August 2023
Chris Clark conducts interviews with leading corporate directors and subject matter experts for Stuart Levine & Associates, a global consulting and leadership development company. The Planet Governance™ interview series features the views of corporate directors, chief executives, and governance experts on timely issues from succession planning to stakeholder activism to cyber resiliency.
This investment advisor and director details the “how and why” the bylaws of companies are being re-opened for change…
Andrew E. Shapiro is President of Lawndale Capital Management, an investment advisor of small/micro-cap activist/relational hedge funds. His most recent public company board level work was as Chairman of the Official Equity Committee in the Premier Exhibitions/RMS Titanic bankruptcy. In addition to his public company engagements, Mr. Shapiro is presently serving as Board Advisor/Observer to early-stage startups, VideoXRM and Miravel Inc.
Andrew E. Shapiro
Chris: What have been the effects so far of unilateral advance notice bylaw amendments as they relate to the new Universal Proxy Card (UPC) rules?
Andrew: To make use of the Universal Proxy Card (UPC) rules and get alternative nominees included on the company’s proxy card and its mailings, the activist or nominator (we’ll call it the activist) is required to commit to a minimum level of its own solicitation efforts. But even before that, the UPC rules require the activist to provide the company notice of the nominations 60 days in advance of an annual meeting. This advance notice timeline is earlier than what was previously required by most public companies’ bylaws. In order to harmonize a company’s advance notice bylaws with the new UPC rules, boards are amending their company bylaws. As this revision process unfolds, several aggressive activist defense lawyers and advisors have advised their client boards to tweak the nomination process further to make it more difficult to nominate alternative candidates at all. The potential impact on the number of contests and nominations remains to be seen. But this strategy of “filtering out” potential nominations is an emerging area of growing litigation due to these aggressive defense tactics employed to entirely eliminate alternative nominations. While it’s great that the UPC was designed to provide shareholders with greater choice of nominees, the adoption of additional potentially economically insurmountable or impractical hurdles to qualify an alternative nominee leads to the legacy system of solely company-selected nominees, which is no different than the Russian system of “choice”. This conflicts with the original purpose of the UPC rules.
Overcoming these hurdles that activist defense advisors have encouraged isn’t as easy as it might seem. The UPC rules were promulgated by the SEC in the context of proxy vote processes and procedures. In contrast, bylaws are established as mechanisms under state law. Should the amendments made to a company’s bylaws serve as a deterrent to initiating nominations, then the benefits of UPC may become inaccessible. Shareholders don’t get a choice in selecting the optimal combination of nominees and the incumbent board becomes further entrenched.
For example, the board of a company called Masimo amended the company’s bylaws, implementing very onerous nomination requirements. The activist sued and governance observers far and wide (including even many activist defense advisors) criticized the Massimo board’s actions. The matter didn’t get fully litigated and set future precedent as Masimo’s board relented and retracted their bylaw changes. But these changes initially encompassed an exhaustive list of prerequisites that an activist needed to satisfy for its nominations to be deemed valid and included on the election ballot. What set these requirements apart was that, in addition to standard elements like the advance notice period and typical nominee background information that shareholders might need to cast an informed vote, the bylaws incorporated various arduous steps and punitive information requirements that no activist would be willing to provide. These requirements extended to providing information about the nominator’s associates or family members, clients, current and even prospective other investments, or activist campaigns. These nomination burdens wouldn’t simply impact shareholder activists but also other engaged shareholders like public pension funds, such as CalPERS, which manage assets for thousands of pension beneficiary “clients”.
Chris: Andrew, I would guess that goes over the line in regard to a certain level of expectation of privacy, yes?
Andrew: Yes, these situations don’t pertain to running for public office; it’s about nominations for the position on the board of a corporation that is partially owned by that shareholder. It doesn’t involve the public interest disclosure aspects of general election fundraising. If an activist manager were faced with these requirements, they’d likely be deterred from making nominations.
Chris: Were there any other mechanisms that were employed?
Andrew: Yes, another approach they pursued involved requiring the nominator to divulge their other investments, activist campaigns, and plans, even if unrelated to the target company in question. Again, these requirements create additional barriers and obstacles intended to create pain points for the nominators so that they wouldn’t nominate at all.
Chris: Do you see these pain points evolving further?
Andrew: I anticipate persistent probing by target boards and their advisors of what increased demands on nominators to furnish more extensive information to qualify their nominees onto a ballot, certainly surpassing current standards, that they can get away with. The trend seems to be expanding these demands until legal action intervenes. While this situation is regrettable, the Delaware courts, and those of other incorporating states, will ultimately establish best practices and boundaries defining the appropriate balance. Hopefully, this will not go so far as to entrench management and the board, effectively disenfranchising the shareholder vote.
Chris: What other related battles do you foresee?
Andrew: In my view, ISS and Glass Lewis are very likely to start targeting, and recommending withhold votes against, directors on the boards responsible for advance notice bylaws and information requirements that are overly burdensome or irrelevant to what a shareholder really needs to cast their vote.
These advisor recommendations and the policies that drive them are likely to become best practices for larger companies, eventually influencing smaller company boards. Of course, there will remain many outliers, unconcerned about best practices.
Chris: My firm is heavily involved in board refreshment, succession planning, and data-driven board assessments. In that light, what are your views on director independence and the viability of duration measures?
Andrew: I have called for duration measures in certain companies, but not as a universally applied policy. I have called for it in certain companies to force board refreshment. This includes advocating for term limits and age limits on a case-by-case basis, focusing on particular companies and directors to facilitate their departure from the board. I have not been a fan of a one-size-fits-all qualification policy, as long as the market or voter efficiency mechanisms remain effective in disciplining gov/nom committees that aren’t doing the right thing when it comes to board refreshment.
I am a proponent of a policy that is like private ordering. This policy would establish that directors lose their “independence” designation after a certain duration on the board, irrespective of whether they meet the stock exchanges’ rather lenient bright-line definitions of independence. You see the listing exchanges tend to compete towards the least restrictive approach in a “race to the bottom” to attract companies to list on their exchanges. My duration-based rule would remove legacy director’s independent status after a specified number of years, whether that’s 7, 9, 10, or 12. I don’t care about their age in this instance; it’s the duration.
This change in status wouldn’t necessarily disqualify the long-tenured board member from board service, but it would prevent them from serving on key committees requiring independence or in cases where legal scrutiny demands independence to apply the more director-friendly business judgment rule versus the entire fairness rule. For example, although stock exchanges might not mandate an independent special committee, legal proceedings and practical state law necessitate an entirely independent special committee for certain situations like corporate change of control, to access the business judgment rule defense rather than the more stringent entire fairness defense.
For instance, there are some new precedents, possibly involving the Black & Decker or Oracle cases (although I am not certain of their formal names), further defining boundaries of director independence and thus the standard of court scrutiny. The case(s) established that board members who had developed social or charitable connections with management or the company were no longer considered independent. This led to the application of the entire fairness test rather than the ordinary business judgment test.
I’d like the idea of making duration a clear line for the determination of independence. The board would then be able to take that determination into account when deciding to re-nominate that long-tenured director. They don’t have to leave the board. They can remain on the board, but no longer be allowed to serve on certain key committees. The board and gov/nom committees can determine whether that legacy director’s value to the board is great enough, even if that director cannot help in sharing the workload on certain key committees.
Now, what that means is the board’s going to have to add additional independent directors, adding to company governance costs, if these directors want to keep their workload the same or, alternatively, increase their individual workload on such committees just to keep the long-tenured director on the board without expansion.
Chris: In other words, it makes the board members think, “Is this person so value-added?”
Andrew: Yes, and more specifically, it compels them to consider whether retaining the legacy director is genuinely beneficial. Maybe some board members who otherwise wouldn’t leave the board voluntarily will now think: “It’s time. I’m going to lose the independent qualification and I want to serve on these committees but can’t. I want to go join another board where I can be considered independent.” I think this policy would help facilitate board refreshment, and it helps eliminate what I call the loss of social independence.
Chris: It’s really about vacant board seats…
Andrew: You need vacancies to address the refreshment issue. My duration-based policy suggestion is just another means of accelerating the creation of more vacancies.
Chris: Quite simply, what’s next for Andrew Shapiro?
Andrew: With my fund now in a runoff phase, this transition has provided me with the opportunity to extend my active engagement with managements and boards and personal board service to companies outside of my portfolio. I have already become an advisor or consultant to several startup founders and boards. Additionally, I am open to being a nominee not only for other activist’s alternative slates, but also by issuers seeking to adopt some internal activist insight, refreshing their board with someone, like me, who can inject new perspectives, the activist perspective, into the boardroom – a form of “activist vaccine”.
Chris: I bet you have more possibilities on the horizon…
Andrew: I would relish the opportunity to contribute my several decades of substantial expertise and experience to an existing activist firm or larger asset manager wanting to become more active and engaged with its portfolio companies. Alternatively, I’m considering establishing a consultancy where I can offer advice on these matters, whether in activist or corporate governance contexts to drive transformative value-creating change.
Chris: Any final thoughts?
Andrew: I have enjoyed serving on boards of companies I have invested in, where my unique value-add was proven beneficial. I look forward to offering my services in similar capacities within other companies and am excited that some of that engagement will be by invitation rather than by proxy contest.
Chris: On behalf of Planet Governance and Stuart Levine & Associates, thank you for your insights and contributions.
Andrew Shapiro is President of Lawndale Capital Management, an investment advisor of small/micro-cap activist/relational hedge funds for three decades. Mr. Shapiro has also served as Board Member, Officer, Advisor or Observer on many corporate and non-profit boards as well as corporate debt and equity bankruptcy committees.
Chris Clark joined Stuart Levine & Associates as a senior consultant after a distinguished career at the National Association of Corporate Directors. His expertise ranges across a variety of disciplines including corporate governance (with data-driven board assessments and cyber risk diagnostics as cornerstones), strategic communications, conference management, and digital content creation.
