Consent Solicitations


The Idea: Action Without a Shareholder Meeting

Public companies in the US typically conduct shareholder business at formal shareholder meetings. Most companies have annual meetings once each year, of course. There, shareholders elect directors, ratify auditors, amend bylaws, approve compensation plans, and vote on various resolutions.

Suppose the corporation or its investors want to take one or another of those actions, but don’t want to wait for the next annual meeting? They could request a special meeting of shareholders, which for an activist investor can be difficult (we will address that subject in another similar guide for investors).

Yet, at some some companies, investors can take these actions without any sort of shareholder meeting. Instead, they agree on a specified action privately, such as changing directors, and then notify the company of their decision. It’s rather like a virtual shareholder meeting, except it happens in writing instead of in person. Investors consent to the stated action - one shareholder solicits the consent of other shareholders for that action - hence, consent solicitation. Since shareholders grant that consent in writing, we activism junkies frequently refer to the process as action by written consent.

Below, we outline the basics of consent solicitations. We also provide a case study of a recent consent solicitation at The Wet Seal, Inc.

Why Consent Solicitations?

Consent solicitations can address just about anything that shareholders would consider at a shareholder meeting. Mostly, though, they involve changing directors, and bylaw amendments that pertain to changing directors.

Today about 70% of US public companies limit or prohibit consent solicitations through their Certificate of Incorporation (CoI) or bylaws. So, about 30% of companies allow it to the extent set forth in their state’s corporation law.

According to a veteran activist investor, in the past ten years there has been 26 consent solicitations at companies with a market capitalization over $100 million. All but two involved changes to the BoD.

Legal Foundation of Consent Solicitation

Both the SEC and states regulate consent solicitations, although states have the more important role. States determine whether and how a corporation and its shareholders can solicit written consent, while the SEC regulates the specific solicitation process.

Most states allow corporations to act by written consent. In particular, Delaware permits consent solicitations as a matter of corporate law. The relevant statue reads:

  1. Unless otherwise provided in the certificate of incorporation ... any action which may be taken at any annual ... meeting ... may be taken without a meeting, without prior notice and without a vote, if ... consents ... in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having [at least] the minimum number of votes that would be necessary to authorize ... such action at a meeting at which all shares entitled to vote thereon were present and voted ...

So, a Delaware corporation can limit or prohibit consent solicitation only if the CoI (not the corporate bylaws!) explicitly imposes those limits or prohibition.

Delaware’s statue is among the most permissive. Other states limit consent solicitations more specifically. For example, a consent solicitation in California that pertains to directors has a strict unanimous consent rule. In other words, a shareholder of a California corporation that seeks to replace a director through a written consent process needs consent from 100% of the outstanding shares, a high threshold indeed.

The SEC regulates the solicitation process, which works similar to the solicitation process for shareholder meeting proxies. The same rules that govern the content of proxy materials apply to the process of obtaining written consent from other shareholders. For this reason, an exempt solicitation is possible, if you need consent from at most ten other shareholders.

Written consent can apply to any action that shareholders would take at an annual meeting:

  1. remove and appoint directors

  2. amend bylaws

  3. approve transactions.

So, unlike the strict SEC rules that limit the scope and nature of shareholder resolutions, state law (at least in Delaware) allows shareholders to solicit consent for all manner of business.

Consent solicitation is limited to one or more specific actions. Shareholders consent to whatever the investor asks for, no more. This differs from a proxy solicitation for a shareholder meeting, in which a shareholder generally grants a proxy wide latitude to vote on any matter at the meeting.

The number of shares needed to act by written consent also depends on state statue. In Delaware, a consent solicitation usually requires approval of a simple majority of shares. But, majority of what - shares voting, shares outstanding, or something else? For purposes of consent solicitations, the standard is a majority of shares outstanding, which is a higher standard than would usually apply. Contrast consent solicitation with a shareholder meeting. At a shareholder meeting, investors typically approve motions with a majority (or supermajority, or plurality, etc.) of shares voting at the meeting. Without a meeting, Delaware law considers the number of shares voting to be all shares eligible to vote, or shares outstanding.

The voting standard is higher in many other states. For example, as noted above in California a consent solicitation that removes an incumbent director requires unanimous consent, or 100% of the shares outstanding.

Furthermore, a corporation can impose more strict requirements in its CoI, both on voting thresholds and other aspects of consent solicitations. Delaware and most other states allow corporations to limit the scope of consent solicitations, and to impose voting standards higher than a majority of shares outstanding. On the other hand, if the CoI is silent as to these limits, then shareholders can act by written consent pursuant only to Delaware (or other state) statute.

Timetable for a Consent Solicitation

For a corporation that allows them, a consent solicitation can begin anytime. A specific timetable applies to the process, though. This timetable varies by state, so we’ll consider Delaware here.

Similar to an annual meeting, the investor works with respect to a record date. Only investors that own shares on that date can “vote”, or consent to the solicitation. Any shares purchased after that date don’t count, either from a new investor, or from one that adds shares to an existing position. So, don’t bother soliciting investors that jump into the name after you establish the record date for the consent solicitation.

But, unlike an annual meeting, in which the company sets the record date, in a consent solicitation, the investor establishes the record date. In Delaware, that date becomes the earliest date on which you receive consent, from another investor, or from yourself. You then have up to 60 days to submit consents to the company. This prevents the process from dragging on, with the attendant uncertainty.

Consenting, and Revoking Consent

Shareholders consent to the specified action by completing a form that resembles a proxy card from an annual meeting. In the same way that they submit a proxy card to your or your proxy solicitor, they will submit a consent. Once you have collected consents representing enough votes (typically a majority of shares outstanding, at least in Delaware), you can submit the consents to the company, and declare victory. No need to wait for an annual or special meeting.

Shareholders may also revoke a consent that they previously submitted to you. The company will of course encourage this, and can solicit “revocations” in the same way that you solicit consents. While the company will encourage shareholders to submit these revocations directly to the company, they might submit them to you, as well.

Advantages and Disadvantages

Consent solicitations offer some distinct and obvious advantages. A shareholder:

  1. can take action at any time, without waiting for an annual shareholder meeting or calling a special meeting

  2. need not provide any notice to the company of the intent to solicit consent, unlike the lengthy advance notice period at most companies for a shareholder proposal for a shareholder meeting

  3. take the offense in counting votes, since the investor receives and holds the consents from investors, unlike a conventional BoD election, in which the company receives and holds the proxies; in this way the investor can adjust efforts to reflect the progress of the solicitation

  4. can avoid any disclosure if her or she solicits ten or few consents, which uses the same exemption available for proxy solicitation.

There are a few disadvantages. The main one involves the need to educate other shareholders about the nature and procedure of consent solicitation. It happens so seldom that few shareholders are familiar with how to handle the paperwork needed to grant written consent.

Another disadvantage pertains to the convoluted process for contacting investors who hold shares in street name. An investor that solicits written consents from all shareholders will inevitably need to work through the same Broadridge racket that they face when soliciting proxies for a BoD election.

Finally, the same SEC rules for proxy solicitation apply to consent solicitation, so an investor will need to deal with the same SEC filings, filing deadlines, and disclosures. While consent solicitation avoids the problems associated with advance notice provisions for BoD nominations and annual meeting resolutions, it still must comply with the SEC proxy filing regulations.

The Mechanics - Steps to a Consent Solicitation

  1. 1.Determine your case for change, and recruit director nominees, if needed.

  2. 2.Research other investors, including their holdings and inclination to support the case for change and competing directors, and begin preliminary discussions.

  3. 3.Confirm that consent solicitation is allowed, both in the company’s state of incorporation, and in the company’s bylaws.

  4. 4.Understand the voting rules, including whether you count votes with respect to shares outstanding (most likely) or some other standard.

  5. 5.Determine if you need to solicit all shareholders, or whether you can solicit only a subset - some corporate bylaws and CoIs require you to send consents to all shareholders.

  6. 6.Decide if exempt consent solicitation is possible, specifically if the “ten-or-fewer” rule will capture the required number of shares.

  7. 7.Retain a securities attorney with experience with proxy solicitations and a proxy solicitor, and possibly a public relations firm.

  8. 8.Draft solicitation documents, much like a proxy solicitation.

  9. 9.Follow SEC rules for filing preliminary and definitive solicitation materials, including the time needed for SEC review of preliminary solicitation materials.

  10. 10.Solicit consents! For larger investors, an investor should plan to meet in person, and collect consents directly. For smaller investors, a proxy solicitor will collect completed consent documents.

  11. 11.Submit consents to the company - for a Delaware corporation, the shareholder must file consents with the company within 60 days of receiving the first consent, which becomes the record date for voting; this serves to prevent the consent solicitation process from dragging on.

  12. 12.Check on revocations, since investors that previously submitted a consent to the investor are also allowed to revoke their consent by so indicating to either the investor or company. The company may file a “revocation solicitation” similar to the consent solicitation, with their case against the shareholder’s proposals.