Special Shareholder Meetings

The Idea: Act Before the Next Annual Meeting

Annual meetings have become enshrined in investor thinking. They usually take place sometime in the spring, during “annual meeting season”, a few months after the December 31 fiscal year-end. Most companies hold them at the executive offices, although big companies hold them at various far-flung offices, plants, or stores. A few shareholders show up (sometimes even more than company staff!), have coffee and a snack, hear about the state of their investment, vote on a few things, pick up some company trinkets, and call it a year.

The most important business usually entails electing directors. Thus, shareholders can exert this critical bit of influence once a year.

Suppose a matter comes up that can’t wait until the next annual meeting? This happens relatively frequently, such as when a company needs shareholder approval of a transaction. The company can schedule a meeting at its convenience, subject to many of the same notification requirements for a regular annual meeting, and take care of business.

And, suppose shareholders have a matter that can’t wait until the next annual meeting? For example, they don’t like the direction that the company has taken, and they want to switch out a few directors? This happens less frequently, usually when an activist investor has gotten involved. At some companies, investors can also schedule a special shareholder meeting, subject to some varied and interesting rules, and a bit of strategy, which we explain here.

We can think of two principal advantages to demanding a special meeting:

1.It allows an investor to accelerate change at a portfolio company, so that you need not wait for the next annual meeting to restructure a BoD or make other changes.
2.It provides a unique strategy in facing off against company management, and allows an investor to demonstrate concrete, significant support for their program without necessarily needing a vote on that program.

Legal Foundation of Special Shareholder Meetings

The schedule for shareholder meetings follows both state corporation law, and the individual corporation’s bylaws. Since Delaware dominates corporate law, we can use them as a model, although as we will see the state of incorporation matters in this situation.

Delaware code provides that in general, only the BoD can call a special meeting:

(d) Special meetings of the stockholders may be called by the board of directors or by such person or persons as may be authorized by the certificate of incorporation or by the bylaws.

The corporation can allow others to call a special meeting, such as the BoD Chair, CEO, or yes, shareholders. The bylaws or CoI needs to specify this, though. Many states, such as New York, follow the Delaware law.

Other states are more permissive. California, among others, requires its corporations to allow shareholders to call a special meeting. For this to happen, in California and most other states that provide for this, the demand for the special meeting needs the support of investors representing a given percent of outstanding shares, frequently 10% (more on this below).

Read the Bylaws! and the CoI!

So, since most corporations are in fact domiciled in Delaware, a shareholder needs to dig into a portfolio company’s bylaws and the CoI to see what the company will require to propose a special shareholder meeting.

Bylaws, of course, vary greatly in this respect. Microsoft (to use a random example), a Delaware corporation, in its bylaws allows shareholders to call a special meeting, subject to restrictions in the CoI. A quick read of both together reveals that (subject to some detailed and somewhat onerous notification requirements) investors representing 25% of the outstanding shares can call a special meeting.

The notification requirements also bear some explanation. In general, companies require a letter or similar notification from investors having a sufficient number of shares, demanding a special meeting and stating the purpose for that meeting. The company can then set the date for the meeting, typically within a 30 to 90 day time period after receipt of the demand. The company also sets a record date for eligibility to vote at the meeting, perhaps 15-30 days in advance of the meeting date.

Companies can also require detailed disclosure about the shareholder demanding the annual meeting. These frequently follow the requirements for director nominees and for proxy solicitations pursuant to SEC rules.

State the Purpose

Investors must call a special shareholder meeting for a specific reason. Most of the time it involves electing directors that will support the investor case for change. That agenda, though, frequently has several components:

❖dismiss some or all current directors
❖change size of BoD (if needed)
❖elect new directors to fill vacancies
❖revoke any unfavorable amendments to the bylaws or CoI

Investors that wish to pursue this, then, must think carefully and thoroughly about what changes it will need to make, and plan the special meeting accordingly.

Soliciting Support

A demand for a special meeting is not the same as the meeting itself. So, an investor that seeks support for the demand confronts different, easier requirements than seeking votes at the meeting. Of course, the need to solicit support applies only if the investor itself does not have enough shares. An investor with over 10% of the shares in a company that requires only 10% of the shares to call a special meeting obviously can do this alone.

Most investors will need other shareholders to demand a special meeting. In that case, some solicitation rules do and do not apply. In particular, the SEC proxy solicitation rules don’t apply to the solicitation for the demand. Other requirements do apply, though. An investor that assembles a large enough group will need to file a Form 13D disclosure. A large enough group might also trigger a poison pill at companies that have those provisions.

After an investor succeeds in demanding a special meeting, it yet has more work. You still need to win support for the agenda. The process for winning that support looks like any other proxy solicitation at an annual meeting. But, the very support for the special meeting gives the investor some leverage in that process.

Voting strategy

In most situations, a company requires a demand from enough investors to hold an annual meeting. “Enough” varies considerably. A few companies allow a single shareholder to do this, or investors representing 1% of the shares, while a few require as many as 80% of the shares to demand a special meeting.

The typical lower threshold is 10% of the shares, while most others require either 25% of the shares (Microsoft’s level) or 50% or 51% of the shares. Most companies that allow shareholders to call a special shareholder meeting use one of these standards.

The special meeting vote threshold lends itself to some strategizing around a special meeting demand. Of course, at companies with a 50% or greater threshold for a special meeting, shareholders that succeed in calling a special meeting will also win whatever vote they want, or at least any vote that requires a simple majority.

Companies with a threshold under 50% present a more interesting situation. Investors might muster enough shares to call a special meeting at a lower threshold, say 10%. This should make the company wonder if investors will win enough votes at the special meeting to approve their agenda.

Investors can of course use that uncertainty to their advantage. Calling a special meeting confers on shareholders a degree of leverage over the company. Investors that can win more than 10% of the shares just to call a special meeting could very well win many more than that once they start to solicit proxies. Most special meetings involve director elections, which typically work pursuant to a less-restrictive plurality standard, rather than a majority standard. Thus, having 10% or so of the shares in hand for the special meeting request may persuade the company to settle the BoD matter without actually holding the special meeting.

A shareholder need not present exactly 10% of the shares in their demand, either. An investor can submit a greater number, as a means of showing the prospective depth of support for the investor’s case. Or, a shareholder can submit closer to the 10%, even if they have a higher number, as a means of disguising the true support for their case.

How-to Checklist

✓Research bylaws and CoI to understand:
❖shareholder support threshold
❖notification requirements
✓Determine specific agenda consistent with bylaws and CoI
✓Understand and plan timing consistent with company notification requirements
✓Solicit other shareholders to support the demand
✓Notify the company of the demand, with needed disclosures pursuant to the bylaws and CoI
✓Solicit other shareholders to support the proposed agenda.