2023 Activism Recap: Universal Proxy Rule Predictions Fell Flat; Director Nomination Rejections on the Rise

Significant Increase in Activist Activity?

No.

2023 saw 60 US activist campaigns where the dissident sought board representation, compared to 61 campaigns in 2022. While these levels are higher compared to 2020 and 2021—which saw 15 and 23, respectively—the prediction that 2023 would be a much more active year than 2022 proved to be incorrect.

More Proxy Contests Going to a Stockholder Vote?

No.

Out of the 60 US activist campaigns where a dissident sought board representation in 2023, 14 campaigns (~23%) went to a proxy contest and all the way to a stockholder vote, which is the same rate as in 2022.

Larger Slates of Dissident Director Nominees?

No.

The proportion of US proxy contests seeking minority board representation, including single-seat nominations (out of all US proxy contests seeking board representation), was 80% in both 2023 and 2022. Some had predicted that the universal proxy rules would encourage dissidents to put up larger slates of director nominees; however, that was not the case.

Dissidents Spending Less on Campaigns?

No.

Contrary to many predictions, the universal proxy rules generally have not reduced the amount of money activists spend on their campaigns. Out of 26 US proxy contests in 2023 where costs were disclosed, activists reported an average estimated cost of $2.5 million and median estimated cost of $1 million, as compared to an estimated average cost of $1.16 million and median estimated cost of $1 million among the 24 US proxy contests in 2022 where costs were disclosed.

Significant Impact on Settlements?

No, but There Were Marginal Impacts.

There was an uptick in the number of US activist campaigns that resulted in public settlements (42% in 2023 compared to 34% in 2022) and in the number of US proxy contests that settled prior to the dissident filing their preliminary proxy statement (68% in 2023 compared to 57% in 2022). This could indicate a trend of more campaigns resulting in a settlement, and settling earlier on, prior to dissidents spending on preliminary proxy filings—we will see if these rates increase further in 2024.

Dissidents Winning More Board Seats?

No.

Of the US campaigns that resulted in a public settlement, dissidents won board seats at about the same rate—84% of settlements in 2023 resulted in the dissident gaining board representation, as compared to 86% in 2022.

Key Takeaways:

Apply Bylaw Requirements Equitably and Avoid Subjectivity

The Court stated in AIM that bylaws that “are applied inequitably” will be struck down and that certain of AIM’s bylaws were “ripe for subjective interpretation by the Board” and therefore overreaching.

In Ocean Power, the Court stated that “if a board could call a nomination notice deficient simply because it disagreed with opinions voiced by the nominating stockholder, rejection would be a foregone conclusion” and noted that, irrespective of any good intentions in ensuring that notices are accurate, dismissal of a notice based on perceived inaccuracy of opinion statements may be preclusive.

Limitations on Stockholder Voting Power Must Be Reasonable and Proportional to a Legitimate Corporate Purpose

The Court in AIM placed limits on the company’s advance notice bylaw disclosure requirements, stating that broad sweeping information hooks can be disproportional to the company’s objective of obtaining transparency from a nominating stockholder when they potentially trigger disclosure requirements that become “overbroad” and “unworkable.”

The Court in Ocean Power suggested that information hooks can also be too narrow and applied in a preclusive fashion. There, the company’s advance notice bylaws required nominating stockholders to disclose any barriers nominees would have to obtaining security clearances from the U.S. government. By contrast, however, incumbent directors never made such a disclosure, and further, the company had no government-related contracts or apparent business reason for requesting such disclosure. The Court questioned the intention of Ocean Power’s board in amending the bylaws to include this disclosure as the amendment did not occur until after Paragon launched its campaign at the company and the board had reason to believe that the nominees would indeed have barriers to disclose.

Omission of Required Disclosure is Not Necessarily Grounds for Valid Rejection

The Court stated in AIM that it will examine whether a rejection of a nomination notice is fair by assessing whether any of the missing information is something directors and stockholders would justifiably want to know. The Court indicated that there could be instances where a nomination notice omits required disclosure and is therefore not compliant with the bylaws, but such omission might not be a valid basis for rejection if directors and stockholders would not justifiably want to know such omitted information.

Depending on Timing, Companies Might Have to Provide a Complete List of Deficiencies and an Opportunity to Remedy

The Court noted in AIM that the dissident’s night-of nomination notice submission left no chance for the dissident to remedy any deficiencies pertaining to omitted information that a sensible director or stockholder would reasonably want to know. This suggests that if a dissident submits a non-compliant nomination notice with ample time prior to the nomination deadline, the Court might expect the company to identify such deficiencies to the dissident and provide them with the opportunity to re-submit rather than rejecting the nomination notice outright.

This view is further supported by the Court’s remarks in Ocean Power, wherein the dissident submitted a non-compliant nomination notice three weeks prior to the nomination deadline. There, the company continuously declined to provide the dissident with a complete list of deficiencies, which the Court indicated was akin to moving the goalposts and could be the board’s way of “sifting through the notice to dig up deficiencies,” including ones the Court considered to be “nitpicky.”