is more shareholder nominations for the board rather than other proposals. But, you know, there's supposedly some sort of a duty that the board has to do all this. And so by asking for, you know, your wife's second cousin's involvement in this, you're discharging your fiduciary duty.
- [06:09]
B
No, I mean, that's the issue that the bylaws, they. I mean, that there's a legit. There. There may be a legitimate reason for the board to ask for certain kinds of basic information. But as you say, bylaws can often require such onerous and sensitive information that it stops really being about collecting information. Like it's about determin. Deter. It's actually about deterring activists from challenging.
- [06:30]
A
It's always.
- [06:31]
B
Well, okay, it always is. But I mean, legally, the. Legally, the courts are drawing a distinction. So, like, there was that Massimo case. There was one bylaw where originally they asked for all other investments and planned investments of the hedge fund nominating the candidate and all investments of the candidate's family members. Right. So. So legally. So, yeah, no, I'm with you. I agree with you that it's always about deterring the contest. But there is a theoretic rationale, which is to allow boards to properly inform shareholders and to run a proper contest where shareholders have all full information. So a couple of years ago, we talked about this, the Delaware Supreme Court. So this is where the law kind of was decided, a case called Kellner. And the court held first that these bylaws might turn out to be. If you're challenging one of these bylaws, if you're legally saying this is improper, they can be facially invalid for various reasons, like if they conflicted with statutory law or the corporate charter, or in that particular case, if they're so long that they are literally unintelligible, that will be. That would be an invalid advance notice.
- [07:31]
A
And that's called facially facial. That's the rational facial. Okay. Facial invalid.
- [07:35]
B
Facially invalid. But the court also held that if an advance notice bylaw was adopted for the improper purpose of preventing a contest in the first place, rather than to simply collect information to run a proper contest, so the court draws a distinction. If it's adopted for the improper purpose of preventing a contest, then the bylaw would be Unenforceable, said the court. But the court also held that if the board was acting in good faith and adopted the bylaw to legitimately collect information. But the bylaw was just onerous because the board just got over its skis and it demanded too much.
- [08:10]
A
Overly exuberant about what data it was looking.
- [08:13]
B
Exactly. Yeah. But if they acted in good faith and they weren't just trying to deter a contest, they were genuinely trying to collect information, but they just went too far. Far. If that's the situation, then the legal remedy that can be enforced by the court is not to just invalidate the whole bylaw, but to essentially rewrite it to Blue Pencil, like to take out
- [08:32]
A
parts of it or something.
- [08:32]
B
Take out the parts of it that don't make sense. But the court held, again, if the motive of the bylaw was actually to prevent the contest at all, then you invalid. Then you just don't enforce the bylaw at all. So that was a couple years ago. And this latest case.
- [08:46]
A
And that was the Kelner. That was Kellner.
- [08:47]
B
That was Kellner. That was Kellner.
- [08:48]
A
Okay, got it. All right, go ahead. Yeah.
- [08:49]
B
So the latest case, we have these two companies, Owens Corning and AES, and they adopted advance notice bylaws that it was alleged, were extremely onerous. Like they may have required the fund disclose some of their limited partners, definitely required disclosure of the performance fees that were being charged to limited partners, that kind of thing. So obviously sensitive stuff. And a couple of stockholders sued for a declaration that these bylaws were unenforceable because they were not adopted for the legitimate purpose of gathering information, but for the illegitimate purpose of preventing a stockholder challenge at all. And the stockholders filed a books and records request, and they got some history that they claimed showed that this was improperly motivated and so forth. But these particular stockholders who brought the case, they had no intention of mounting a proxy contest. They didn't want to nominate any directors. So the issue was, could they even sue? And their claim.
- [09:42]
A
Oh, is there, like, standing?
- [09:43]
B
Yeah, they were phrased as standing. It was phrased as ripeness. But that's the same idea.
- [09:48]
A
Because their claim.
- [09:49]
B
Their claim was they were injured and should be permitted to sue because these bylaws would deter other stockholders from running contests and entrench the board, and that would harm all corporate stockholders because the board would then kind of know, it would insulate it from any kind of challenge. And what the Delaware Supreme Court held
- [10:05]
A
was, before we get there, can I just make sure I understand what's happening here. Absolutely. So for in these two companies, individual shareholders, not an institution, they were individuals. Some little guys, I assume, you know, widow and orphan kind of types, sued to challenge the advanced onus bylaws at each of Onan's, Cornings and owens, Corning and AES.
- [10:29]
B
Yes.
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A
Basically asking the Chancery Court to declare the. Either the entire thing or the amendments invalid.
- [10:40]
B
Yeah.
- [10:41]
A
Just on the basis. Just, just on the basis is that they work. That they. And I'm being a little casual here in my language, but, but on the basis that the changes were bad, they disenfranchised shareholders in some material way. But importantly, neither of those two shareholders, and this is in the factual record, neither of those two shareholders had any intent to like turn around and nominate. You know, it's not like the two shareholders said, and I was planning on nominating somebody, but these bylaw terms that they adopted in the past, probably couple years deterred me. The basis for their objection to them was that they were just disenfranchising kind of on their own. Right.
- [11:31]
B
Yeah.
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A
And then. Okay, and that was before Chancery Court. And Chancery Court said, no thanks, I think.
- [11:37]
B
Exactly. Yeah. And exactly. And then it was appealed to the Delaware Supreme Court because basically. So the idea was that the shareholder, I mean, not exactly that they were disenfranchised. It was just the idea that if in a company where the board is this entrenched, that's going to be bad for me as a stockholder.
- [11:50]
A
Yeah, right. Yeah, yeah, yeah.
- [11:52]
B
But the Delaware Chancery Court. And then, and this is what the Delaware Supreme Court just held on appeal, that these shareholders could not sue, that they can't sue unless they either plan to run a. Run a proxy contest or show that they were deterred from running a contest. Something like that. They were a little vague as to exactly what you have to show. But what you definitely can't do is simply say, I'm not running a proxy contest. I'm simply injured as a stockholder of this company in order to challenge a bylaw. That was. That was what they had.
- [12:21]
A
What was the reasoning?
- [12:23]
B
Yeah.
- [12:23]
A
So that either or both Chancery and Supreme set forth.
- [12:28]
B
Well, I'll. Supreme Court, Supreme Court. And I gotta tell you that I find the reasoning a bit tough to parse. They're a little all over the place. And that's because I think they use two different kinds of rationales and they kind of mix them together. So one rationale was the distinction between law and equity. This is a classic Delaware thing. Directors have certain legal hard limits on their behavior that come from statutes, maybe the corporate charter. And then separately, there are the fiduciary limits on their discretion that they exercise the duties of loyalty and care, which
- [12:58]
A
comes more from law than.
- [13:00]
B
No, that's the equity side. So fiduciary duty is the equity, Right, Exactly. The limit. The hard limits, the statutes. Like this is simply a power directors don't have. That's law. And equity is fiduciary duties. So directors have to act within the statutory bounds, like just generally, like, they can't sell all corporate assets without a shareholder vote. They can't pay dividends out of stated capital. Those are hard limits on directors managerial authority. They can't go beyond their statutory authority. That's legal. And then separately, they have to comply with their fiduciary obligations. That's equitable. So the way Delaware likes to put it, the very poetically, Director actions are twice tested, Once in law and once in equity.
- [13:40]
A
Right?
- [13:40]
B
Yeah. So the case begins by drawing. Yeah, I've probably told it to you before. I love to tell it to my students. So the case begins by drawing this distinction. An invalid bylaw is illegal under the authorizing statutes, and an inequitable one violates the director's fiduciary duties. And the challenge here wasn't that the bylaw conflicted with statutory law or was beyond directors powers. This was an equitable challenge on the grounds that the directors violated their fiduciary duties.
- [14:07]
A
Right, because. Because the law allows companies to have advance notice terms.
- [14:15]
B
Right, Exactly.
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A
This was a dispute about the nature of those terms.
- [14:19]
B
I think exactly one day the Delaware legislature could pass a law that gives more color to this, but so far hasn't. So this was exactly. This was a fiduciary duty of loyalty. Issue of whether they were violating. They were being disloyal, essentially by entrenching themselves and undermining the shareholder vote. And the court held that kind of challenge. And it has to be brought in the context of a particular nomination. Now, I got to tell you, if they'd stopped there, if that had been it, if that had been the opinion, I could kind of see with the rationale, like I could. You could say that a court's equitable powers to interfere with corporate management to put a bylaw on hold really shouldn't come into play over abstract disputes. If the court's going to issue an injunction this powerful remedy, we need someone who can point to a more personal injury. I would understand that logic. I'm not saying I would agree with it, but I'd understand it. The problem was that wasn't really the logic. They set the stage with this distinction between law and equity, but they did then take the next step and say equity is different because it's this powerful tool and courts should be hesitant to use it. That's actually not what they said. They said, if you're mounting a legal challenge, you're going to have to show that it's illegal to apply the bylaw in all circumstances. Like if the director didn't comply with the proper statutory procedures for enacting a bylaw. So. So the bylaw was never enacted in the first place, then that means the bylaw is always unauthorized. But the court said equitable challenges are different. The court said, we can't decide equitable challenges in the abstract the way we can decide legal challenges. We can't decide equitable challenges in the abstract outside the context of a particular nomination because we don't have enough facts. We don't know what the nomination contest will look like. We don't know how the board will interpret the Bible.
- [16:03]
A
Oh, because these two guys said, we're not nominating anybody.
- [16:06]
B
Right, Exactly. Like, what if they're misinterpreting the Bible? What if the bylaw would actually be interpreted some other way? We don't know what kinds of burdens will actually be placed on the nominator. And until we have that information, we can't really decide whether the bylaw operates inequitably. So we can't make these abstract pronouncements. That was their logic. But here's the problem with that logic. Remember, in Kellner, the rule was, if an advance notice bylaw is adopted for an improper purpose, it's unenforceable, period, under any set of circumstances. And if that's really the rule, we don't need to know the facts of some hypothetical future challenge. All that's irrelevant. All we need to know is why they adopted this one now. And that's something we can determine.
- [16:49]
A
And it was in the. I think it was in the record, or there was some facts. There was a couple footnotes there or something that was said. Oh, you know, universal proxy was there. And then we're trying to make life harder for activists. I mean, they.
- [17:02]
B
There were some stuff, but there were.
- [17:04]
A
There was some testimony that this was intended to make life hard for shareholders.
- [17:08]
B
Not testimony. It was all like. But they had, like, board meeting minutes. And it was definitely intended to make, like, practice, but that doesn't necessarily mean it was in, you know, so the plaintiff said that it suggested, but like, not so. So that's the problem. Like this idea that there's a distinction between a facial attack on something and attacking it as applied to you personally. That idea wasn't invented by the Delaware Supreme Court. The Delaware Supreme Court was actually drawing on a long history of that distinction. When someone challenges a statute, like let's say Congress passes a statute and you want to challenge it as unconstitutional, the statute's unconstitutional, can't be enforced in that context. There's a long history of courts drawing a distinction between a facial challenge where you argue that the statute is unenforceable in all circumstances, and an as applied challenge which says, well, maybe the statute is okay sometimes, but it's bad when you apply it to me personally. That's the tradition. The Delaware Supreme Court was drawing from this distinction in the legislative challenge context between a facial challenge where you have to show the statute is always unenforceable, usually, and an as applied challenge which says, well, okay, fine, maybe it's okay sometimes, but it's unenforceable as applied to me. Except here's the problem when we're talking about that distinction that's been long drawn in legislative challenges. The facial attack, where you have to show it's always unenforceable, or the as applied challenge where you show it's unenforceable as applied to you. The usual rule in legislation is if your challenge is that the legislators themselves acted for an improper purpose, they had an unconstitutional motive, that's a facial challenge. That's a challenge that the statute can never be applied because the motive taints the whole thing. That's how it usually works. But here, the Delaware Supreme Court, on the one hand, a facial challenge to a bylaw has to show that it's always bad in all circumstances. And then they said, if you adopt it for an improper motive, it's always bad for all circumstances. And then they said, that's the same thing. And then they said, but you can't challenge it for an improper motive unless you actually have a specific activist intervention and you're dealing with a specific context. And then the court went further. So first of all, that logic by itself, I just don't follow. And then the court went further because the fact is, in other cases, they have adjudicated entrenching devices outside the context of a contest of a particular contest. So like several years ago, there was a challenge to a poison pill. It was adopted in Williams, and it had like a 5% trigger, and it had a really broad definition of acting in concert. And there was no actual activist at the time. The public shareholders just sued and said, this pill will inhibit access. It's too onerous. And the court allowed that challenge to proceed. So when dealing with the bylaws, this court, the Delaware Supreme Court, it had to distinguish Williams. It had to, like, why did it allow the Williams challenge to proceed when it was just random stockholders who weren't mounting a challenge and not allow it here? And the argument they made was poison pills have more of a deterrent effect. You're facing financial ruin if you trip a pill. But for an advance notice bylaw, if you submit a nomination, it's rejected and you sue. It's not as onerous. Let's just say you're already. I'm going to ask you about, like, bylaws in practice, but let's just say I accept that. Let's just say for the moment, hypothetically, that I accept their rationale that poison pills have more of a deterrent effect. Because if you trip it like you're blown out of the water financially, whereas with a.
- [20:31]
A
You're diluted out. You're diluted out.
- [20:33]
B
Yeah, exactly. The worst possible thing that happens is they reject your nomination notice. Let's agree that's true for the moment. That would be a very good justification for distinguishing between the two situations. If the court were to hold, as I said before, that equity only acts in extreme cases. But that's not what the court held. The court said, we can't judge whether this entrenching device is improper if we don't see how it works in the context of a particular nominator. But there's no reason that should be any more true for a bylaw than for a poison pill. I mean, if you can't gauge the actual effect without looking at the nomination process, it's just as true.
- [21:11]
A
Then Williams was improperly decided using their.
- [21:14]
B
Yeah, exactly. So now here's what I will say in defense of the decision. Remember, the test is whether they adopted it for an improper motive. Why did the board really adopt the bylaw? Well, here's the thing about motives. We don't have a mind reading machine, okay?
- [21:29]
A
We can't get in their heads. Right?
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B
We can't get in their heads. We have to look at the evidence, like the physical evidence, the documentary evidence, testimony, whatever, to figure out what was in their head. We have to look at all the circumstances. Now, one way you can figure out their motives is by looking at the bylaw. This is what happened in Kellner like the bylaws were so ridiculous that the court was like, okay, these can't possib, possibly have come from a good motive. But that is imprecise and it's very unlikely that in the board minutes they actually wrote now down something like, haha, now we'll never be challenged. We can do what we want. They don't break that down. So if we. But it's true. If we have an actual contest, if we have an actual nominator come along and they try to comply with the bylaw and their nomination is rejected, we will have more facts. It will be easier to determine if the board is acting with a proper or an improper motive. That's true. But at the same time, if the legal question is if the question being asked is what was the motive at the time of adoption and adoption has happened, the evidence is there, it may be thin, maybe the stockholders can't prove their case, but it's there. We should be able to ask the question.
- [22:34]
A
But you also get to the problem that if I was a shareholder, I'm not at either of these two companies. These bylaws may determine a shareholder from doing anything and then developing any of the factual records.
- [22:51]
B
That was exactly what the shareholders argued here and that was exactly what the court rejected. Because they just, their view was this isn't that much of a deterrent, but yeah.
- [23:01]
A
Oh, this is a big deterrent. This is huge.
- [23:03]
B
Well, that's what I'm gonna ask you about. But I mean, this is the thing like between this case and the Tornetta decision on Musk's pay package and some of the other decisions that we've talked about. I think in general, this court and Delaware, with all the legal changes recently, they've taken a new attitude toward public stockholder litigation. They're signaling that they're gonna be very skeptical of public stockholder litigation. I don't think they're sending the same signal for specific activist interventions or claims by parties to a merger, things like that. The difference is when we're talking about public stockholder litigation, claims by random people like the guy who held nine shares of Tesla.
- [23:39]
A
Right. Turn out everything.
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B
Those are lawyer. Those are lawyer driven cases. And some people say that and they mean that like in a denigrating way. And I don't. I think this kind of litigation serves a very important role. But it's true, how these cases come about is the lawyer identifies a case, they identify a stockholder, the lawyer develops
- [23:58]
A
stockholders, they go find plaintiffs. Right?
- [23:59]
B
Yeah, exactly. The stockholder doesn't have a personal interest. They're kind of faceless representatives of all the stockholder. And that kind of litigation fundamentally is regulatory. The stockholder is essentially a placeholder for the general public, and the lawyer is serving as almost like a private attorney general. They're there to enforce the law with respect to the general public. That's different from cases where you have an actual activist intervention, which is the
- [24:24]
A
stuff that I get involved in. Which is where. Right. Yeah.
- [24:27]
B
And I think it's this general litigation that has a regulatory character. That's what Delaware is beating a retreat from. So I think the court saw this future laid out before them where if they went the other way, then imagine what happens every time a company adopts an advance notice bylaw. A lawyer is going to recruit a stockholder to seek books and records, and then they're going to investigate the books and records, and oftentimes they'll sue. And that wasn't the business that the Delaware Supreme Court wanted to be in that like this. They didn't want that relationship with companies and boards incorporated in the states. So it held what it held. But as you say, the problem is this raises the cost of intervention if you're an activist.
- [25:03]
A
Because like I said, I started saying this is a big deterrent. I mean.
- [25:07]
B
Right. If it. Well, if it. Yeah. If it had gone the other way, we would have, like, the public shareholders would have done your job for you. They would have cleaned out the worst of the bylaws, and that would create an easier path to activists in general. So that's.
- [25:23]
A
But it's worth mentioning. It's worth mentioning the nature of the deterrent effect.
- [25:27]
B
Yeah.
- [25:28]
A
Okay. Which is not the advance notice bylaw terms on their face. Sure. Some of them, like, you know, I don't want to disclose my LPs, or I don't want to disclose my fees. But there's a lot of other disclosure that financial activists have just gotten accustomed to just tolerating. Okay. And, you know, putting together, you know, all of our derivative positions and other activists. I mean, things. We're going to object to that. Fortunately for us, Kellner put a stop to some of it. Okay. The nature of the deterrent effect is how companies pursue the advanced notice bylaws. Okay. Because they are in a position to just summarily reject a notice. And sometimes they don't even say why.
- [26:19]
B
Okay.
- [26:19]
A
And we have to really drag it out of them and say, okay, there's three bits of data you forgot to provide, or there's something that was too vague or something okay. And they can string it out. Okay.
- [26:30]
B
To the point where you're past the.
- [26:32]
A
Or, you know, even passed. Right. And it starts to cost you money and you threaten to sue them or you actually do sue them. And then proverbially on the steps of the courthouse, they say, okay, fine, well, because we'll let you onto the, onto the AGM agenda.
- [26:51]
B
Yeah, that's what, that's what happened in Massimo. That, like, you know, they wait until they're just at the point where the court is going to decide it and then they say, oh, no, never mind. So the court.
- [27:00]
A
So that's where, so that's where. That's where my. I have a lot of beef with. As I started. As you started to pick up on. With these overall. But in, in the execution of it, I would love to see some sort of a penalty. I don't know. How does it work? Okay. I've written before that we need some sort of no action process at the Delaware Chancery where somebody could sort of say, here's our advanced notice bylaws. Are you going to, what are you going to say if we get sued over this? Or something? But that's just not how it works. But so, so the nature of the deterrent effect has to do with more with the litigation process and how companies use these and how they weaponize them rather than, you know, some of the facts of the, of, of the terms. So, so, I mean, once again, I hadn't really followed this Owings Corning's case. I mean, it was, I started reading it when you told me about it, but now that I see it, I say, wow, you're right. Delaware, Delaware, at least Chancery and probably Supreme Court is just trying to make it. This is one way where they're trying to make life harder for shareholders. And I like it.
- [28:09]
B
Yeah. Well, I think, I don't think they wanted to. They just didn't like the idea of every time a board passes this bylaw, there's a books and records demand and there's threatened litigation. And I mean, I can see why that would be a hassle. But this situation where, as you say, like, the board can pretty much just create a wall and drag it out and then it never gets tested because
- [28:30]
A
they don't, because they don't litigate it, because they settle it and because all the shareholder wants is to be. I mean, the whole point is to try to get on the AGM agenda.
- [28:38]
B
Yeah.
- [28:38]
A
I mean, and then once they allow that, you're fine.
- [28:40]
B
So this is what I've been expecting with 14A8 more and more like, and we saw it already that, like, as soon as the company will refuse to let a shareholder proposal on the ballot and as soon as.
- [28:50]
A
There it goes.
- [28:50]
B
Well, okay, there it is. It's fine.
- [28:53]
A
Yeah. So anyway, so this, now that we've talked about it, this bothers me even a little more than it did before. So we'll have to return to this at some point. But for now, what I think we should do is take a quick break and then go to this other subject about precatory proposals. Shall we?
- [29:11]
B
Absolutely.
- [29:11]
A
All right, let's do that break now and we'll return in a minute here at Shareholder Primacy.
- [29:19]
C
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B
Welcome back to Shareholder Primacy. I'm Ann Lipton here with Mike Levin. So the universal proxy, it may have prodded companies to start adopting these advance notice bylaws. A lot of them were adopted.
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A
Oh, what we just talked about before the break. Yes, okay.
- [29:59]
B
Exactly. But it also has enabled these, I guess there's a term now for it, zero slate proxy.
- [30:06]
A
I don't love that zero slave phrase. Basically, it's a proxy contest without board candidates.
- [30:12]
B
It's a proxy contest.
- [30:14]
A
That's where the zero comes from.
- [30:16]
B
I credit you with drawing the world's attention.
- [30:19]
A
Well, thank you. But I'm trying, I'm trying to think of a different. No, no, no big. I'm trying to think of a different phrase because it's, some of these can include director candidates, but frequently, you know, the idea is, is, is, is there a way for a shareholder to propose business for the agm, Put it on the proxy, but not include, not include director candidates. Directors. But you know, and I want, I want to, I think my problem with this now that, that we're talking about is I want to focus on the business, not the fact that there's no candidates.
- [30:53]
B
Right.
- [30:54]
A
So, so, you know, make, make, make the proposal or whatever it is, the, the highlight of, of, of the discussion anyway.
- [31:02]
B
Okay.
- [31:02]
A
So yes. And I, I, I don't know if I completely drew. I mean, all I did was notice that a couple years ago there was a winner. There was a real interesting one. And now we have another, now we have another one.
- [31:12]
B
So we mentioned a couple we ago, Trillium did this at BJ's Wholesale for a 14A8 proposal.
- [31:17]
A
They got or they threatened to or something.
- [31:18]
B
They threatened to, they started it and BJ's gave up and agreed to include it on the company proxy.
- [31:24]
A
Right. But there was no sec. There was no SEC stuff. There was no securities filings. This was like a one news release and Trillium claimed credit and I got, I got a little disappointed in Trillium for not getting more. But anyway, so that was, that was
- [31:36]
B
then, but now, now we have this new one. So what's this new one?
- [31:40]
A
All right, so the new one is nexstar. The media company owns a lot of local TV stations. Remember them? They evidently have received proposals from cwa, the Communication Workers of America, the union that represents a lot of their talent and engineers and so forth. It's also worth noting that another proponent in this is soc, the other labor union affiliated fund. So nextar Media, again we said the big broadcasting group, they're the ones that are merging with tecna. So they're the ones that are going to create this massive local broadcasting empire owning a lot of local stations all over the country. And I can't remember, I haven't followed real closely, but I think it's on hold for a minute or somebody but that's next time.
- [32:26]
B
No, the Trump administration approved it, but a lot of states are now suing.
- [32:31]
A
Yeah, there's some, some of them anyway, so, so they have announced, here's what we know, we don't know a ton, which is why we're going to only talk about this a little casually right here and then maybe return to it. Nextar NXTs announced their shareholder meeting is AGM is June 16th. They sent out their definitive proxy. There was no mention of this, of the CWA stuff and so forth. We'll return to that in a minute. Well, anyway, and I missed this, but CWA actually filed one disclosure with on Edgar and they filed it on March 9th. Okay, so it was, it was, you know, obviously several weeks ago. So it was just additional proxy materials. They didn't even file a preliminary proxy statement. And in that they disclosed that they submitted to nexstar five governance proposals and they describe one's for proxy access. One is to allow shareholders to call a special meeting with 15% threshold, allow shareholders to approve a poison pill within a year of adoption, create independent board chair and then allow shareholders to approve any transaction that amounts to 20% or more of the market cap.
- [33:53]
B
So 5, which is interesting because there's already like a NASDAQ rule would require approval of issuing 20% of the shares. But they want to go further.
- [34:02]
A
Yeah.
- [34:02]
B
To any NASDAQ and New York Stock Exchange. Yeah, yeah. Right.
- [34:05]
A
Okay. So there's five very straightforward governance proposals of varying popularity.
- [34:13]
B
Yeah. Those are the kinds of things that Sheridans vote in favor of.
- [34:16]
A
Absolutely. And it's not. It's not entirely clear to me based on what little we've seen so far, why CWA is focusing on this and not something else like. Like labor relations or something. But they have their reasons.
- [34:26]
B
Well, I mean, it might interfere with the actual merger. Right. If you need transaction approval, I suppose. Yeah. But I don't know how the next start thing is structured, though.
- [34:35]
A
I don't know how the timing of the AGM would pertain to that. So. And again, we know everything just from this one filing. So we're going to have to infer a couple things and then return to this is what I think. It seems that the CWA is going to solicit proxies. They're going to do what the mine workers did at Warrior Met Coal. Okay. They're going to go out and hire a solicitor and go collect all the proxies themselves, so on and so forth. So based on this, they're going to replicate. And that was a success for the mine workers. We'll talk about.
- [35:13]
B
But the mine workers ended up having their proposals being included on the corporate.
- [35:17]
A
Right. So what happened then is the mine workers kind of cornered. Warrior Met Warrior Met, got fearful that they were going to lose. My guess is they were going to lose control over the proxy solicitation. So they included all five at the time of the mine workers proposals on the Warrior proxy statement. There of course, were on the agenda. Okay. That did not happen yet. Now, it's clear based on the timing of all this, that nexstar could have done it. You know, Communications Workers of America filed their proxy materials long before they Nextar sent out their proxy statement. Presumably they sent proper notice. It's not clear, you know, whether the notice was accepted or whether the CWA just kind of sent this out, but it seems that these were properly noticed to the company under the advance notice bylaws.
- [36:14]
B
Yeah, yeah. I mean, that's the thing, the advance notice bylaws. They're there for directors things, but they cover this kind of thing.
- [36:19]
A
They cover this as well, too. Right. A couple other things we know from this filing. You know, you know, all the list of Participants, they're all CWA employees. CWA said they would file their preliminary proxy on or about March 30th. We haven't seen it yet, so we don't know what's going on. Nexstar, it's also worth noting had excluded a different proposal. There's some stuff at the SEC, you know, Edgar, or the 14A8 website. So there was some other proposal that was submitted and excluded, not from the CWA. So it's not clear. It doesn't appear that CWA even tried to submit these under 14 and had them, like rejected.
- [37:02]
B
Well, yeah, I mean, they could only have done one under 14A8. So if they wanted to use 14A8, they would have had to pick one. So they probably, you know, they wanted all of these. So.
- [37:12]
A
But what's really most salient is that nexstar did not include any of these five on its own proxy.
- [37:22]
B
So it's going to let this presumably
- [37:26]
A
once, if and when the CWA submits its own preliminary and then official proxy and then hires a solicitor inside, they're going to really have competing proxy processes going on here. And that conceivably could disrupt a little bit the next star proxy solicitation in the. And the agm. I don't know how much, you know, some of these, again, some of these are relatively popular proposals.
- [37:54]
B
These are the kinds of things that even the big mutual funds tend to vote.
- [37:56]
A
Right. And if they want to, approval of poison pills. So if, you know, make this up, if Vanguard. Yeah, I don't know what they think of this. I just picked them out, out of nowhere, you know, likes the idea of voting for the poison pill adoption proposal. They're going to have to vote on the CWA proxy and they will not vote on the NextAR process.
- [38:19]
B
Well, they could attend the meeting, I suppose. I don't know, maybe Vanguard.
- [38:22]
A
Yeah, they're not going to attend the meeting. They don't have time for this. So. So on the one hand, there's a lot of open questions. We don't know how the solitation is going to work. We don't know. You know, when, when Warrior met, when the mine workers did the Warrior met coal, they did their own solicitation. There was, you know, Brandon Rees is the guy's name at the mine workers. He's actually with the AFL CEO. He actually worked the phones. It was really. It was beautiful. Okay. It's not clear whether the CWA is going to do something similar, that they're going to hire a solicitor or what they're going to do. There's, like I said, there's a lot of open questions because they haven't filed the definitive either pulling your proxy statement yet. But I've been waiting for this. We've been wanting to see who else would do this, and now we have a really interesting example. And nexstar clearly is handling this a little differently than Warrior Met did, but we'll have to see. So clearly this is a response in part to problems with The SEC in 1488, I think.
- [39:24]
B
But I think this one in particular is more about the merger. I mean, there's a reason why the workers in particular. And if they were doing 14A8, they would have just done one proposal. But. Right. I mean, we may be in a new world where this is the thing if 14A8 is increasingly unavailable, but.
- [39:44]
A
And these are like blue chip ESG activists, the CWA and sec.
- [39:48]
B
Yeah, yeah. They have money and they have money to do it. My concern is since the sec, what the SEC giveth, the SEC can take it away. They created the universal proxy rule. The Business Roundtable's already objected to these i0 slate.
- [40:02]
A
So there's, so there's a. There's a chance. There's a chance the SEC may. It's probably too late for this one.
- [40:08]
B
Not for this one. Yeah. But they can give new guidance that says actually you have to run a director candidate to use.
- [40:13]
A
You can't like reinstating. What is it called? The bonafide. Bonafide director rule for. For this kind of stuff. So.
- [40:19]
B
Yeah.
- [40:20]
A
Anyway, so I wanted to highlight this, point out that it's out there. I am eager to sort of see what happens if and when the CWA files its proxy and then how nexstar responds. They might amend the proxy and then list all these.
- [40:36]
B
Yeah.
- [40:36]
A
Change the date of the meeting. Who the hell knows? So it could get really interesting. So we will look at this again probably in the next few weeks, I suppose. Okay.
- [40:46]
B
Right.
- [40:46]
A
All right. Let's do that in the next few weeks though, and pause here to go on other stuff. All right. This is Shareholder Primacy, hosted by Ann Lipton and me, Mike Levin. I'm an independent activist investor and advisor to investors about their activist situations and is of course and always professor of Law and The Lawrence W. DeMuth Chair of Business Law at the University of Colorado Law School. You can find me, mike@theactivistinvestor, one word.com and annaw colorado edu. Our podcast is produced and distributed by Free Float Media. Thanks for listening. We'll talk again soon.