Activist Investors Confront ‘Weaponized’ Board Nomination Bylaws

Corporate boards looking to slow the momentum of activist investors are triggering a series of legal showdowns over claims they’re wielding a new strategy for rigging proxy contexts.

Confronted by a tide of dissidents, sitting directors are increasingly deploying strict reporting requirements and deadlines onerous enough to “choke a horse,” in the words of one recent lawsuit, against those who nominate rivals. The tactic has led to a wave of court cases asking how far boards can push those advance-notice bylaws to keep activist nominees off shareholder ballots, including suits targeting Halliburton Co. and Peloton Interactive Inc.

“They’re being weaponized to come up with dirt,” said Charles Elson, a retired University of Delaware law professor. “The more gamesmanship one plays with it, the less likely a judge will approve,” Elson said.

The bylaws emerged in the past few years thanks to several factors, according to Tulane University law professor Ann Lipton. She pointed to regulatory changes that emboldened activists by requiring companies to use universal proxy cards—which place incumbent board members and dissident nominees side by side—and to a Delaware Supreme Court ruling easing scrutiny of measures that may disenfranchise shareholders.

For one thing, the universal proxy “has made boards very, very defensive,” while at the same time “it’s pretty clear now that Delaware courts are applying a lower bar to these advance-notice bylaws, which suggests more will slip through,” Lipton said. But because the bylaws are so novel, judges are just beginning to grapple with them, she said.

“They’re difficult to challenge because each one might be sort of idiosyncratic, and it takes time,” Lipton said. “Picking them off one by one is sort of hard for shareholders, because the next one will come up with something different and more creative.”

Similar disputes in recent years have entangled BlackRock Inc.—which fought off Boaz Weinstein’s Saba Capital Master Fund Ltd.—and an affiliate of Alden Global Capital, one of the largest US newspaper owners, which dropped a hostile takeover attempt after losing a similar case.

Hints for the Future

The most recent major decision on advance-notice bylaws came in December, when Vice Chancellor Lori W. Will upheld the way directors at biotech company AIM Immunotech Inc. wielded certain provisions to reject a board bid by an activist who hid his ties to “a felon who had meddled with AIM’s business.”

Will, ruling for Delaware’s Chancery Court, said the investor had violated sections of the bylaws that the board enforced validly. But she also struck down other provisions, saying they “imperil the stockholder franchise to no legitimate end.” The split decision “hints at what coming activism disputes may bring,” the judge said. AIM and its directors have appealed.

Adrienne Ward, a partner at Olshan Frome Wolosky LLP who deals with activist investor matters, said the disputes over the bylaws raised a critical question about the way courts should approach them: whether those with overzealous provisions should be completely invalidated or just cut down to size.

“The bylaws are a form of contract,” Ward said. “If a contract provision is illegal, generally the approach is to strike that particular provision unless it materially taints the entire contract. That’s what you see playing out, where the vice chancellors are asked to strike this entire set of bylaws. So far they’re saying, ‘No, I’m only going to strike the ones that I’m finding problematic.’”

Lipton said it’s not clear if a board’s naked effort to stay in power should outright invalidate the bylaws it may be abusing, particularly if it’s simultaneously using them against scammers or other bad actors.

“If the board was illegitimately trying to keep someone off the ballot, then the fact that this one action might have been okay, in isolation—I don’t know if that should cleanse the board’s activities overall,” she said. “On the other hand, there are very legitimate reasons for these bylaws.”

Avoiding the Trap

Among those reasons: ferreting out nominees with conflicts of interest—like in the AIM Immunotech case—or those who face regulatory barriers that shareholders have a right to know about. A federal judge in Pennsylvania, for instance, recently rejected a bid by Driver Management Co. for access to the ballot at AmeriServ Financial Inc., saying the investment firm failed to disclose that one of its nominees was ineligible due to service on another bank’s board. Driver has appealed.

But the cases also raise allegations that companies are brandishing the bylaws to dig for dirt or manipulating deadlines to keep activists off the ballot on a pretext. The nomination questionnaires are supposed to “look for conflicts, look for qualifications,” according to Elson. “The point is supposed to be a legitimate debate on corporate policy between two camps, and shareholder resolution of that dispute. That’s it. It’s not politics.”

The lawsuits have been winding their way through the courts since around 2019, when Saba Capital said in its suit against BlackRock that the asset manager wrongfully disqualified its nominees for failing to hit a deadline related to its advance-notice bylaw. A Delaware judge ruled for Saba, calling sections of the nomination questionnaire unreasonable. But the state’s top court reversed, saying the activist firm should have objected to those questions before the deadline passed.

The Saba litigation highlighted the perils for activists of trying to avoid the “trap” laid by board members who want the questionnaires submitted early so they have more time to find reasons for rejecting a nomination, according to Ward. Better for activists to file their notices early, along with any challenges to the specific questions being asked, she said.

A slew of activists and ordinary shareholders are now bringing similar cases. Besides Halliburton, AmeriServ, AIM, and Peloton, lawsuits filed in Delaware in the last year have taken aim at advance-notice bylaws adopted by BioAtla Inc., Sportsman’s Warehouse Holdings Inc., ContextLogic Inc., Cano Health Inc., Ocean Power Technologies Inc., First Foundation Inc., and Purple Innovation Inc.

‘Run Into a Judge’

Ward said the universal proxy is part of the answer to the “why now” question, but only indirectly.

“None of the bylaw changes were necessitated by the universal proxy rules, but that’s used as an excuse,” she said. “Then the companies can sort of say, ‘We did all these changes on a clear day. We weren’t being presented with an activist at the time. We weren’t doing this to try to disenfranchise anyone. We’re just trying to have state-of-the-art bylaws.’”

According to Elson, the flood of cases reflects the ordinary flow of litigation over the untested waters around a novel device. He said he expected boards to keep pushing the bylaws as far as they can until “they run into a judge.”

“This is give and take in Delaware,” he said. “It always happens. And then we reach equilibrium.”

Lawsuits by activists like Driver, AIM investor Ted Kellner, and Paragon Technologies Inc.—which brought the Ocean Power case—have largely concerned the way boards are using the bylaws, rather than their overall validity. But challenges brought by ordinary shareholders with no skin in the game—such as the Halliburton and Peloton suits—may force judges to stop taking the issue case-by-case and develop a unified doctrinal approach, according to Ward.

“I think that’s in the future, but it’s coming up pretty soon,” she said.