July 16, 2014
Board-adopted corporate by-laws have long been used to provide protections against potential corporate threats, dating back at least to the 1980s and the famous development of the poison pill. In the current era of heightened hedge fund activism, potential shareholder-approved proxy access and increasing shareholder litigation, interest is developing in a new generation of corporate by-laws designed to protect the company from the potential threats posed by dissident directors and intra-company litigation. These include provisions:
- Relating to the qualification of directors.
- Designed to control intra-company litigation, in particular, by-laws that:
- seek to limit the forum for intra-company disputes (exclusive forum by-laws);
- require arbitration for intra-company disputes (arbitration by-laws); and
- allocate the cost of intra-company litigation to a losing plaintiff (fee-shifting by-laws).
Counsel should advise the board cautiously with respect to any of these by-law amendments. Much of the case law to date relates to Delaware corporations. Therefore, companies incorporated outside of Delaware have little guidance. Moreover, the context in which a board adopts these types of by-laws may be scrutinized, since courts are wary of board-adopted by-laws that are reactive to a specific threat from shareholders. By-law amendments are best considered on a “clear day” when no specific threat is apparent. Consideration should also be given to how key shareholders are likely to react to these types of by-law amendments, since some large institutional shareholders, the Council of Institutional Investors (CII) and key proxy advisors have expressed concerns.
This article examines the use of board-adopted by-laws to protect against corporate threats, including guidance from recent case law, and offers practical considerations counsel should think about when weighing the opportunities and risks associated with their adoption.
To read the full article, see: Using Board-adopted By-laws to Reduce Corporate Threats.