Special Meetings and Consent Solicitations: How the Written-Consent Right Uniquely Empowers Shareholders.

Author:Foster, Meredith

AUTHOR. Yale Law School, J.D. 2018.I am very grateful to Professor John Morley for his guidance and encouragement and to Stephen Fraidin for his mentorship and for sparking my interest in the topic. I am also exceptionally thankful to Yena Lee and the editors of the Yale Law Journal for their thoughtful edits. Finally, I want to thank my family and friends for their support and the professor and students in the Advanced M&A Deals Workshop. All errors are my own.


INTRODUCTION 1708 I. THE BACKLASH AGAINST TAKEOVER DEFENSES 1714 A. Takeover Defenses in the Early 2000s 1714 B. The Current State of Takeover Defenses 1716 II. THE RIGHT TO ACT BY WRITTEN CONSENT 1719 A. A Majority of Companies Still Bar Shareholders from Acting by Written Consent 1719 B. The Procedural Differences Between the Two Rights Are 1722 Overstated III. COMPARING RESTRICTIONS ON THE TWO RIGHTS 1726 A. Data on the Use of the Special-Meeting and Written-Consent Rights 1726 B. The Key Difference Between the Special-Meeting and Written-Consent Rights 1728 1. Restrictions on Special Meetings Imposed by Company 1728 Bylaws a. Limitations on When a Special Meeting Can Be Called 1729 b. Limitations on How a Special Meeting Can Be Called 1731 c. Limitations on Who Can Call a Special Meeting 1732 d. How These Restrictions Interact with a Poison Pill and Section 13(d) of the Williams Act 1734 2. Boards' Inability to Impose Similar Restrictions on Shareholders' Right to Act by Written Consent 1736 IV. TAKEAWAYS FOR CORPORATE GOVERNANCE 1739 CONCLUSION 1740 INTRODUCTION

In the early 1980s, the hostile takeover--talcing control of a company without the approval of its board of directors--emerged as a significant phenomenon in corporate governance. (1) In response to the growing popularity of hostile takeovers, boards of directors started to adopt increasingly severe takeover defenses. (2) Takeover defenses are provisions--generally found in a company's bylaws or articles of incorporation--that make it harder for activist investors and hostile bidders to gain control of a company without board support. A common example is the "poison pill," which essentially prevents the acquisition of a company without board approval. (3)

Takeover provisions have been a key focus of corporate law scholarship ever since. (4) They drive, for example, a heated debate about how much control shareholders should have over the affairs of a company relative to the board of directors. Dozens of academic papers have been published on the topic, discussing everything from which defenses have the largest antitakeover effects (5) to whether defenses increase or decrease shareholder wealth. (6) The debate has also played out in the public arena. During the 2000s, shareholders increasingly brought proposals at annual meetings to request that the company remove its takeover defenses, (7) most prominently in the movement to destagger board-of-director elections. (8)

Although the debate between shareholders and boards continues to this day, shareholders seem to be winning: the most widespread types of takeover defenses from the early 2000s are now present in only a minority of companies' corporate-governance documents. As an illustration, in 2002, 61% of S&P 500 companies had classified boards, 59% barred shareholders from calling special meetings, and 60% had poison pills in force. (9) In 2018, however, only 11% of S&P 500 companies had staggered boards (also known as classified boards), 36% barred shareholders from calling special meetings, and fewer than 2% had poison pills in force. (10)

Yet despite this general decline in takeover defenses, one takeover-defense provision has remained remarkably resilient. The vast majority of public companies' articles of incorporation still include a provision barring shareholders from acting via written consent. (11) This provision persists despite the fact that a number of companies each year receive shareholder proposals requesting the right to act by written consent, (12) and despite the fact that hostile bidders and activists have successfully used consent solicitations to gain concessions from, or control over, companies. (13)

This takeover-defense provision--barring shareholders from acting by written consent--is explained in depth below. Essentially, it works by preventing shareholders from acting in concert before a company's annual meeting. For example, imagine that an acquirer makes an offer to buy a company, which the board refuses against the shareholders' wishes. As a result, the shareholders want to replace the board with new directors that they believe will better represent their interests. If shareholders do not have the right to act by written consent, (14) they must wait until the next annual meeting--which may be up to twelve months away--before taking such action. In that time, the acquirer may drop its bid, hesitant to wait around for an annual meeting in which it is uncertain that a majority of the board will be replaced. By contrast, if a target company lacks this takeover defense, the bidder could engage in a consent solicitation, allowing the bidder to gain control of the target's board once it obtains consents from greater than 50% of the outstanding shares. (15)

This Note explores why the takeover defense against written consents has endured, while most of the other key antitakeover provisions have disappeared. The provision has endured in part because of state laws requiring board approval to remove it. (16) More significantly, however, it has endured because boards have persuasively argued that removing it would not benefit shareholders. (17)

Specifically, boards have argued that shareholders do not need the right to act by written consent because most companies already give shareholders the right to call a special meeting. (18) Like the right to act by written consent, the right to call a special meeting allows shareholders to act before the regularly scheduled annual meeting. Boards thus contend that the right to call a special meeting is functionally equivalent to the right to act by written consent. Both rights allow shareholders to take various actions including removing and replacing directors prior to the annual meeting. Boards have also argued that the special-meeting right benefits shareholders, such as by ensuring notice to all shareholders and a lower voting threshold. (19)

This Note argues that, contrary to this view, there is an important distinction between the two rights: while boards can unilaterally place extreme restrictions on the exercise of the special-meeting right, they cannot do so with the written-consent right because most changes to that right require shareholder approval. (20) Put differently, the written-consent right uniquely empowers shareholders not because of what it allows shareholders to do, but because of what it prevents boards from doing without their consent.

While this distinction may seem minor, its consequences are significant. Although the bylaws of most S&P 500 companies in Delaware nominally give shareholders the right to call a special meeting, this right is, in reality, extremely limited at many of these companies--and, at some companies, virtually nonexistent--due to the extreme restrictions that companies' bylaws place on the right. (21) Consequently, in the fraction of companies that give shareholders both rights, the written-consent right is often much more robust than the special-meeting right. For that reason, even though far fewer companies give shareholders the right to act by written consent, shareholders use it to gain representation on company boards far more often than they use the special-meeting right. (22)

The right to act by written consent, although used frequently by activists and hostile bidders, has gone virtually unexamined in the academic literature. (23) In particular, no published work has identified precisely how the written-consent right empowers shareholders relative to the special-meeting right. This Note is also the first academic paper to draw attention to the restrictions that boards can and do place on shareholders' right to call a special meeting.

More importantly, by revealing exactly how the written-consent right uniquely empowers shareholders, this Note's conclusions can help shareholders who want to remove such provisions wage a more persuasive fight. In the last two decades, shareholders and academics have successfully pressured boards to remove or soften existing takeover defenses. (24) Yet provisions barring shareholders from acting by written consent endure in the vast majority of companies' charters. (25) While shareholders have brought proposals to remove this defense in the past, (26) their arguments have generally failed to adequately respond to boards' contentions that the special-meeting right is not only sufficient but also preferable for shareholders. (27) Such proposals have failed to receive approval from a majority of the shareholders. (28) This Note directly responds to this contention and demonstrates that the right to act by written consent does uniquely empower shareholders.

This Note proceeds in four Parts. Part I discusses the movement against takeover-defense provisions. It explains that while there has been a drastic decline in most takeover-defense provisions, the vast majority of S&P 500 companies still bar shareholders from acting by written consent. Part II explores the reasons why provisions barring shareholders from acting by written consent have persisted. Most importantly, boards have successfully argued that getting rid of this provision--and giving shareholders the right--would have no benefits for shareholders who already have the right to call a special meeting. The Part then concludes by comparing the two rights, explaining that the significance of many of the procedural differences between them is overstated. Yet, while these rights can be used in similar ways for similar...

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