How to end the voting pill nightmare

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If you are the director of a public company, you may have a nightmare that goes something like this. You are in the middle of a proxy fight in a deep, dark Scandinavian forest and you think that you have your wolf-shaped activist nemesis cornered only to find out – possibly to the strains of The Knife's "Silent Shout" – the night before either the special or annual meeting where you are up for election, that the single wolf is actually a pack, banded together to vote you out.

It's a scenario that has been a very real concern in recent proxy battles, including last spring's fight between Access Holdings and Tuckamore Asset Management and the high profile U.S. battle between Valeant Pharmaceuticals International Inc. and Allergan Inc..

The voting pill is the suggested tonic for this ailment. Problem is, regulators don't like the way a voting pill affects the voting rights of shareholders, and lawyers I've spoken with take a dim view of its prospects.

So, if not a voting pill, what can a board do to stop "wolf pack" activists? With apologies to my Irish colleague Niall McGee who may associate such "modest proposals" with satirical plans to eat his fellow nationals, I would like to offer a suggestion that's both more modest and more sure to withstand regulatory and judicial scrutiny than a voting pill: a bylaw amendment.

Before describing how such an amendment would protect boards and shareholders against "wolf pack" activists, it's worth thinking about what exactly a voting pill does. I've discussed the voting pill before, but, in essence, it's a shareholder rights plan with an expanded definition of "beneficial ownership" that prevents shareholders from collecting shares, or agreeing, to vote against the current board by significantly diluting that shareholder's or group's ownership interest.

The typical poison pill defense prevents a person or group from buying additional shares once they have acquired control over 20 per cent of a company's securities, including during a proxy fight. The voting pill is aimed at preventing a different form of activism not covered under the poison pill – namely, co-ordinated voting and side agreements that give dissidents the right to vote other shareholders' shares. The problem for companies hoping to stymie activists using such tactics is that courts have tended to protect voting as a fundamental right of share ownership. This likely means that any instrument that attempts to defeat shareholder co-ordination by affecting voting rights is a bit of a fool's errand; the best a board can do is buy time.

Indeed, proxy fight jurisprudence firmly supports policies that give shareholders time to decide. In Genesis Land Development Corp v. Smoothwater Capital Corp the Alberta Court of Queen's Bench found that the remedy for the failure of a dissenting shareholder to disclose that it was working in concert with another party was an extension in the meeting date and increased disclosure. And, just this spring, in Orange Capital, LLC v Partners Real Estate Investment Trust, the Ontario Superior Court found that Advance Notice Bylaws – which require that directors be nominated a set period of time before a special meeting in order to prevent ambushes during the meeting – could be used to give shareholders better information, but not to thwart activists altogether.

If our law allows directors to buy time in order to best represent shareholder interests, a voting pill is a blunt and uncertain way to do this. Not only are securities regulators deeply skeptical of board actions that harm a shareholder's voting rights, voting pills are a difficult fiduciary duty case. Imagine a board arguing to a court that it was necessary to harm the rights of certain shareholders in order to protect its own position. It's a big ask.

Still, regardless of the viability of the voting pill defense, boards have good reason to want to prevent creeping takeovers – and shareholders have reason to be concerned about prowling activists as well. Activists who don't co-ordinate until well into a proxy fight deny shareholders valuable information about exactly who is supporting the dissident directors, possibly allowing a dissident group to acquire control over company policy in a way contrary to the interests of long term shareholders.

Here's my counter-proposal to the voting pill: A corporate bylaw that automatically reschedules meetings – either special or annual – say, 90 days from the time that activists staging a proxy fight have agreed to vote more than 20 per cent of a company's shares against the board.

A bylaw is better than a voting pill, because it's both effective and easily defensible. First, such a bylaw is consistent with a board's fiduciary duties. Instead of diluting a shareholder's voting rights, the delay puts boards and activists on equal footing when pitching to shareholders, creating an orderly process that is almost certainly in the best interests of the company. Second, the bylaw gives shareholders time to adequately evaluate both the incumbents and the dissidents with full information. Third, in the case of violations by activists – such as the failure to file an early warning report in Smoothwater – the bylaw allows the board, not the court, to decide how much extra time shareholders need.

While such a bylaw has a bit of a blind spot where activists coordinate before requisitioning a special meeting, it at least forces them to reveal their co-ordination early, while the poison pill operates to prevent the acquisition of shares beyond the 20 per cent threshold.

Of course, such a solution won't likely defeat the wolf pack altogether but, given the current state of Canadian law, I doubt a total defeat is possible. Instead, it's about regaining control of the process from the activists, which is both a more modest goal and one more consistent with a board's duties.

I would think that such a bylaw would make a board sleep easier, at least, if the board thinks it's got the better argument. And if it doesn't, maybe it shouldn't be sleeping so well to begin with.