In December, Starboard Value LP nominated six director candidates for four available slots on Rogers Corp.’s (ROG) 10-person board — three outside candidates and three of the activist fund’s principals.
The Jeff Smith-led investor planned to cut back its slate to four nominees had the contest gone the distance, but in February it reached a settlement that canceled the election and replaced two incumbents with new directors.
Even so, Starboard’s overnomination is part of a broader director election strategy employed by a wide variety of activist funds seeking to maintain maximum flexibility as they face a barrage of tougher advance notice bylaw provisions seeking to complicate, or discourage, their boardroom battles. Universal proxy card director candidate reporting rules that took effect in September are also raising issues for activists and pushing dissidents to overnominate.
Other activist tactics include nominations made behind closed doors, hiding the exact names of nominees in hopes of reaching a consensual resolution before a vote and nominating alternate or placeholder director candidates.
“The increased abuse of advance notice bylaw provisions to try to invalidate an activist’s nomination is leading many of my clients to be more strategic in how and when to nominate,” said Olshan Frome Wolosky LLP partner Elizabeth Gonzalez-Sussman, an adviser to activists.
Of the tactics being employed by insurgents to optimize their chances of winning board seats amid the current climate, overnominating is one of the most popular.
“We want a show of force,” Gonzalez-Sussman said. “These nomination deadlines can come up months in advance of annual meetings, so having more nominees provides flexibility, as some potential directors might obtain operating roles that disqualify them, or they need to quit the slate because of personal or professional reasons in the interim.”
Activists will overnominate to demonstrate that their nominees bring a broad range of skillsets to the company but may also do so to ensure enough nominees are available at the time of election, which is often months away. More candidates, too, may be useful if companies put pressure on activist-backed nominees, driving them to step down or quit.
New rules for proxy contests may also be encouraging activists to overnominate. Universal proxy card regulations that became effective in September require dissidents to provide notice to the company of their intent to nominate directors 60 days before the anniversary of the previous year’s annual meeting, while companies need to provide the names of their candidates 50 days ahead of the same anniversary.
As a result companies may make changes to their boards after the activist is required to submit its candidates, Gonzalez-Sussman said.
“The activist may not have the benefit of knowing what the company’s final slate will be until after it submits its candidates,” she said. “Activists overnominate so they can run the best candidates versus the final company slate.”
More dissident director candidates with a wider range of skillsets could be useful to ensure that the insurgent has the best final dissident slate to compete with the company’s final incumbent board.
Activists may also overnominate in case the board decides to expand the size of the class up for election after the nomination deadline but before the proxies are finalized, added David Hunker, shareholder activism defense leader at Ernst & Young LLP.
“I have seen activists overnominate and then pare down their slate,” he said. “These things will get litigated if they go all the way to a vote, but we’re not there yet. There are differing opinions about whether or not these things are allowed, but it is a novel strategy on the activist’s part.”
The Securities and Exchange Commission issued guidance in 2022 noting that activists can still nominate more candidates than there are seats available, but they have to identify which candidates are their core nominees and which are alternates.
For example, after Freshpet temporarily reduced the size of its slate up for election at its 2023 meeting from four candidates to three, activist Jana Partners LLC adjusted its slate to include three core nominees and an alternate. In addition, Trian Fund Management co-founder Nelson Peltz nominated himself earlier this year to Walt Disney Co.’s (DIS) board, and he offered his son, Matthew Peltz, as an alternate, though he canceled his effort in February.
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