Anti-takeover devices — measures designed to prevent an unsolicited acquisition of a company — have proliferated at U.S. public companies over the past 15 years. Takeover defenses take many forms, including blank check preferred stock, fair price provisions, advance notification requirements and prohibitions on greenmail.These measures generate few if any shareholder proposals, however. Accordingly, this chapter focuses on the most common proposals, those dealing with the following defenses: (1) the classified board, (2) shareholder rights plans or "poison pills," (3) supermajority shareholder voting requirements to amend the charter, approve a merger or make other fundamental corporate changes, and (4) limitations on shareholders' ability to act by written consent and/or call a special meeting.

§ 27.02 The Market for Corporate Control: Tension among Shareholders, the Board of Directors And Management

Commentators have observed that conflicts of interest among shareholders, the board of directors and management, which are created by the separation of ownership and control that is the hallmark of the modern public company,[fn1] are nowhere more stark than in the takeover context. Briefly, most shareholders believe that the market for corporate control serves to discipline corporate management, which might otherwise be tempted to act in its own interest rather than on behalf of shareholders.[fn2] Shareholders worry that takeover defenses may empower a self-interested board of directors to spurn an offer that is in the shareholders' best interests.

Managements and boards of directors, for their part, accuse shareholders of short-termism, of wanting to cash out at the first opportunity rather than wait for a company to deliver perhaps even more value by executing its long-term strategic plan. Shareholders are also criticized for intruding into matters with which the board has more expertise and familiarity than shareholders, and for insisting on going it alone in responding to a tender offer rather than letting the board maximize value on their behalf. Additionally, questions have been raised about the efficiency and effectiveness of the market for corporate control.[fn3]

[fn1] See Adolf Berle & Gardiner Means, The Modern Corporation and Private Property (1932) (positing that equity investors are passive, absent a control position).

[fn2] See, e.g., TIAA-CREF Policy Statement on Corporate Governance, dated Mar. 2000 (available at http:/ /www.tiaa-cref.org/libra/governance/index.html) ("In evaluating proposals with anti-takeover implications, TIAA-CREF will consider the broad context of takeover defenses at a particular company — including charter and bylaw provisions and applicable state laws — with a view that the market for corporate control provides appropriate mechanisms for disciplining management, and that takeover defenses should not make a board impregnable.") (hereinafter, "TIAA-CREF Policy Statement"); see also, e.g., Roberta Romano, "A Guide to Takeovers: Theory, Evidence and Regulation," 9 Yale J. on Reg. 119, 129 (1992) ("Takeovers accordingly keep the capital market competitive, and constrain managers to work in the shareholders' interest.").

[fn3] Martin Lipton & Steve A. Rosenblum, "A New System of Corporate Governance: The Quinquennial Election of Directors," 58 U. Chi. L. Rev. 187, 197-202 (1991) (criticizing reliance on hostile takeovers as "the primary instrument of managerial discipline").

§ 27.03 Classified Boards of Directors

§ 27.03[A] General In a classified or staggered board structure, each director does not stand for re-election every year. Rather, directors are divided into classes — there are usually three of them — and elections rotate by class. Thus, with a typical classified board, the members of a given class are re-elected every three years. A classified board has the effect of deterring takeovers because a hostile acquiror waging a proxy contest would have to win two successive elections in order to obtain voting control (in this case two-thirds) of the board. Such an endeavor would be both time-consuming and expensive.

As of October 1, 1999, 58.7% of the 1,900 companies tracked by the Investor Responsibility Research Center (IRRC) had classified boards of directors.[fn4] Many companies classified their boards in response to the takeover boom of the 1980s.[fn5]

[fn4] Virginia K. Rosenbaum, Corporate Takeover Defenses 2000, vi (1999) (hereinafter, "Takeover Defenses").
[fn5] Richard H. Koppes, et al., "Corporate Governance out of Focus: the Debate over Classified Boards," 54 Bus. Law. 1023, n. 11 (1999).

§ 27.03[B] Corporate Governance Guidelines The Council of Institutional Investors Core Policies state, "All directors should be elected annually. . . ."[fn6]

TIAA-CREF analyzes board declassification proposals in the context of all of a company's takeover defenses:

Staggered election of directors can provide legitimate benefits to the board. However, a classified board structure at a public company also can be a significant impediment to a free market for corporate control, particularly in combination with other takeover defenses, such as a "poison pill" shareholder rights plan. We analyze the pattern of defenses in determining whether to support shareholder-mandated election of directors on an annual basis, and generally will not support such a mandate if shareholders are permitted to remove directors without cause.[fn7]

The California Public Employees' Retirement System's Corporate Governance Guidelines provide, "Every director should be elected annually."[fn8]

[fn6] Council of Institutional Investors, Corporate Governance Policies, Core Policy No. 4 (undated) (available on www.cii.org) (hereinafter, "CII Policies").

[fn7] TIAA-CREF Policy Statement, supra note 2.

[fn8] California Public Employees' Retirement System, Corporate Governance Core Principles and Guidelines 11 (1998) (available at www.calpers-governance/principles/domestic/us) (hereinafter, "CalPERS Guidelines").

§ 27.03[C] Typical Proposals § 27.03[C][1] Non-Binding Proposals Shareholder proposals asking for the repeal of a classified board are almost always non-binding, simply recommending that the board take the necessary steps to require all directors to be elected annually. Proposals tend to be non-binding because in many states, including Delaware, board classification must appear in the charter, and a charter amendment must be initiated by board, not shareholder, action.[fn9] A typical proposal seeking to declassify the board states,

RESOLVED: That Airborne stockholders urge the Board of Directors to take the necessary steps, in compliance with state law, to declassify the Board for purpose of director elections. The Board's declassification shall be completed in a manner that does not affect the unexpired terms of directors previously elected.[fn10]

[fn9] For a list of states restricting the power to initiate charter amendments to the board, and a list of those allowing shareholders to initiate such amendments, see Park McGinty, "Replacing Hostile Takeovers," 144 U. Pa. L. Rev. 983, 996 n. 38 (1996). Twenty states, including Delaware, provide that board classification may be accomplished in the charter or bylaws. Pennsylvania and Texas require that a classified board provision appear in the bylaws. Stacey Burke, "IRRC Corporate Governance Service 2001 Background Report C: Classified Boards," Feb. 15, 2001, at 8 (hereinafter "IRRC Classified Boards Report").

[fn10] Proxy Statement of Airborne Freight Corporation filed Mar. 13, 2001 ("2001 Airborne Proxy Statement").

§ 27.03[C][2] Binding Proposal Shareholders have voted on one binding proposal to declassify the board, which was submitted at Kmart in the 2000 proxy season.[fn11] That proposal provided:

RESOLVED, that pursuant to Section 450.1611 of the Business Corporation Act of the State of Michigan, the shareholders amend the Articles of Incorporation of Kmart, Inc. (sic) to

eliminate the classification of directors of the Company. Article VII is amended as follows: 21 Strike all but the first sentence of the first paragraph, and substitute: There shall only be one class of directors. All directors shall be elected annually, at the annual meeting of stockholders, beginning with the 2001 annual meeting of stockholders, except that any director elected to a longer term prior to enactment of this provision shall be permitted to serve out his term (unless removed earlier for cause). Strike the third paragraph in its entirety. Strike from the fifth paragraph the following, final phrase, "and such directors so elected shall not be divided into classes pursuant to this article.

[fn11] Kmart is incorporated in Michigan, which, unlike Delaware and many other states, permits charter amendment without board approval. IRRC Classified Boards Report, supra note 9, at 10.

§ 27.03[D] The Debate over Classified Boards Proponents of proposals to declassify the board frame the issue as one of accountability to shareholders: that directors who are up for re-election only every three years are less likely to be attentive to shareholder concerns and are thus more likely to "rubber stamp" management decisions. The election of directors, according to many proponents, is the most important way shareholders can influence a company's strategic direction.[fn12]

Some proponents criticize the anti-takeover effect of a classified board. One proponent has argued that the classified board is problematic because it reduces shareholder power at precisely the time — during an unsolicited takeover bid — when directors are most likely to suffer from a conflict of interest.[fn13] That a company has other anti-takeover measures in place weighs in favor of declassifying the board for some proponents.[fn14]

An adverse effect on share value flowing from the anti-takeover effect of a classified board, as documented in three studies, has also been offered as a reason for declassification. Proponents frequently have cited a 1991 study by John Pound of Harvard University and Lilli Gordon of the Gordon Group as proving such a relationship.

In 2002, Harvard professor Lucian Bebchuk and two co-authors published a study[fn15] showing that stock of companies with effective staggered boards — which they define as staggered boards coupled with takeover defenses that make circumvention of the staggered board impossible[fn15.1] — garnered returns of 31.8% in the nine months after a takeover bid was announced, while the stock of companies without effective staggered boards rose by 43.4%.[fn15.2]

Finally, a 2001 study by Harvard professor Paul Gompers and two co-authors provides support for the general notion that shareholder-disempowering governance features, including classified boards, are significantly correlated with a reduction in shareholder value. The study, which constructed an index of 24 governance features and classified companies according to the degree of power accorded to shareholders, found that companies in the top decile, which gave shareholders the most power, outperformed companies in the bottom decile by 8.5% per year over the period from 1990 through 1999.[fn15.3]

In response to companies' arguments that a classified board promotes stability and continuity, proponents point out that directors who stand for election annually are, with rare exceptions, re-elected year after year, and that there are no director term limits at most companies. If all of the directors are removed in a proxy contest, one proponent stated, "it would be obvious that the incumbent directors' contributions were not valued."[fn16]

Companies opposing board declassification proposals contend that a classified board strikes the right balance between accountability and continuity. A classified board does not eliminate accountability, these companies say, because one-third of the board is still elected every year, and shareholders can change a majority of the board in only two years.[fn17] In a twist on the usual argument, Eastman Chemical claimed that staggered elections promote accountability more than annual elections because directors elected annually worry more about pleasing management and ensuring re-nomination each year.[fn18]

Companies argue that staggered elections mean that two-thirds of the directors have prior experience and familiarity with the company, which is especially important for companies whose businesses are complex.[fn19] That stability promotes long-term planning and encourages a long-term focus, according to some companies.[fn20] Likewise, the classified board is credited with helping attract board candidates willing to make a long-term commitment to the company.[fn21]

Some companies are upfront about the anti-takeover purpose and effects of a classified board. Echoing arguments made in support of poison pills, companies claim a classified board increases the board's negotiating power with bidders and reduces the likelihood of a takover occurring without the receipt of a premium by share-shareholders.[fn22] Companies also point out that directors' fiduciary duties do not depend on how often they are re-elected.[fn23]

The popularity of classified boards is also a selling point for companies. Many companies cite statistics indicating that a majority of companies in their index have classified boards.[fn24] Finally, companies insist that director accountability is fostered by paying directors in stock and having a significant proportion of independent directors.[fn25]

[fn12] See, e.g., Proxy Statement of Eastman Chemical Company filed Mar. 30, 2000 ("2001 Eastman Proxy Statement").

[fn13] See, e.g., Proxy Statement of Baxter International filed Mar. 23, 2001 ("2001 Baxter Proxy Statement").

[fn14] See, e.g., Proxy Statement of Albertson's Inc. filed Apr. 27, 2001 ("2001 Albertson's Proxy Statement").

[fn15] The study, "The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence & Policy" (available at www.law.harvard.edu/faculty/bebchuk), was scheduled to be published in volume 54 of the Stanford Law Review. Professor Bebchuk's co-authors are John Coates IV and Guhan Subramanian.

[fn15.1] Such defenses include the elimination of the right to act by written consent or call a special meeting.

[fn15.2] The study examined companies that were takeover targets between 1996 and 2000.

[fn15.3] Paul A. Gompers, Joy L. Ishii, and Andrew Metrick, "Corporate Governance and Equity Prices" (2001) (available at www.ssrn.com).

[fn16] Proxy Statement of Willamette Industries filed Mar. 29, 2001 ("2001 Willamette Proxy Statement").

[fn17] See, e.g., Definitive Proxy Statement of Weyerhaeuser Company filed Mar. 7, 2001.

[fn18] See 2001 Eastman Proxy Statement, supra note 12.

[fn19] See, e.g., Definitive Proxy Statement of Delphi Automotive Systems filed Mar. 16, 2001 ("2001 Delphi Proxy Statement").

[fn20] See, e.g., Definitive Proxy Statement of Lone Star Steakhouse & Saloon Inc. filed May 1, 2000.

[fn21] See, e.g., 2001 Willamette Proxy Statement, supra note 16.

[fn22] See, e.g., 2001 Albertson's Proxy Statement, supra note 14; see also Koppes, supra note 5, at 16 ("[T]he evidence continues to be inconclusive regarding the impact that a classified board has on a corporation's share value.").

[fn23] See, e.g., Definitive Proxy Statement of Bristol-Myers Squibb filed Mar. 16, 2001.

[fn24] See, e.g., 2001 Airborne Proxy Statement, supra note 10.

[fn25] See, e.g., Definitive Proxy Statement of Coca-Cola Enterprises filed Mar. 12, 2001; 2001 Delphi Proxy Statement, supra note 19.

§ 27.04 Shareholder Rights Plans or "Poison Pills"

§ 27.04[A] General A shareholder rights plan or "poison pill" is a takeover defense that gives a company's existing shareholders the right to acquire new shares of stock at significantly below-market prices upon the occurrence of triggering events related to an unsolicited takeover bid. The resulting dilution of the putative acquiror's interest would make proceeding with a bid without the target board's approval "financial suicide. Hence, the moniker `poison pill.'"[fn26]

Absent a shareholder approval requirement in a company's charter or bylaws, the board of directors may adopt a poison pill unilaterally. A shareholder rights plan may be adopted in response to an unsolicited offer, or a board may adopt such a plan purely for preventative purposes.

Since its invention in 1983, the form and operation of the poison pill has varied.[fn27] However, a typical modern poison pill operates as follows:[fn28]

A new security called a right is issued as a dividend to a target company's existing shareholders. The right is attached to the company's common stock until a triggering event occurs, and before such an event a majority of the company's board can redeem the right for a nominal amount. (The latter feature allows friendly bids to proceed.)

The first triggering event occurs when an acquiror acquires or announces an intent to acquire a threshold percentage (usually 15 or 20%) of the target's stock without the approval of the target's board. At that time, the rights detach from the stock and the target's shareholders receive certificates entitling them to purchase the target's common stock. Once the acquiror actually acquires the threshold amount, the target's shareholders can exercise the rights at a price usually equal to 50% of the stock's market value. The acquiror is prohibited from exercising the rights attached to stock it owns.

If the acquiror effects a second-step merger despite the triggering of the poison pill, any rights that have not yet been exercised convert into rights to purchase shares of the acquiror's common stock at a price equal to 50% of market value. Again, the acquiror is prohibited from exercising rights attached to stock it owns.

[fn26] John H. Matheson, "Corporate Governance at the Millennium: the Decline of the Poison Pill Antitakeover Defense," 22 Hamline L. Rev. 727, 793 (1999).

[fn27] See Peter V. Letsou, "Are Dead Hand (and No Hand) Poison Pills Really Dead?" 68 U. Cin. L. Rev. 1101, 1104-12 (2000) (outlining evolution of poison pills).

[fn28] See generally Ronald J. Gilson & Bernard S. Black, 2 The Law and Finance of Corporate Acquisitions 741 (1995).

§ 27.04[B] Variants § 27.04[B][1] Dead-Hand Poison Pill As discussed above, ordinary shareholder rights plans permit the board of directors to redeem the rights from shareholders, disabling the rights plan and enabling a bid to proceed. This feature not only allows a target's board to enter into friendly deals, but also creates an "end run" around the poison pill. A hostile bidder could attempt to obtain control of the target's board by means of a proxy contest; a new board controlled by the bidder could, once elected, redeem the pill. A modification to the poison pill has been created to preclude such a result.[fn29]

A "dead-hand" provision allows only "continuing directors" to approve the redemption of the pill. Continuing directors are defined as the directors who were in office when the pill was adopted or directors who were endorsed by such directors. Thus, the definition of continuing directors excludes directors elected to facilitate a transaction opposed by the incumbent board.

For example, Profit Recovery Group International, Inc.'s shareholder rights plan generally permits the board of directors to redeem the rights. However, if the board includes any person elected at a meeting or by written consent of shareholders who was not nominated by the board of directors in office immediately prior to such meeting or action by written consent, then the rights may only be redeemed by a majority of continuing directors (defined to exclude nominees of any putative unsolicited acquiror) then in office. If no continuing directors are in office, the rights may not be redeemed.[fn30]

[fn29] See generally Letsou, supra note 27, at 1101, 1112-14.

[fn30] "Shareholder Protection Rights Agreement," sections 1.1 and 5.1(c), attached as Exhibit 4.1 to Profit Recovery Group International, Inc.'s filing on Form 8-K filed on Aug. 9, 2000.

§ 27.04[B][2] "Chewable" Poison Pill The "chewable" poison pill, whose name derives from the fact that the pill is not activated under certain circumstances, has been touted as a compromise that addresses the concerns of target boards while preserving a role for shareholders in responding to a tender offer.[fn31] Although chewable pills take several forms, the most common formulation provides that a triggering event entitling shareholders to exercise the rights will not occur if an offer (a "qualifying offer") meets certain requirements designed to eliminate coercion and ensure that: (a) the offer is fair to all shareholders, (b) the offeror will consummate a second-step transaction at the offer price promptly after the initial offer, and (c) the board will have sufficient time to develop alternative transactions.

A "qualifying offer" is usually defined as an all-cash offer for all outstanding shares of a company's stock that complies with the following requirements:[fn32]

The person or group making the offer must have provided to the target's board firm written commitments from responsible financial institutions to provide funds which, when added to the amount of cash and cash equivalents which such person or group then has available and has committed to use for the offer, will be sufficient to pay for all shares outstanding on a fully diluted basis and all related expenses;

The person or group must own, after consummating the offer, shares representing a certain percentage (usually a majority but sometimes more) of the voting power of the then-outstanding shares of voting stock;

The offer must remain open for a minimum amount of time — companies adopting a chewable pill have used anywhere from 40 to 90 business days — and must be extended for at least 20 business days after the last increase or permitted decrease in the price offered and after any bona fide higher alternative offer is made; and

Prior to commencing the offer, such person or group must irrevocably commit in writing (a) to consummate promptly upon completion of the offer an all-cash transaction for all remaining shares at the same price per share paid in the offer; and (b) that the person or group will not materially amend such offer.

Some chewable poison pills also require the bidder to provide a written opinion that the consideration to be paid in the offer is fair to target shareholders. A specific premium above a company's stock price in the open market may also be part of the definition of a qualifying offer.

[fn31] See Jonathan R. Macey, "The Legality and Utility of the Shareholder Rights Bylaw," 26 Hofstra L. Rev. 835, 863 (1998) (chewable pill allows shareholders to reap benefits of poison pill, including amelioration of the "prisoner's dilemma" inherent in coercive tender offers, while blunting its entrenchment effects).

[fn32] See, e.g., Amendment No. 1 to Amended Rights Agreement dated as of October 15, 2000, filed as Exhibit 2 to Texaco, Inc.'s filing on Form 8-A, 12B/A filed on Oct. 25, 2000.

§ 27.04[C] Corporate Governance Guidelines The American Law Institute's Principles of Corporate Governance recommends in Section 6.02(a) that "The board of directors may take an action that has the foreseeable effect of blocking an unsolicited tender offer [sec. 1.39] if the action is a reasonable response to the offer."[fn33] The comments to that section state, "In some circumstances, directors may conclude that blocking a tender offer is a reasonable response to the offer because blocking the offer is reasonably likely to result in greater economic value to the shareholders."[fn34]

The comments deal with the use of defensive measures, although not specifically poison pills. "Section 6.02 assumes, but does not specifically address, that the board of directors will have the authority, recognized by existing judicial decisions, to engage in defensive planning in advance of an unsolicited tender offer, within the limits imposed by statute and the corporation's charter documents."[fn35] The validity of dead hand and no hand rights plans is also questioned:

"Creation of rights or other securities with characteristics designed to block all future unsolicited tender offers for a significant period of time, which the board lacks the power to amend or redeem in the face of specific future offers, could, depending on the facts and circumstances, constitute an unreasonable restriction on shareholders' right to transfer their shares."[fn36]

The Council of Institutional Investors Core Principles urge that a "majority vote of common shares outstanding should be required to approve major corporate decisions including . . . shareholder rights plans, or poison pills."[fn37]

CalPERS' Governance Guidelines state, "No board should enact nor amend a poison pill except with shareholder approval."[fn38]

TIAA-CREF singles out for particular disfavor "dead hand" or "slow hand" poison pills, which limit the ability of the board of directors to redeem the pill. TIAA-CREF "specifically opposes shareholder rights plans that contain `continuing director' or `deferred redemption' provisions that seek to limit the discretion of a future board to redeem the plan."[fn39]

[fn33] American Law Institute, Principles of Corporate Governance: Analysis and Recommendations § 6.02(a) (1994) (hereinafter, "ALI Principles").

[fn34] Id. comment c(8) to § 6.02.

[fn35] Id. comment c(10) to § 6.02.

[fn36] Id.

[fn37] CII Policies, supra note 6, General Principle A.5(b).

[fn38] CalPERS Guidelines, supra note 8, at 11.

[fn39] TIAA-CREF Policy Statement, supra note 2.

§ 27.04[D] Typical Proposals § 27.04[D][1] Non-Binding Proposals Although binding bylaw amendments regarding poison pills have appeared in the last few years, most proposals concerning poison pills are non-binding and ask the board to redeem the poison pill or obtain shareholder approval for its continuance. A typical proposal states,

RESOLVED, that the shareholders of Circuit City Stores Inc. ("Circuit City" or the "Company") request the Board of Directors (the "Board") to redeem the preference share purchase rights distributed on April 29, 1998, unless such distribution is approved by the affirmative vote of holders of a majority of shares present and voting, to be held as soon as may be practicable.[fn40]

[fn40] Definitive Proxy Statement of Circuit City Stores, Inc. filed on May 15, 2002.

§ 27.04[D][2] Binding Bylaw Amendments First proposed by arbitrageur Guy Wyser-Pratte at Wallace Computer Services, Inc. in 1996,[fn41] binding bylaw amendment proposals amend a company's bylaws to limit the board of directors' ability to unilaterally adopt a new poison pill or maintain an existing one, by requiring shareholder approval or by making the pill "chewable." Binding bylaw amendments purport to be effective immediately upon approval by the requisite number of shares, which makes them appealing to proponents that are frustrated with what they perceive to be unresponsiveness of boards to successful non-binding proposals.

A binding bylaw amendment must be closely tailored to the company's existing bylaws, so binding proposals may vary more than non-binding proposals. However, a binding proposal submitted in the 2000 proxy season at Chubb Corporation provides an example:

RESOLVED, pursuant to Section 2.9 of the New Jersey Business Corporation Act and Article X of the By-Laws of the Chubb Corporation ("Company"), the shareholders hereby amend the By-Laws to add the following Article XI, which shall take effect immediately upon adoption at the shareholder meeting where this resolution is considered: "ARTICLE XI." "Shareholder Rights Plans" "The company shall not adopt any rights plan, share purchase rights plan or similar agreement, commonly known as a `poison pill,' which is designed to impede, or has the effect of impeding, the acquisition of a block of stock in excess of a specified threshold and/or merger or other transaction between a significant shareholder and the Company, unless such plan or agreement has previously been approved by holders of a majority of the votes cast at the shareholder meeting where the matter is considered. The Company shall promptly redeem any such rights or otherwise terminate any such plan in existence on the date this By-law is adopted, including without limitation the rights plan adopted by the Company in 1999. Notwithstanding any other provisions of the Bylaws, this By-law may not be amended, modified or repealed, except by holders of a majority of the votes cast at the shareholder meeting where the matter is considered."

The validity of binding bylaw amendments dealing with poison pills is an unsettled question under the laws of most states, including Delaware. The highest court of only one state, Oklahoma, has ruled on the issue. In that case, International Brotherhood of Teamsters General Fund v. Fleming Cos., the Oklahoma Supreme Court held that Oklahoma law does not grant exclusive authority to the board of directors to create and implement shareholder rights plans, where shareholder objection is brought and passed through official channels of corporate governance.[fn42] The decision upheld a binding bylaw amendment, which had been approved by 60% of the shares voted, requiring shareholder approval for the adoption or maintenance of a poison pill.[fn43]

[fn41] See Charles F. Richards, Jr. & Robert J. Stearn, Jr., "Shareholder By-Laws Requiring Boards to Dismantle Rights Plans are Unlikely to Survive Scrutiny Under Delaware Law," 54 Bus. Law. 607 (1999); Kate Margolis, "Binding Shareholder Bylaw Amendments: an Antidote for the Poison Pill?" 67 Miss. L.J. 817, 831 (1998).

[fn42] 975 P.2d 907, 908 (Okla. Sup. Ct. 1999).

[fn43] Id. at 909-10.

§ 27.04[E] The Debate over Poison Pills Proponents of proposals asking the board to redeem or seek shareholder approval for a poison pill argue that shareholders, not the board of directors, should decide whether a price offered by a potential acquiror of the company is adequate.[fn44] Some shareholders go as far as to say that the board and management are simply shareholders' agents, implying that the extent of the agency delegation can be scaled back at any time, including during a tender offer, to allow shareholders to act for themselves.[fn45]

Another formulation attacks the pill as giving "veto power" over a proposed transaction to the board of directors, regardless of how beneficial the deal might be for shareholders.[fn46] In the same vein, proponents contend that poison pills are overinclusive, allowing boards to block not only the abusive or unfair offers used to justify adoption of a pill, but all offers not negotiated with the board.[fn47]

Proponents also argue that by interfering with the market for corporate control, poison pills tend to entrench or insulate management and the board, making them less accountable to shareholders.[fn48] This argument may be bolstered by pointing to other takeover defenses, such as a classified board or supermajority voting requirement, deployed by the company or the lack of sufficient independent directors on the board.[fn49] Poor company performance may also be offered as a circumstance justifying increased accountability to shareholders.[fn50]

Finally, proponents point to studies showing poison pills' adverse effect on share value. The SEC's Office of the Chief Economist found in a 1986 study that stock prices declined during the two-day window around the announcement of the adoption of a poison pill.[fn51] A 1992 study by Professor John Pound of Harvard University's Corporate Research Project and Lilli A. Gordon of the Gordon Group found a correlation between high corporate performance and the absence of poison pills.[fn52]

A 2001 study by Harvard professor Paul Gompers and two coauthors provides support for the general notion that shareholderdisempowering governance features, including poison pills, are significantly correlated with a reduction in shareholder value. The study, which constructed an index of 24 governance features and classified companies according to the degree of power accorded to shareholders, found that companies in the top decile, which gave shareholders the most power, outperformed companies in the bottom decile by 8.5% per year over the period from 1990 through 1999.[fn52.1]

Companies, like proponents, focus on the roles of shareholders and the board of directors in responding to an unsolicited tender offer. Companies tend to view the board of directors as the proper — even "optimal" — guardian of shareholders' interests in the takeover context. Companies contend that the board, which is under a fiduciary duty to shareholders, is in the best position to evaluate offers, negotiate with a bidder, and pursue alternative transactions.[fn53] The poison pill, companies say, gives the board more time and flexibility to accomplish those tasks and increases the board's leverage with bidders.[fn54] To support those arguments, most companies cite studies by J.P. Morgan and proxy solicitor Georgeson & Co. showing that shareholders of companies with poison pills obtain higher acquisition premiums than shareholders of companies without pills.[fn55]

Companies claim that poison pills are intended to ensure that shareholders are not victimized by abusive or unfair bid practices, such as partial or two-tier tender offers,[fn56] that deprive shareholders of a meaningful choice whether to tender their shares.[fn57] For that reason, according to companies, poison pills do not deter fair and equitable offers.[fn58]

Companies disagree over the relevance of other governance provisions and structures to the debate over poison pills. Some companies point to the lack of other takeover defenses to justify their poison pills,[fn59] while others claim that other takeover defenses are not a substitute for a poison pill.[fn60] The issue has also been framed as whether shareholders trust the board to administer a poison pill. Some companies urge that their boards should be trusted because they are composed of a majority of independent directors.[fn61] When faced with binding bylaw amendments on poison pills, companies often assert that the proposals are illegal under the law of the company's state of incorporation, even when the SEC has denied no-action relief on that basis.[fn62]

[fn44] See, e.g., Definitive Proxy Statement of Navistar International Corporation, filed on Jan. 22, 2001.

[fn45] See Definitive Proxy Statement of Cooper Tire & Rubber Co. filed on Mar. 17, 2000.

[fn46] See Definitive Proxy Statement of Electronic Data Systems Corporation filed on Mar. 26, 2001 ("2001 EDS Proxy Statement").

[fn47] See Definitive Proxy Statement of Anheuser-Busch Companies filed on Mar. 13, 2001.

[fn48] See, e.g., Definitive Proxy Statement of Burlington Northern Santa Fe filed on Mar. 13, 2001.

[fn49] See 2001 EDS Proxy Statement, supra note 46.

[fn50] See Definitive Proxy Statement of McDermott International filed on Mar. 30, 2001.

[fn51] Office of the Chief Economist, Securities and Exchange Commission, "The Effects of Poison Pills on the Wealth of Target Shareholders" (1986).

[fn52] See, e.g., Definitive Proxy Statement of Southwest Gas Corporation filed on Apr. 3, 2001.

[fn52.1] Paul A. Gompers, Joy L. Ishii, and Andrew Metrick, "Corporate Governance and Equity Prices" (2001) (available at www.ssrn.com).

[fn53] See, e.g., Definitive Proxy Statement of Applied Materials Corp. filed on Feb. 22, 1999 ("1999 Applied Materials Proxy Statement").

[fn54] See, e.g., Definitive Proxy Statement of Raytheon Company filed on Feb. 15, 2001.

[fn55] See, e.g., Definitive Proxy Statement of Southwest Airlines Corporation filed on Mar. 23, 2001.

[fn56] In a partial bid, the offeror seeks to purchase only the number of shares required to gain control of the corporation; this was once done on a first-come, first-served basis. A two-tier offer involves two parts: In the first or "front-end" offer, usually for 51% of the stock, the offeror pays a premium above market price; in the "back-end," commenced once 51% has been purchased, the terms, which may include securities rather than cash, are much less favorable. Two-tier tender offers create a collective action problem for shareholders, since those that do not tender into the front-end offer will receive only the consideration offered in the back-end. Thus, a shareholder might tender into the front-end offer even if she believed the consideration was inadequate. The Williams Act, 15 U.S.C. § 78a, eliminated first-come, first-served offers but not two-tier tender offers. See Guhan Subramanian, "A New Takeover Defense Mechanism: Using an Equal Treatment Agreement as an Alternative to the Poison Pill," 23 Del. J. Corp. L. 375, 385-91 (1998).

[fn57] See, e.g., Definitive Proxy Statement of Bank of New York Company filed on Mar. 31, 2000.

[fn58] See, e.g., Definitive Proxy Statement of General Motors Corporation filed on Apr. 19, 2001.

[fn59] See, e.g., Definitive Proxy Statement of Chubb Corporation filed on Mar. 24, 1999 ("1999 Chubb Proxy Statement").

[fn60] See 1999 Applied Materials Proxy Statement, supra note 53.

[fn61] See, e.g., 2001 Delphi Proxy Statement, supra note 19.

[fn62] See 1999 Chubb Proxy Statement, supra note 59; 1999 Applied Materials Proxy Statement, supra note 53.

§ 27.04[F] Poison Pill Endorsement Statutes Two of the binding proposals found excludable by the SEC staff have involved companies incorporated in Minnesota. In both Health Risk Management, Inc.[fn63] and Dayton Hudson Corporation,[fn64] the companies argued that allowing shareholders to adopt a bylaw limiting the board's power over poison pills would violate Minnesota's poison pill endorsement statute. Generally, poison pill endorsement statutes authorize the board of directors to create and issue rights, options or warrants for the purchase of shares of the company's stock, including rights that explicitly discriminate against a hostile bidder.[fn65] Twenty-five states have poison pill endorsement statutes: Colorado, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Maryland, Massachusetts, Minnesota, Nevada, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Virginia, Washington and Wisconsin.[fn66]

[fn63] Health Risk Management, Inc., 2000 SEC No-Act. LEXIS 503 (Apr. 3, 2000).

[fn64] Dayton Hudson Corporation, 1999 SEC No-Act. LEXIS 387 (Mar. 25, 1999).

[fn65] See Katherine E. Wychulis & David S. Haddock, II, "Business and Corporate Law," 29 U. Rich. L. Rev. 825 (1995); Matheson, supra note 26, at n. 60.

[fn66] IRRC Poison Pill Report, supra note 9, at 39.

§ 27.04[G] Delaware Law Issues Since the change in policy, the SEC staff has permitted exclusion of two proposals submitted at companies incorporated in Delaware,[fn67] which is the jurisdiction of incorporation for the vast majority of U.S. public corporations. Although a thorough analysis of the Delaware law issues raised by binding bylaw amendments is beyond the scope of this book, the broad parameters are as follows.[fn68]

Under Delaware law, shareholders have the power to amend the corporation's bylaws. Section 109(a) of the Delaware General Corporation Law (DGCL) states that, "the power to adopt, amend or repeal by-laws shall be in the stockholders entitled to vote. . . . The fact that such power [to amend the bylaws] has been so conferred upon the directors . . . shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal by-laws."[fn69] Delaware law permits bylaws on any subject "not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees."[fn70]

However, Section 141(a) of the DGCL charges the board of directors with managing "[t]he business and affairs of every corporation . . . except as may otherwise be provided in [the DGCL] or in [the corporation's] certificate of incorporation."[fn71] The authority to issue rights or options entitling holders to purchase from the corporation any shares of its capital stock is also conferred on the board in DGCL Section 157.[fn72]

Opponents of binding bylaw amendments on poison pills argue that Section 109(b)'s prohibition on bylaws that are "inconsistent with law" invalidates bylaws that conflict with the grants of power to directors in Sections 141(a) and 157. In other words, a binding poison pill proposal "may be found `inconsistent with law' because it purports to delegate to the shareholders decisions that are within the exclusive domain of the board of directors."[fn73]

Opponents say binding bylaw amendments are inconsistent with law for two reasons. First, opponents note that "Delaware courts have consistently protected a board's authority to manage the affairs of a corporation" and have not hesitated to invalidate delegations of this authority to shareholders.[fn74] An integral part of this authority, opponents say, is the board's role in making decisions about potential changes of control, which derives from directors' fiduciary duty to protect shareholders from reasonably perceived harm.[fn75] Opponents point to the decision of the Delaware Supreme Court in Quickturn Design Systems, Inc. v. Shapiro,[fn76] in which the court held that a no-hand poison pill was invalid as depriving a newly elected board of its authority to manage the business and affairs of the corporation under Section 141(a) of the DGCL, as undermining the validity of the binding bylaw amendment under Delaware law.[fn77] Second, opponents urge that DGCL Section 157's grant of authority to the board over rights and options, including rights used in shareholder rights plans, is exclusive since, unlike other DGCL provisions, Section 157 confers no power on shareholders. Moreover, Section 157 is not subject to limitation in a company's bylaws. Accordingly, opponents argue, a bylaw that purports to give shareholders the power to pass on the propriety of rights plans would be invalid under Delaware law.[fn78]

Supporters of binding bylaw amendments insist that Section 141(a)'s broad grant of authority to the board is subject to the shareholders' right, conferred in DGCL Section 109(b), to adopt bylaws, including bylaws circumscribing the board's authority. "This specific empowerment of shareholders," one supporter has written, "should trump any vague, general norms about directors' power to run the firm, particularly because the shareholder rights bylaw does not interfere with directors' ability to make strategic decisions about the firm's operations."[fn79]

Section 157, it is also claimed, does not abrogate the shareholder bylaw authority contained in Section 109; rather, Section 157 may, at most, "give the board agenda control over the terms" of a pill.[fn80] Finally, supporters also argue that the importance of maintaining a robust market for corporate control militates in favor of allowing binding bylaw amendments.[fn81]

[fn67] Novell, Inc., 2000 SEC No-Act. LEXIS 212 (Feb. 14, 2000); General Dynamics Corporation, 2001 SEC No-Act. LEXIS 326 (Mar. 5, 2001).

[fn68] See supra Chapter 14.

[fn69] 8 Del. C. § 109(a) (2001).

[fn70] Id. § 109(b).

[fn71] Id. § 141(a).

[fn72] Id. § 157.

[fn73] Richards & Stearn, supra note 41.

[fn74] Mattel, Inc., 2001 SEC No-Act. 327 (Mar. 7, 2001).

[fn75] Novell, Inc., 2000 SEC No-Act. LEXIS 212 (Feb. 14, 2000).

[fn76] 721 A.2d 1281 (Del.Sup.Ct. 1998).

[fn77] See Mattel, Inc., 2001 SEC No-Act. LEXIS 327 (Mar. 7, 2001); Novell, Inc., 2000 SEC No-Act. LEXIS 212 (Feb. 14, 2000); General Dynamics Corporation, 2001 SEC No-Act. LEXIS 326 (Mar. 5, 2001); Richards & Stearn, supra note 41.

[fn78] See Mattel, Inc., 2001 SEC No-Act. LEXIS 327 (Mar. 7, 2001), Novell, Inc., 2000 SEC No-Act. LEXIS 212 (Feb. 14, 2000); General Dynamics Corporation, 2001 SEC No-Act. LEXIS 326 (Mar. 5, 2001); Richards & Stearn, supra note 41.

[fn79] Macey, supra note 31, at 867-68.

[fn80] Jeffrey N. Gordon, "`Just Say Never?' Poison Pills, Deadhand Pills, and Shareholder-Adopted Bylaws: An Essay for Warren Buffett," 19 Cardozo L. Rev. 511, 547 n. 148 (1997).

[fn81] Id. at 857-59.

§ 27.05 Supermajority Voting Requirements

When shareholder approval is required to authorize corporate action, the corporate laws of most states require only the approval of a simple majority of outstanding shares, or 50% plus one for most actions.[fn82] However, these state-law rules may be default rules, that is, rules that apply in the absence of a contrary requirement in a company's charter or bylaws.[fn83]

Some companies, in their charter or bylaws, provide that a higher vote than the one set by statute — usually two-thirds, 75% or 80% of outstanding shares — is required to approve a particular corporate action. For example, Baker Hughes, Inc.'s charter requires a vote of 75% of outstanding shares to amend the bylaws.[fn84] Such requirements are referred to as supermajority voting requirements.

Because supermajority voting requirements may make it more difficult for an unsolicited takeover offer to be successful, they are considered to be a form of takeover defense. For example, an acquiror may wish to acquire a company whose board size is established in its bylaws, with a vote of 80% of outstanding shares required to alter the number of directors. If the acquiror is rebuffed by the target's board, it might decide to seek shareholder approval to amend the bylaws to enlarge the board by enough seats to enable it to nominate and elect candidates comprising a majority of the board.[fn85] A supermajority voting requirement for such an amendment would make this strategy much less likely to succeed.

[fn82] See Arthur R. Pinto, "Corporate Governance: Monitoring the Board of Directors in American Corporations," 46 Am. J. Comp. L. 317, 325 (1998).

[fn83] See Melvin A. Eisenberg, "The Structure of Corporate Law," 89 Colum. L. Rev. 1461 (1989) (describing and analyzing mandatory and default rules).

[fn84] See Article SEVENTH of Restated Certificate of Incorporation of Baker Hughes Incorporated, filed as Exhibit 3.1 to Form 10-K for the period ended Dec. 31, 1998.

[fn85] For an example of this strategy in action, see Definitive (Contested) Proxy Statement of Paul Dupee filed at Maxicare Health Plans Inc. on Apr. 22, 1998.

§ 27.05[A] Relationship to Fair Price Provisions/Statutes Fair price requirements, which may be imposed by statute or may appear in a company's charter or bylaws, require a bidder to pay a "fair price" to all shareholders. A "fair price" is generally defined as the highest price the bidder paid for any shares of the company's stock acquired during a specified period before the commencement of a tender offer.[fn86]

Most fair price provisions do not apply if a transaction receives the target board's blessing or if a supermajority of the target's shareholders approve the deal.[fn87] The supermajority requirement is thus an integral part of the fair price provision. Nonetheless, most recent shareholder proposals do not distinguish between supermajority requirements that are part of a fair price provision and those that are not. For example, proposals submitted in the 2001 proxy season at Electronic Data Systems, Lockheed Martin and Boeing, all of which have fair price provisions, simply sought elimination of all supermajority voting requirements.[fn88]

[fn86] Takeover Defenses, supra note 4, at xii.

[fn87] Id.
[fn88] Definitive Proxy Statement of Lockheed Martin Corporation filed on Mar. 20, 2001; Definitive Proxy Statement of Boeing Company filed on Mar. 23, 2001; 2001 EDS Proxy Statement, supra note 46; but see Definitive Proxy Statement of PG&E Corporation filed on Apr. 16, 2001 (proponent discusses utility of fair price provision in context of proposal to repeal supermajority voting requirement) (hereinafter, "2001 PG&E Proxy Statement").

§ 27.05[B] Corporate Governance Guidelines The Council of Institutional Investors Core Principles state, "A majority vote of common shares outstanding should be sufficient to amend company bylaws or take other action requiring or receiving a shareholder vote."[fn89] CalPERS' Corporate Governance Core Principles and Guidelines recommend, "A majority of shareholders should be able to amend the company's bylaws by shareholder proposal."[fn90]

[fn89] CII Policies, supra note 6, General Principle A3.

[fn90] CalPERS Guidelines, supra note 8, Governance Guideline D1.

§ 27.05[C] Typical Proposals Proposals dealing with supermajority voting requirements may be binding or non-binding. Whether a proposal is binding depends in part on whether the requirement at issue is contained in the charter or bylaws: if the requirement is in the charter, the law of many states, including Delaware, requires board approval before shareholders can vote to remove the requirement from the charter. Accordingly, a proposal to remove such a requirement is usually non-binding.[fn91] A typical non-binding proposal states:

Recommend [that the] Board of Directors take steps necessary to implement this shareholder resolution to reinstate simple majority vote on all issues that can be submitted to shareholder vote.[fn92]

By contrast, when a supermajority provision is in the bylaws, a shareholder may, depending on the law in the company's state of incorporation and the ability of shareholders under the company's governing documents to amend the bylaws, submit a binding proposal to repeal the requirement. Binding proposals vary significantly because they must hew closely to the company's existing bylaws.

[fn91] See supra note 9 for a discussion of state law regarding board and shareholder initiation of charter amendments.

[fn92] Definitive Proxy Statement of Allied Signal Inc. filed on Mar. 10, 1998.

§ 27.05[D] The Debate over Supermajority Voting Requirements Proponents seeking repeal of supermajority requirements focus on the fact that they allow a small minority to frustrate the will of the majority of shareholders. For example, one proponent argued that under a rule requiring the vote of 80% of outstanding shares to remove a director for cause, "if 79% of shares outstanding voted to remove a director with cause and only 1% voted no — only 1% of shares could force their will on the overwhelming 79% majority."[fn93]

Like poison pills and classified boards, supermajority requirements are attacked as insulating the board and management from accountability to shareholders and promoting entrenchment. "Simple majority vote," said one proponent, "is particularly important when management needs greater accountability to avoid another bumpy ride," referring to performance problems.[fn94] As that same proponent put it in a proposal at another company, "A competitive management does not need the power to override a shareholder majority."[fn95]

Some proponents explicitly attack supermajority requirements as deterring takeovers that shareholders may believe to be in their best interests.[fn96] Supermajority requirements are presented as obstacles to reforming other corporate governance structures at a company. A proponent advancing a proposal to repeal a supermajority voting requirement warned that unless his proposal was implemented, the vote of 80% of outstanding shares would be required to amend the company's charter to declassify the board.[fn97]

A 2001 study by Harvard professor Paul Gompers and two coauthors provides support for the general notion that shareholder disempowering governance features, including supermajority voting requirements, are significantly correlated with a reduction in shareholder value. The study, which constructed an index of 24 governance features and classified companies according to the degree of power accorded to shareholders, found that companies in the top decile, which gave shareholders the most power, outperformed companies in the bottom decile by 8.5% per year over the period from 1990 through 1999.[fn97.1]

Companies defend supermajority requirements as necessary to ensure that "decisions affecting only the most important aspects of the existence of the company and how it operates are fair to all of our shareholders, large and small."[fn98] As one company explained, "These supermajority vote provisions are designed to provide protection for all shareholders against the self-interest of a few large shareholders."[fn99]

Companies deny that supermajority requirements deter all takeovers. Rather, they say, such a requirement "encourages potential acquirers to negotiate the terms of an acquisition with the Board of Directors."[fn100] As with poison pills, companies urge that shareholders benefit, in the form of higher premiums, when the board negotiates on their behalf.

Some companies point to other governance provisions in arguing against the repeal of supermajority requirements. For example, in opposing a proposal to reduce an 80% vote requirement for removing a director for cause, Lockheed Martin noted that it offered shareholders the opportunity to elect all directors every year. Such annual election, Lockheed contended, "more adequately ensures the independence and qualifications of the board than would be achieved through reducing the voting requirement for a director's removal for cause."[fn101]

[fn93] Definitive Proxy Statement of Lockheed Martin Corp. filed on Mar. 20, 2001 (hereinafter, "2001 Lockheed Proxy Statement").

[fn94] 2001 EDS Proxy Statement, supra note 46.

[fn95] Definitive Proxy Statement of Sempra Energy filed on Mar. 20, 2001 (hereinafter, "2001 Sempra Proxy Statement").

[fn96] See, e.g., 2001 PG&E Proxy Statement, supra note 88.

[fn97] Definitive Proxy Statement of First Energy Corporation filed on May 15, 2001.

[fn97.1] Paul A. Gompers, Joy L. Ishii, and Andrew Metrick, "Corporate Governance and Equity Prices" (2001) (available at www.ssrn.com).

[fn98] Id.

[fn99] Definitive Proxy Statement of Boeing Company filed on Mar. 23, 2001.

[fn100] 2001 Sempra Proxy Statement, supra note 95.

[fn101] 2001 Lockheed Proxy Statement, supra note 93.

§ 27.06 Limitations on Shareholders' Right to Act by Written Consent and/or Call a Special Meeting

Taking action by written consent in lieu of a meeting and calling a special meeting of shareholders are two mechanisms shareholders can use to raise matters outside the normal annual meeting cycle. State corporate law generally defines shareholders' right to act by written consent, a procedure in which written ballots are executed and tabulated in the same manner as regular proxy cards. Delaware, for instance, provides, "Except as provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of stockholders of a corporation, or any which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting. . . ."[fn102]

Similarly, state corporate law establishes the contours of shareholders' right to call a special meeting. In Illinois, for example, special meetings of shareholders may be called by "the holders of not less than one-fifth of all the outstanding shares entitled to vote on the matter for which the meeting is called."[fn103]

Both types of state-law rules may be subject to limitation or expansion in a company's charter or bylaws. While New York law requires unanimous shareholder consent for an action to be effective, it permits New York corporations to provide in the charter for a lower threshold.[fn104] Under Nevada law, the articles of incorporation or bylaws may limit the statutory right of shareholders to act by written consent.[fn105] Limitations on shareholders' right to act by written consent or call a special meeting that are stricter than the rules set by state law are considered takeover defenses because they may impede the ability of a hostile bidder to succeed in completing a transaction or obtaining control of the board of directors.

An example of the use of the special meeting right to facilitate a transaction was Brooke Group Ltd.'s ("Brooke's") 1996 solicitation of consents from holders of common and certain preferred stock of RJR Nabisco Holdings Corporation ("RJR"). In that solicitation, Brooke asked RJR shareholders to consent to a non-binding proposal recommending that RJR spin off its remaining equity interest in Nabisco Holdings Corp. and to a proposal amending RJR's bylaws to reinstate the right of 25% of RJR's shareholders to call a special meeting. By conducting the solicitation, Brooke, whose Liggett Group subsidiary is in the tobacco business, hoped to facilitate a separation of RJR's food and tobacco businesses. Brooke's chairman and CEO, Bennett LeBow, had previously proposed a business combination between Liggett and RJR.[fn106]

[fn102] 8 Del. C. § 228(a) (2001).

[fn103] 805 Ill. Comp. Stat. 5/7.05 (2001).

[fn104] See N.Y. Bus. Corp. Law § 615(a) (Consol. 2001).

[fn105] See Nev. Rev. Stat. Ann. § 78.320(2) (Michie 2001).

[fn106] See Definitive Revised Proxy Statement (Non-management) filed at RJR Acquisition Corp. by Brooke Group Ltd. on Jan. 2, 1996.

§ 27.06[A] Typical Proposal

Be it RESOLVED, that the shareholders of Louisiana-Pacific Corporation request that the Board of Directors amend the certificate of incorporation to reinstate the rights of the shareholders to take action by written consent.[fn107]

[fn107] Definitive Proxy Statement of Louisiana-Pacific Corp. filed on Mar. 26, 1999.

§ 27.06[B] The Debate over the Right to Call a Special Meeting and Act by Written Consent Supporters of proposals to give shareholders the right to call a special meeting or act by written consent (or both) argue that these rights are valuable to shareholders who need to act quickly to protect the value of their investment. They specifically identify the importance of being able to give "timely consideration" to a bid for the company or a proposal to elect dissident director candidates even if those matters arise outside the normal annual meeting cycle.[fn108]

The need for stability to permit the board and management to engage in long-term planning and activities is cited by companies opposing these proposals.[fn109] Some companies contend that allowing shareholders to call special meetings or act by written consent is "disruptive" as well as expensive and distracting to management.[fn110] As one company stated, "the Board believes that management's time is better spent on the day to day operations of the Corporation and its ongoing efforts to enhance stockholder value."[fn111]

A 2001 study by Harvard professor Paul Gompers and two coauthors provides support for the general notion that shareholderdisempowering governance features, including restrictions on shareholders' ability to act by written consent and call a special meeting, are significantly correlated with a reduction in shareholder value. The study, which constructed an index of 24 governance features and classified companies according to the degree of power accorded to shareholders, found that companies in the top decile, which gave shareholders the most power, outperformed companies in the bottom decile by 8.5% per year over the period from 1990 through 1999.[fn112]

[fn108] See Definitive Proxy Statement of Sensormatic Electronics Corp. filed on Oct. 14, 1998.

[fn109] See id.

[fn110] See Definitive Proxy Statement of Unisys, Inc. filed on Mar. 12, 1998.

[fn111] See Definitive Proxy Statement of Newmont Mining Corp. filed on Mar. 28, 2000.

[fn112] Paul A. Gompers, Joy L. Ishii, and Andrew Metrick, "Corporate Governance and Equity Prices" (2001) (available at www.ssrn.com).

§ 27.07 Takeover Defense Proposal — Most Common Grounds for Exclusion

Binding proposals are vulnerable to exclusion under Rule 14a- 8(i)(1), allowing exclusion of proposals whose subjects are improper ones for shareholder action under state law, and/or Rule 14a-8(i)(2), permitting omission of proposals that require the company to violate the law, both on the theory that the law of the state of the company's incorporation does not permit shareholders to amend the bylaws (or does not permit shareholderadopted bylaws on the particular topic) and the proposal thus violates that law. Note that the analysis often does not involve a statute that expressly prohibits shareholder bylaws on a particular subject; rather, companies frequently urge that a shareholder bylaw infringes on the board's power to manage the business and affairs of the corporation and is thus impermissible.
Proposals that impute a negative "purpose" to an anti-takeover device may be omitted under Rule 14a-8(i)(3), dealing with false and misleading statements; the SEC has taken the view that such statements are false and misleading, and must be revised to discuss the effect of the device rather than its purpose.
A company may attack a proposal to declassify the board under Rule 14-8(i)(8), relating to the election of directors, if the proposal does not clearly state that declassification will be carried out in such a way that all directors currently on the board will be able to serve out their terms.

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