Proxy Wars, Judicial Disruptions, and a New(ish) Player: The 2024 Proxy Season So Far

The 2024 proxy season has seen a number of important developments that have impacted shareholder activism and the M&A landscape. Here are some key trends and notable courtroom surprises that have shaped the season so far:

1. Proxy Contest Outcomes: The Year of Management Clean Sweeps? - Despite the introduction of universal proxy cards (UPCs) in 2023, which increased the ease with which activists could gain board representation, proxy contests this year have seen a notable trend of management success. Seven out of the eight proxy contests that have gone to a vote in the US this year have resulted in management clean sweeps, with only three dissident nominees elected at Norfolk Southern Corporation (NSC). This trend, however, may not necessarily indicate a broader shift in favor of management, and companies have found success even when recommendations were made in favor of dissident nominees by the leading proxy advisors.
2. Delaware Court Decisions: Unexpected Surprises and Calls for Statutory Amendments - An increasingly concerning theme of the 2024 proxy season has been the rash of controversial Delaware court decisions that have disrupted market practice and threatened the predictability of Delaware law. In particular, the Delaware Court of Chancery's decision in W. Palm Beach Firefighters' Pension Fund v. Moelis & Co. invalidated certain provisions of a shareholder agreement that were deemed to deprive the Board of Directors of its authority to manage the business and affairs of a corporation under Delaware General Corporation Law (DGCL) 141(a). This decision has called into question the enforceability of common provisions in settlement agreements between companies and activist shareholders, potentially disrupting the settlement process and increasing the risk that previous settlements could be invalidated. In response, the Council for the Corporation Law Section of the Delaware State Bar Association (DSBA) has rushed to propose statutory amendments to reverse the ruling and reestablish prior market practice.
3. Labor Activism at the Proxy Ballot Box: A New(ish) Player - Another notable development has been the resurgence of labor activism at the proxy ballot box. Labor-led campaigns have participated in several high-profile proxy contests, including agitating for change at Amazon and Tesla. While labor activism in corporate governance is not a new development, its increasing presence at the proxy ballot box is an interesting development and a potential disruptor for companies and investors to consider.
4. Delaware judiciary upends customary M&A market practices - In two notable merger litigation decisions, the Delaware judiciary upended customary M&A market practices. In Activision Blizzard, the court ruled that Activision's Board potentially violated DGCL 251(b) when it approved a merger agreement with some key terms missing and that the Board may not have provided adequate notice of the shareholder meeting to approve the merger. Following common practice, the Board approved a near-final draft of the merger agreement and delegated authority to a Board committee to finalize the agreement. Similarly, in line with other notices, Activision's special meeting notice listed approval of the merger agreement as an agenda item and attached the proxy statement that included the merger agreement as an appendix. The Delaware Court of Chancery held that Section 251(b) requires boards to approve an essentially complete merger agreement. The Activision Board did not meet this requirement because the following provisions were missing from the merger agreement approved: (1) the purchase price; (2) the company disclosure letter; (3) the certificate of incorporation of the surviving corporation; and (4) a definite resolution of whether the target could pay dividends between signing and closing. In addition, the court held that Activision's notice to shareholders was defective because (1) the annexed merger agreement did not include a certificate of incorporation of the surviving corporation (as required by Section 251(b)) and (2) attaching the proxy statement/merger agreement as an appendix did not satisfy Section 251(c)'s requirement to include a brief summary of the merger agreement in the notice.

In Crispo v. Musk, the Chancery Court called into question the enforceability of "Con-Ed" lost-premium damages provisions, which require a buyer who withdraws from a merger to pay the target the premium that target shareholders would have received if the merger closed. These provisions were added to merger agreements following the Second Circuit's decision in Consolidated Edison, Inc. v. Northeast Utilities, which held that stockholders had no right to recover lost-premium damages where a merger agreement did not designate them as third-party beneficiaries. Without the threat of such Con-Ed provisions, in the absence of specific performance, many M&A practitioners fear that merger agreements will be turned into mere options for buyers, with a termination fee (almost always lower than the lost premium) as the option price.

These decisions have led legal commentators to debate whether Delaware is still the best place for corporations to incorporate. Delaware has been viewed by many as the preferred jurisdiction for corporate law because of its reputable courts overseen by experienced judges with corporate experience, voluminous precedent, lack of jury trials, balance between protections for management and shareholders, and deeply rooted trust in the fairness of its courts. Nevertheless, these recent decisions signal a departure from Delaware's traditional approach and have led some to question whether other states can provide a more favorable environment for businesses.

In conclusion, the 2024 proxy season has seen a number of significant developments that have impacted shareholder activism and the M&A landscape. On the proxy contest front, the surprising success of management clean sweeps has called into question the efficacy of universal proxy cards and the influence of large, passive institutional shareholders. On the judicial front, the unexpected rulings in Moelis, Activision, Crispo, and Tornetta have called into question the predictability of Delaware law, opening debates on whether other states can provide a more favorable environment for businesses. Lastly, the resurgence of labor activism at the proxy ballot box is a notable development that may herald more disruption for companies and investors to come.