Proxy contests spill over into court for many reasons, but there are certain flashpoints of which both activists and issuers should be mindful. For activists, these are pitfalls to avoid, while for issuers they may represent opportunities to push back on sharp tactics and maintain a level playing field in the struggle for shareholders’ votes.
Some common reasons for which parties may find themselves before a judge include:
- Securities disclosure requirements: Securities laws require disclosure of positions at specific thresholds, and these requirements can vary from one jurisdiction to the next. An activist wants to focus on its message for shareholders, not be dragged into the distraction of defending itself from allegations it is offside securities laws. From an issuer’s perspective, these statutory filings may be the first evidence that an activist wants to make a move on the company.
- Inadvertently acting in concert: Seeking support from fellow shareholders is integral to an activist campaign, but in doing so would-be dissidents should be careful to avoid communications or agreements that could result in them being considered by a securities regulator to be acting in concert, which could cause the activist to accidentally pass disclosure or even takeover bid thresholds.
- Don’t get carried away: Securities laws prohibit false or misleading statements, and the defamation suit has a prominent place in the special situations litigator’s toolkit. For both activists and issuers, the solution is a simple one: speak with the facts, and avoid making up new ones.
- Be careful with social media: Just because an appeal to shareholders is made in a tweet doesn’t mean there aren’t applicable securities laws. Be mindful of, for example, shareholder solicitations made on social media which could trigger regulatory filing requirements.
- The bylaws set the rules: Issuers are increasingly adding disclosure requirements and other rules to control the parameters for of the proxy playing field long before an activist investor emerges onto the scene. Activists need to do their research and, if an activist wants to challenge a provision in the issuer’s bylaws, the activist should be prepared to go to court.
- Standstill agreements: Parties who agree to a standstill should choose their language carefully, or else an issuer could find itself confronted by an activist challenger much sooner than they believed they had bargained for. Conversely, an activist that believes it is outside a standstill could have its campaign stopped in its tracks if a court disagrees with its interpretation of the contract.
- It’s not over until it’s over: Winning a campaign is not necessarily the end of the threat of litigation for the activist. Where there is a sale of the company closely following a successful campaign, the activist can face a claim, which could come in the form of a class action, alleging that the newly elected directors breached their duties to the issuer.
For all of these, the best and most important precaution that an activist or issuer can take is to hire counsel experienced in proxy disputes and securities laws. Indeed, lawsuits are infrequent precisely because it is uncommon for activists to launch proxy contests without hiring external consultants to help them navigate the legal waters, and issuers are well-advised to take the benefit of similar expertise.
Unintentionally landing in court is expensive, distracting, and usually unpleasant. It should never happen by surprise.
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