A number of present and anticipated developments will give activist investors new tools to carry on campaigns against public companies. Issuers should be aware of these matters and continue to monitor their investor relations functions and takeover defenses with respect to activist investors.

Activists Can Round Out Short Slate Nominees Using Nominees of Another Activist

The short slate rule was originally adopted to help dissident shareholders propose less than a majority of the board in their slate while still permitting a dissident to vote for certain directors on the management slate. The short slate rule was necessary as the bona fide nominee requirement in the proxy rules prohibited a dissident shareholder from soliciting proxies to vote for members of the management slate since the members of the management slate had not consented to being named in the dissident’s proxy statement. Without the short slate rule, a shareholder would be forced to choose from voting for only the dissident’s short slate, and not being able to exercise voting rights with respect to other directors on the one hand, or choosing to vote for the full management slate on the other hand. The short slate rule permits a dissident to “round out” its slate with certain management nominees by designating members of the management slate it will not vote for, while committing to exercise the proxy for other members of the management slate.

Activist investors Carl Icahn and Eastbourne Capital Management (ECM) changed this balance of power somewhat as a result of recent no-action letters issued in connection with the annual stockholder meeting of Amylin Pharmaceuticals, Inc. Icahn owns 9.4% of Amylin stock, while ECM owns 12.5% of Amylin stock. Amylin does not have a staggered board, and there are twelve directors up for election at its annual meeting. Icahn and ECM separately notified Amylin that they each intend to propose a slate of five nominees in connection with Amylin’s annual meeting.

Under the no-action letters issued by the SEC, the SEC stated it would not take any action if, subject to certain restrictions, Icahn and ECM seek authority to vote for each other’s nominees, instead of rounding out their slate with management nominees. Thus, the collective dissidents have significantly greater power to influence the election of ten directors on their collective dissident slates, instead of only five, as would be allowed under strict application of the short slate rules.

One requirement of the SEC in the no-action letters is that Icahn and ECM do not act as a group under the 13D rules. Note, however, that while their combined voting power will give them a significant advantage in electing their respective slates, it will not trip a shareholder rights plan, or so-called poison pill, since they are not a group.

Proposed Changes to Delaware Law

Proposed amendments to the Delaware corporate law would permit the bylaws of a Delaware corporation to provide that:

  • The corporation may be required to include in its solicitation materials (including any form of proxy it distributes) one or more individuals nominated by a stockholder in addition to the individuals nominated by the board of directors when the corporation solicits proxies for the election of directors.
  • The corporation would reimburse a stockholder for the expenses such stockholder incurred in soliciting proxies in connection with an elec¬tion of directors, subject to the conditions and procedures prescribed by the bylaws.

Inclusion of the new provisions in the bylaws may not be entirely optional to a corporation’s board of directors. Note that, in certain circumstances, stockholders can propose that bylaws be amended.

Other Potential Changes

Other likely changes include:

  • Potential SEC rules that permit a shareholder to nominate directors and include the nomina¬tion in the issuer’s proxy statement. As a result, the shareholder will not have to go to the time and expense of preparing its own proxy state¬ment.
  • Potential SEC rules or legislation that gives shareholders an advisory vote on compensation of corporate executives.