Shareholder Nomination Restrictions: A Corporate Governance Mystery.

• Author: Butler, Aristotle A.
• Position: NOTE

St. Denis J. Villere & Co. v. Epiq Systems, Inc., No. 1516-CV26509 (Mo. Cir. Ct. Jackson Cty. Apr. 5, 2016)

1. INTRODUCTION

   Envision a citizen registered to vote in his or her state's gubernatorial election. Further suppose that in the months leading up to the general election, that citizen is denied the right to vote in any of the primaries for that governorship. Effectively, the citizen is permitted to vote for whomever he or she chooses in the general election but lacks the power to help select who ultimately participates in that race. Now, hypothesize the reason that person is prevented from voting in the primary is to ensure that those promulgating the rule can hand-select the candidates.

   When electoral rights such as these "are subjected to 'severe' restrictions," the United States Supreme Court has held that "the regulation must be 'narrowly drawn to advance a state interest of compelling importance.'" (1) It has further held that "[c]asting a ballot in a primary election established and regulated by state law is an act of voting... and the immunity against discrimination on account of race or color which is guaranteed by [the Constitution] protects the plaintiff in his right to vote in such primary, where the only obstacle interposed is that he is a negro." (2)

   So, what does this have to do with corporate governance? In Nixon v. Herndon, the discriminatory nomination restrictions were held unconstitutional because they created a suspect classification that prevented African Americans from having any real choice in selecting their elected officials. (3) Corporate governance in a publicly held corporation is analogous. To effectively participate in the maximization of their investment, shareholders in a company have the right to vote and to nominate candidates for director. Absent the right to nominate, the right to vote in the ultimate election becomes severely watered down. Despite corporate governance existing for decades, the area of nomination restrictions has gone largely without judicial analysis.

   This Note first introduces the facts and judgment of a recent case in the Circuit Court of Jackson County, Missouri: St. Denis J. Villere & Co. v. Epiq Systems, Inc. (4) It then examines the origins of shareholders' right to nominate candidates for director, the purpose of that right, and the background for analyzing restrictions of that right. It next discusses the judgment of the court. To be clear, the holding of the actual case is largely insignificant for the purposes of this Note. Its facts, however, do present an important example of shareholder nomination restriction issues, which are the focus of this Note. Finally, this Note concludes by evaluating the nomination restrictions in the case, as well as other possible restrictions; addressing what should be the source of shareholders' right to nominate; and proposing the appropriate legal framework within which such restrictions should be reviewed.

2. FACTS AND HOLDING

   St. Denis J. Villere & Company, L.L.C. ("Villere"), a Louisiana investment management firm, and George Young, Chief Compliance Officer for Villere, were the plaintiffs in this shareholder nomination action. (5) Epiq Systems, Inc. ("Epiq"), a Missouri publicly held legal services and technology provider, (6) and its board of directors ("Board") were the defendants. (7) Villere owned 5,255,524 shares of Epiq common stock. (8) These shares, like most publicly traded stock, were held in "street name." (9) This means the shares on Epiq's stock ledger are registered under the name Cede & Company ("Cede & Co."), which serves as Villere's nominee, or stock steward. (10) Young is also an Epiq shareholder and was nominated to serve as a member of Epiq's Board. (11)

   Epiq has been a publicly traded company since February of 1997. (12) The company is traded on the NASDAQ stock exchange and currently has 37,513,009 outstanding shares of common stock. (13) Epiq consistently fell short of its declared financial goals over the ten years prior to the suit. (14) In particular, Epiq failed to meet its revenue guidance in five of the last seven years and missed its earnings per share guidance in all seven of those years. (15) Moreover, Epiq stock has largely underachieved for the greater part of a decade. (16) During that time, the disparity between Epiq's underperformance and the general performance of the market grew increasingly farther apart. (17)

   As Epiq continued to struggle economically, Villere and its other investors vocalized their discontent with the Board's actions. (18) In June of 2010, the Board amended Epiq's Bylaws to include an advance notice provision (the "Notification Bylaw"), (19) which modified the eligibility requirements for shareholder director nominations, (20) the informational disclosures required of both nominees and nominating shareholders, (21) and the deadline for submitting the information to the company. (22)

   On October 9, 2015, the Board again amended Epiq's Bylaws (the "2014 Amendment"). (23) The most significant addition of the 2014 Amendment was the eligibility requirement that nominating shareholders must "have been in compliance with their obligations (including with respect to timing, filing and disclosure) under 17 C.F.R. [section] 240.13d-l through 240.13d-7 under the Securities Exchange Act of 1934 ('Exchange Act') for a period of at least twelve months prior to such time as a notice is delivered." (24)

   Villere, remaining unsatisfied with Epiq's progress, prepared a slate of nominees to stand for election to the company's Board (the "Nomination"). (25) Since its shares amounted to at least a seven percent beneficial ownership in Epiq over the previous two years, Villere instructed Cede & Co. to make the Nomination official prior to the notification deadline. (26) Villere maintained it complied with all other requirements of the Notification Bylaw. (27) Despite Villere's compliance and the candidates being adequately qualified, the Board rejected the Nomination. (28)

   In December of 2015, Villere filed a complaint with the Jackson County Circuit Court alleging that Epiq's Bylaws directly infringed upon valid shareholder rights. (29) Particularly, Villere asserted that the following illicitly constrained shareholder nomination and voting rights: "(a) the Defendant Directors' adoption and application of the invalid [Notification Bylaw] and 2014 Amendment[] to the Notification Bylaw; (b) Defendants' refusal to honor Villere's valid termination of the Director Appointment Agreement; and (c) Defendants' invalid rejection of the Nomination." (30)

   Villere further contended that the Board's refusal to accept the Nomination was improper where: (1) the Agreement was validly terminated; (2) the Nomination complied with all requirements in Epiq's Bylaws; (3) the Notification Bylaw and 2014 Amendment served as "a pretext to reject an otherwise valid Nomination" and were thus invalid; and (4) the amendments were "facially invalid" because their sole purpose was to entrench the incumbent Board by dampening shareholders' ability to act effectively. (31) Villere posited that the Board's enforcement of the Notification Bylaw further limited the already minimal group of shareholders eligible to make nominations. (32)

   Villere requested the court issue a declaratory judgment holding the Agreement was validly terminated, the Nomination complied with all of Epiq's Bylaws, and the bylaw amendments violated Missouri law. (33) The complaint likewise requested Epiq be enjoined from meddling with Villere's nomination to the Board. (34) Epiq's Answer and Counterclaim sought to enjoin both Villere and Cede & Co. "from continuing to violate the Director Appointment Agreement and... Bylaws by attempting to nominate directors for the 2016 Annual Meeting of Shareholders." (35) The Board asserted that Villere did not qualify as an "owner" of at least five percent under the Bylaws because it was not a shareholder of record. (36) They further contended that Cede & Co. did not qualify as an owner because it was a conglomeration of shareholders and not a single shareholder as the term intended. (37) Epiq additionally asked the court to issue a declaratory judgment stating that Villere's nomination was unlawful. (38)

   Subsequently, the parties agreed to permit the court to rule on all preliminary issues deemed purely legal in nature. (39) After two days, the court issued its Judgment. (40) The Jackson County Circuit Court began its analysis by examining the construction and termination of the Agreement under the general principles of contract law. (41) In reaching its conclusion, the court cited the "plain, unambiguous language" of Section 2(c) of the Agreement. (42) The court then proceeded to analyze Villere's nomination, which the court held was compliant with all of Epiq's Bylaws. (43) In particular, the court pronounced that "Cede, through Villere," is a beneficial owner and registered shareholder of Epiq and, as such, is qualified to nominate a slate of directors. (44) Accordingly, the court ruled that precluding Villere from presenting its slate of nominees at the 2016 Annual Meeting, when it had properly complied with all nomination requirements, would cause it to suffer irreparable harm. (45) Unfortunately, the court did not have occasion to address the validity of the shareholder nomination restrictions, which is the focus of this Note. (46)

3. LEGAL BACKGROUND

   A corporation is a type of business organization (47) "established in accordance with legal rules into a legal... person that has[:] a legal personality distinct from the natural persons who make it up[;] exists indefinitely apart from them[;] and has the legal powers that its constitution gives it." (48) The United States Supreme Court has described corporations as "artificial being[s], invisible, intangible, and existing only in contemplation of law.... [with] only those properties which the charter of [their] creation...