Many US and Canadian public companies have implemented so-called advance notice provisions (“ANPs”), bylaws and policies requiring shareholders to provide a company with notice by a specified deadline should they wish to propose an alternative slate of directors at a shareholder meeting. Recently, a shareholder of a US company listed on the New York Stock Exchange ran out of time to provide the usual form of notice and instead nominated “placeholder candidates”. This article examines the novel and previously untested tactic of nominating “placeholder candidates” in proxy contests.
The Basics of ANPs
ANPs are designed to permit orderly meetings and election contests, and to provide a company with sufficient time to respond to shareholder nominations. At a minimum, ANPs require a shareholder intending to nominate director candidates to provide the company with notice by a deadline in advance of a shareholder meeting (typically not less than 30 days and not more than 65 days prior to a scheduled meeting, or not less than 15 days following the date of the public announcement of the date of a special meeting). More onerous ANPs require additional information about the director nominees and the nominating shareholder. ANPs generally have the support of shareholder advisory firms like ISS and Glass Lewis.
ANPs have generally been upheld by Canadian courts where they afford shareholders a fair opportunity to nominate candidates.1 A Court will generally not excuse an activist’s failure to comply with the deadline imposed by an ANP unless new material facts arise after that deadline.2
Corvex’s use of “placeholder candidates”
On August 24, 2016, Corvex Management LP publicly announced its intention to nominate a full slate of director candidates at the upcoming shareholder meeting of The Williams Companies. Corvex’s announcement was so close to the deadline imposed by the company’s ANP that Corvex was unable to assemble a slate of qualified directors to challenge the incumbent directors.
Seeking to preserve its right to contest the election of the incumbent directors, Corvex nominated “placeholder candidates”. Specifically, Corvex nominated 10 of its employees for election at the shareholder meeting. If elected, Corvex’s nominees will immediately resign from the board and appoint qualified candidates whom Corvex would have, presumably, nominated if it had sufficient time to do so before the company’s ANP deadline.
Nominating placeholder candidates to comply with a fast-approaching ANP deadline is a novel tactic that has not been tested by any Court in Canada and the United States. Corvex may have abided by the ANP’s technical requirements but its tactic may not withstand judicial scrutiny. At a minimum, in order to obtain shareholder votes for their nominees, Corvex will likely have to identify, sufficiently in advance of the shareholder meeting, the candidates who would replace any resigning placeholder candidates who are elected. Without this information, shareholders would lack material information about the real impact of their vote for the placeholder candidates. As a further consideration, placeholder candidates who resign after being elected must ensure that by resigning and nominating other candidates to the board, they are complying with their fiduciary duties to the company.
To defend against this novel tactic, companies may consider proactively amending their ANPs to prevent or limit the nomination of placeholder candidates.3 One way to accomplish this is by simply prohibiting the nomination of placeholder candidates. Another response may be to impose minimum term requirements for director nominations. Other defenses will undoubtedly be developed.
Public companies and shareholder activists will continue to monitor the proxy contest between Corvex and The Williams Companies. If there is litigation, or if any of Corvex’s placeholder candidates are elected, we will provide another update on the application of this novel but untested tactic.
1 Northern Minerals Investment Corp. v. Mundoro Capital Inc., 2012 BCSC 1090; Jaguar Financial Corp v Alternative Earth Resourcs Inc, 2016 BCSC 257; Orange Capital LLC v Partners Real Estate Investment Trust, 2014 ONSC 3793.
2 Accipiter Life Scis. Fund, L.P. v. Helfer, 905 A.2d 115, 127 at p. 17 (Del. Ch. 2006); Openwave Systems Inc. v. Harbinger Capital Partners Master Fund I, Ltd., C.A. No. 2690-VCL.
3 For OBCA and CBCA companies, directors can adopt ANPs without shareholder approval (subject to subsequent shareholder ratification), and therefore ANPs can be implemented tactically. However, the ANP must be submitted to the shareholders at the next meeting of shareholders, where the shareholders can confirm, reject or amend the ANP. If the shareholders reject an ANP, it would cease to be in effect from the date the shareholders reject it. Note, however, that in the context of Canadian public companies, ANPs have to date almost always been approved by shareholders.