Volume 26 Number 3, March 2012 MERGERS AND AQUISITIONS Delaying Judgment Day: How an adjournment, the meeting is convened without taking a stockholder vote, but then reconvened to Defer Stockholder Votes in at a later time and date. However, a stockholder Contested M&A Transactions meeting also can be postponed or recessed. In a postponement, the previously scheduled stock- holder meeting is not convened, but is delayed to In connection with an M&A transaction, pub- a subsequent time and date. In a recess, the stock- lic companies sometimes fi nd it desirable to delay holder meeting is convened, and then “recessed” a previously scheduled stockholders meeting. without taking a stockholder vote and continued Adjournment is the most traditional method, but at a later time and date. a recess or postponement may be appropriate. In any event, a review of the company’s charter and The determination of whether a company can bylaws, applicable state or foreign law, the federal delay its previously scheduled stockholder vote, securities laws and the agreements governing the and the best method of doing so, requires a rigor- transaction must be analyzed. ous analysis of the company’s charter and bylaws, applicable state or foreign law, the federal securi- by Lois Herzeca and Eduardo Gallardo ties laws, and the agreements governing the trans- action. Public companies that are seeking stockholder approval of a contested business combination Reviewing Organizational Documents transaction have sometimes found it desirable to delay a previously scheduled meeting of stock- As an initial matter, both the charter and holders. The company may wish to provide stock- bylaws of the company should be reviewed to holders with additional time to consider new determine if, and to the extent that, they address information (such as a new or revised acquisition the ability of the board of directors, or the chair proposal), may need additional time to solicit of the meeting, to delay a stockholders meeting. proxies, or may not have a quorum. Ideally, the bylaws should empower the board of directors, without a vote of the stockholders, to Adjournment is the most traditional, and most (1) postpone, reschedule, or cancel any previously accepted, method to delay a stockholder vote. In scheduled annual meeting of stockholders and (2) postpone, reschedule, or cancel any previously scheduled special meeting of the stockholders Lois Herzeca and Eduardo Gallardo are partners at Gibson, called by the board of directors or management Dunn & Crutcher LLP, in New York, NY. (but not by the stockholders). Further, the bylaws should provide that the chair of any stockholders thereby subjecting the decision to the “compel- meeting has the right to convene, recess and/or ling justifi cation” standard. 3 Though the defen- adjourn the meeting. dant argued that “the adjournment was lawfully consistent with its bylaws and was made without It also is important to determine whether a objection from any shareholder present at the delay in a previously scheduled meeting could [a]nnual [m]eeting,” the court concluded that such have the effect of re-opening the advance notice an argument “ignores the clear rule that inequi- window under the company’s bylaws, thus table action does not become permissible simply allowing a dissident stockholder to nominate because it is legally possible.” 4 Upon a rehearing, directors, or bring other proposals to a vote at the court reiterated that while it did not intend to the meeting, when it might have been prevented “entirely foreclose the ability of a Delaware cor- from doing so absent such delay. For example, in poration to reschedule or adjourn a shareholders December 2011, the Delaware Chancery Court meeting,” the court stated that “[w]here a decision sided with a dissident stockholder of China- to adjourn is made due to an improper purpose, Cast Education Corporation, who argued that that decision may be challenged as a breach of the company’s decision to postpone its 2011 fi duciary duty.” 5 annual meeting of stockholders had effectively re-opened the advance notice window under the When the court determines that the board’s pri- company’s bylaws, allowing him to nominate mary purpose was not to frustrate voter franchise, three individuals to the company’s six-member but the delay in the stockholder vote was nonethe- board. 1 less used as a defensive tactic, the court will still review the board’s decision with the “enhanced Analyzing State Law scrutiny” applicable to other takeover defense tac- tics under an Unocal standard. 6 I n Kidsco Inc. v. Even if a company’s organizational docu- Dinsmore , The Learning Company (TLC) reached ments empower the board of directors and/or the a negotiated merger agreement with Broderbund chair of a stockholder meeting to delay the stock- Software, Inc. (Broderbund), but a hostile tender holder vote, state law (or in the case of a foreign offer was later commenced by Softkey Interna- corporation, foreign law) may govern the manner tional Inc. Broderbund eventually presented an in which such power may be used. improved offer and, in order to allow more time to consider the improved offer, TLC’s board post- Under Delaware law, for example, if a Dela- poned its stockholder meeting from November 9 ware court determines that a meeting was delayed to December 11. 7 The court, in determining that as a defensive tactic or to interfere with the stock- the measure was appropriate, applied the Unocal holders’ right to vote, the court will place the standard, requiring that the board’s action be burden on the company seeking the delay to dem- “reasonable.” It must “demonstrate that it had onstrate that the delay was appropriate, regard- reasonable grounds to believe that a danger to less of the authority granted under the company’s corporate policy and effectiveness existed,” and bylaws. In State of Wisconsin Investment Board “proportional,” in that the response was “neither v. Peerless Systems Corp. , the company’s bylaws preclusive nor coercive” and fell “within a range of provided that any meeting of the stockholders reasonable responses to the threat posed.” 8 could be adjourned by the chairman of the meet- ing. 2 In reviewing the factual record, the Dela- Delaware courts have provided some guid- ware Court of Chancery found that the primary ance as to what factors will be considered to purpose of the adjournment may have been to determine whether the board acted appropriately frustrate or interfere with stockholder franchise, in determining whether to delay a stockholder INSIGHTS, Volume 26, Number 3, March 2012 2 meeting. For example, the Delaware Court of Delaware courts have noted the “general practice Chancery has stated that it will fi nd that a board of the SEC that encourages issuers to seek stock- acted in accordance with its fi duciary duties if, holder pre-approval for an adjournment.” 11 for example, “well-motivated, independent direc- tors” postpone a stockholder meeting to vote on If new material information is presented to a merger, when they: stockholders immediately prior to the stock- holder meeting, the company may be required to • believe that the merger is in the best interests allow stockholders additional time to consider of the stockholders; the proposal in light of such new information. If • know that if the meeting proceeds the stock- a defi nitive proxy statement previously mailed to holders will vote down the merger; stockholders has become materially misleading • reasonably fear that in the wake of the merger’s prior to the date of the meeting due to a subse- rejection, the acquiror will walk away from quent event, such as an amendment to the terms the deal and the corporation’s stock price will of the merger agreement, the proxy statement plummet; must be amended or supplemented to correct • want more time to communicate with and pro- any materially misleading statement or omission. vide information to the stockholders before Proxy materials must then be fi led with the SEC the stockholders vote on the merger and risk and disseminated to stockholders with enough the irrevocable loss of the pending offer; and time prior to the meeting to allow the stockhold- • reschedule the meeting within a reasonable time ers adequate time to digest the new information. period and do not preclude or coerce the stock- holders from freely deciding to reject the merger. 9 While there is no specifi cally required num- ber of days that a meeting should be delayed to Delaware courts also have found that there was give stockholders time to consider new material not a breach of fi duciary duty where the adjourn- information, 5 to 10 business days generally is ment of a meeting was considered a “defensive mea- regarded as common practice. A helpful bench- sure intended to enable the … board to present the mark is the tender offer rules which require an [board-sponsored] transaction to its shareholders in extension of the offer for an additional 10 busi- an environment that would provide the board a rea- ness days for changes in the price or amount of sonable time to explore and develop other options securities sought and 5 business days for other if the [board-sponsored] deal were rejected.”10 material changes in the offer. 12 Additionally, when Delaware courts have enjoined stock- Federal Securities Law Requirements holder meetings and mandated that further information be disclosed to stockholders, they Rule 14a-4 under the Exchange Act grants a have enjoined the meeting for a similar period.13 company the ability to solicit proxies conferring discretionary authority to management to vote on In the case of In re Anderson, Clayton Share- matters “incident to the conduct of the meeting.” holders’ Litigation , 14 a competing bid was pre- However, the SEC generally considers the use sented three days prior to the target company’s of an adjournment at a stockholder meeting to stockholder meeting, which the target board did require the previous disclosure in the proxy state- not postpone.