A Very Special Shareholder Meeting by The Activist Investor
Special how? We’ve not seen anything quite as restrictive as these new bylaw terms, about how investors request a special shareholder meeting at a company we follow.
Around half of US companies allow shareholders to call a special shareholder meeting. Some time ago we highlighted how these work, and why and how investors can and would call such meetings.
Companies clearly loathe special shareholder meetings. They can mean only one thing: investors want to replace directors, and don’t care to wait until the next annual shareholder meeting. Sure, some shareholders call for special shareholder meetings for a different reason, say for changing restrictive bylaw terms related to special shareholder meetings. Most of the time, though, they involve replacing directors.
Thus, BoDs and the CEOs they entrench look for new ways to prevent shareholders from calling special meetings. At Birner Dental Management Services (BDMS), they found some true winners. They even figured out a way for shareholders to pay for the company’s solicitation costs.
The old way: high share thresholds
If a company wished to avoid a special shareholder meeting, it used to eliminate the right completely. Delaware code (DGCL) defaults to only directors or executives calling a special meeting. Companies would need to state otherwise in bylaws for shareholders to do this.
A company could also make it more difficult to round up the votes needed to do so. Some set thresholds of 50% or more of outstanding shares needed to demand a special meeting. Shareholders have fought these high thresholds for years.
Instead, they have demanded the right to call special meetings at reasonable share thresholds. 10-20% of outstanding shares became the typical threshold, too low for some BoDs and executives.
The new way: demand a record date, in detail, and pay for the privilege
Until last week, BDMS had a straightforward process for special meetings. Investors representing 10% of outstanding shares could send a simple letter demanding one, stating the purpose of the meeting. The BoD would need to schedule it within 60 days of the demand.
Earlier this year, investors representing over 31% of outstanding shares created a Form 13D group. One member of that group alone owns over 20%, comfortably beyond the 10% threshold. The group sent a series of letters criticizing management and the BoD, and demanded a deal to sell the company.
Last week, BDMS announced bylaw amendments that break new ground in making life difficult for investors. 10% of shares remains the threshold. Three other new provisions, two we’ve seen before and one that is completely new (at least to us), create barriers to a special shareholder meeting that only a stubbornly determined investor could overcome.
Request Record Date
Now, shareholders don’t merely demand a special meeting. They request a record date for shareholders entitled to vote on whether to convene a special meeting. Only then can shareholders demand a special meeting, or really a vote on whether to convene one. In other words, two separate requests. What with the request for a record date, and the BoD resolution to set a record date, and the record date itself, and the special meeting demand, the actual special meeting could take place as long as 6 months after shareholders first demand one. We’ve seen a few other companies include this annoying set of intermediate steps.
The two demands now must provide all sorts of unnecessary detail. Each must contain the same information a shareholder would include in a proxy statement, about the shareholder(s) and any BoD candidates. They also set forth the purpose of the meeting and specific matters to be considered, consistent between the record date demand and special meeting demand. Each shareholder signatory to each demand must include the date of signature, presumably to trip up shareholders on the timing of the various demands. And, shareholders transmit the demands using only registered mail or personal delivery. Other shareholders hardly care about this information. Companies impose these terms because failure to conform to these exact requirements constitutes grounds for rejecting the notice. We’ve seen many other companies do stuff like this.
Cost of Notice
BDMS now requires shareholders to bear the cost of the notice of the meeting. The company will proffer a “reasonably estimated cost” to the shareholder, who must deposit that amount with the company pending the outcome of the meeting. Upon receipt of the payment, the company sends the notice of the meeting. If the shareholder prevails, the company returns the money. No negotiation, either, as the company decides the amount. This is a first, at least for us.
We wonder if these terms, particularly the payment of the cost of notice, would pass muster with a judge in Colorado, the state of incorporation for BDMS. It strikes us as designed specifically to disenfranchise shareholders, usually grounds for an override. Let us know if you’ve heard about similar barriers.