2015 Proxy Season Preview: Chancery Court Declines to Order Waiver of Advance Notice Bylaws
By William Axtman and Caitlin Howe
Can an activist shareholder avoid compliance with advance notice bylaw provisions to run a dissident slate of directors at a fast-approaching annual meeting? The answer, which is discussed in our summary of AB Value Partners, often hinges on the actions of the board.
In AB Value Partners, LP v. Kreisler Manufacturing Corp., Vice Chancellor Parsons denied AB Value’s request for a temporary restraining order to enjoin enforcement of Kreisler’s advance notice bylaw provisions. AB Value, a hedge fund that owned approximately 11% of Kreisler’s shares, sought to run a competing slate of director’s at Kreisler’s annual meeting. The bylaws of Kreisler required that stockholders provide advance notice within a 60-90 day window prior to the anniversary date of the preceding annual meeting of any business that the stockholders wanted to address at Kreisler’s annual meeting. AB Value failed to propose its slate of directors within this required timeframe.
The two types of cases in which advance notice bylaws have typically been enjoined – (1) where the board is aware of an imminent proxy contest and imposes advance notice provisions to thwart the challenge and (2) where advance notice provisions are ambiguous – did not apply in this case.
Instead, AB Value sought largely to use the Court’s decision in Hubbard to find that the directors’ failure to waive the advance notice requirement in this case was inequitable. To meet this high standard, V.C. Parsons required a showing of three elements: (1) a change in circumstances occurring after the advance notice deadline; (2) the change was unanticipated and material; and (3) the change was caused by the board of directors.
AB Value contended that certain circumstances entitle it to relief, including the dissolution of a trust and the subsequent distribution of the trust’s Kreisler shares to sitting directors and their siblings after the advance notice deadline and a proposal by the sitting directors to substantially increase their pay. V.C. Parsons rejected each in turn.
First, the Board – which was the focus of V.C. Parson’s analysis – had nothing to do with the dissolution of the trust and distribution of the shares. A change in stockholder composition, in which the Board had no hand, did not entitle AB Value to enjoinment of the bylaw. Second, a proposed pay bump was not the kind of radical shift in corporate direction that is required, as “neither the operations of the [c]ompany nor its business direction have changed,” and the Board (including its independent directors) unanimously approved the pay increase. The Court also rejected the other claims by AB Value, finding that AB Value failed to show “the existence of a colorable claim,” and its request for a temporary restraining order was denied.