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Feature

Lawrence Lederman &
Robert S. Reder
Milbank, Tweed, Hadley & McCloy LLP

Preparing for your next annual meeting

Using proxy contest strategies to conduct a successful annual meeting

By Lawrence Lederman and Robert S. Reder

Originally published in longer form in Directors & Boards, Winter 2003

In light of escalating shareholder activism and increased use of “vote no” campaigns against incumbent directors, officers and directors should focus as never before on preparing for an annual meeting they once considered "routine." Even if no shareholder has proposed alternative director candidates and the proposals to be voted on by shareholders seem to be unobjectionable, management can no longer assume that proxies are "in the mail." Rather, a concerted and well-thought-out campaign to assure high voter turnout and a comfortable winning margin is essential.

A successful annual meeting is an opportunity for management to instill investor confidence and enhance its credibility with shareholders. On the other hand, an annual meeting at which management-sponsored candidates and proposals are approved by only slim margins or, much worse, defeated can signal shareholder discontent and pave the way for a proxy contest and/or hostile takeover activity. Furthermore, if the SEC’s controversial shareholder access proposals are adopted, poor voter turnout or a successful “vote no” campaign could result in shareholders being able to include alternative director candidates in the company’s proxy statement.

Many of the techniques that have become standard practice in proxy contests will be useful to managers in improving the likelihood of a successful annual meeting:

1. Advance Planning and Preparation. Public companies should take a fresh look at their annual meeting timelines and factor in more time for developing the agenda and script for the meeting, reviewing shareholder nominations for directors and other proposals, preparing disclosure documents, obtaining SEC clearance (when necessary), lobbying shareholder advocacy groups for their support, and soliciting proxies from shareholders. As a result, the whole process should begin much earlier than it has in the past so that management, together with their professional advisers, can fully evaluate what types of issues will need to be addressed at the next annual meeting and how best to secure a favorable vote.

2. Retention of Professionals. Public companies are generally accustomed to allowing in-house legal staffs and investor relations departments to control the preparations for their annual meetings. These individuals will continue to be key players, but given the politically-charged environment in which public companies now operate, managers should seriously consider retaining one or more of the following professionals early in the process:
    -- an experienced corporate and securities lawyer accustomed to operating in the rough-and-tumble world of proxy contests;
    -- a top proxy solicitation firm to help analyze the shareholder profile, advise on likely voting patterns among institutional and retail shareholders, interface with advocacy groups such as Institutional Shareholder Services (ISS), contact shareholders, and count and evaluate the actual votes; and
    -- a public relations firm to help draft shareholder communications and act as a liaison (and buffer) with the electronic and print media.

3. Focus on Corporate Governance. Shareholder activists and the news media are likely to remain focused on corporate governance issues and companies’ adherence to “best practices”. Companies should continually reassess the adequacy of their corporate governance standards and undertake reforms on their own initiative. By making appropriate changes well in advance of their annual meetings, companies can improve their corporate governance scores that are now published and delivered to institutional investors by ratings agencies such as ISS.   Companies should also review the proxy voting guidelines of their institutional investors and other shareholder advocacy groups before finalizing the matters to be presented to shareholders at the next annual meeting.

4. Understanding Your Shareholder Profile. With the help of professional advisers, management should analyze the company's shareholder population in order to get a sense of whether, and how, institutional and retail holders are likely to vote on a particular matter. Companies in the past have shied away from ordering "NOBO lists" (a list of beneficial owners of the company's stock who do not object to disclosure of their name and address by the registered owner of the stock for purposes of facilitating direct communication on corporate matters). The fear was that the list would fall into the hands of would-be dissident shareholders or hostile acquirers. This position should be reconsidered when there is a perceived need to get behind the record owners to assure a high voter turnout and/or a favorable vote. Even in the case of uncontested matters, management can no longer afford a low voter turnout that signals weakness and invites takeover activity.

5. Consider New "Get-Out-the-Vote" Strategies. Traditional proxy solicitations involving a single mailing and targeted telephone calls will no longer suffice. Working with their advisers, management should consider techniques to increase voter turnout and a favorable vote. Carefully rehearsed, face-to-face meetings with institutional shareholders and shareholder advocacy groups will often be critical. In addition, electronic voting strategies, including use of the Internet, are being developed by the leading proxy solicitation firms to facilitate timely voting by retail holders.

6. Consider Long-Range Needs for Employee Stock Plans. Clearly, it has become more difficult to establish and amend equity-based compensation plans. Under the new NYSE and Nasdaq rules, shareholder approval is almost always required, and brokers are no longer able to vote in favor of these plans without client instructions. Unless a compelling case can be made, it will be difficult to convince institutional investors to vote in favor of new plans. Because shareholder approval can no longer be assumed, a real selling effort by management will be required. Rather than seeking shareholder approval on a piecemeal basis, long-range planning will be necessary; no company will get many bites at the apple.

7. Shore Up Takeover Defenses. Although it will be nearly impossible to convince institutional investors to vote for a staggered board or eliminate shareholders' ability to take action by written consent, there are steps that a board can take, without seeking shareholder approval, to strengthen the company's takeover defenses.

For instance, a board can establish a shareholders’ rights plan, more commonly known as a "poison pill," without a shareholder vote (assuming sufficient authorized preferred or common shares). For companies that have had rights plans in effect for several years, this is a good time to conduct a review to make sure that their plans will operate as intended and contain the latest improvements. Expiration dates, ownership thresholds, and exercise prices all should be examined. Recent innovations such as a “chewable” feature and sunset provisions should be considered in order to head-off shareholder initiatives to compel early termination of the rights plan. Generally, but not always (especially in the case of older plans), rights plans grant boards wide discretion to make necessary amendments.

In addition, a board is generally permitted to amend the company's bylaws without shareholder approval. Thus, a board may adopt advance notice bylaw provisions, or upgrade existing provisions, to make sure that the company has plenty of advance notice of a shareholder's intention to present alternative director candidates or submit other proposals for a shareholder vote. Low voter turnout could cause management that does not have adequate notice of dissenting shareholder initiatives to be surprised with a last-minute proposal that could gain significant support among institutional investors.

Lawrence Lederman (at left) is a senior partner in the New York office of Milbank, Tweed, Hadley & McCloy LLP and is chairman of the firm's International Corporate Practice. Robert S. Reder (right) is a partner in the firm’s Global Corporate Department.