Proxy contests are expected to increase soon, as a result of three factors: (1) the massive de-staggering of corporate boards, (2) the increasing concentration of share ownership among a small group of institutional holders, and (3) the adoption of SEC Rule 14a-19, which mandates the use of universal proxy cards. That last rule just became effective, and many predict that smaller firms will particularly experience increased proxy activism, as Rule 14a-9 will significantly reduce the costs to insurgents in these cases.

In response, corporate managements are looking for new defensive tactics to resist or delay activists. Yet, the poison pill seems disproportionate to this context, and in In re Williams Cos. Stockholder Litig., 2021 Del. Ch. LEXIS 34 (Feb. 26 2021), the Delaware Chancellor invalidated a poison pill set at a low 5% threshold (at least in the absence of clearer evidence of a specific threat to the target corporation). If the poison pill is unsuitable as a means to defend against proxy contests, corporate practitioners need to explore other means, and some are considering advance notice bylaws that require the nominator to disclose more about who is associated with it and their interrelationships with other nominees and other proxy contests. This is certainly a milder and more proportionate response than the poison pill, but a larger question remains: Is it (or when is it) legitimate for corporate management to reject a nomination in a director election (given that management is usually self-interested)? This column’s answer will be that an independent corporate board is entitled to take actions (including through bylaws amendments) that generate greater transparency and material information—subject to judicial review. Thus, if the primary purpose of the bylaw seems to chill or harass the insurgents, a Delaware court should strike down such an attempt.

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