6.3 Activist Investor Solicitations of Shareholder Votes

While the solicitation process is basically the same for activist investors or others who initiate a proxy solicitation and vote of the shareholders (usually in a special shareholders' meeting), because the process is usually adversarial to a company, additional players are usually involved. The first and main participant is the proxy solicitation participant or the person or group initiating and encouraging activist actions. The SEC proxy rules identify a proxy solicitation participant as any person or group who solicits or who "directly or indirectly takes the initiative, or engages, in organizing, directing or arranging for the financing" of any person or group that solicits proxies, as well as any person nominated for election as a director. Each person named as a nominee in a proxy solicitation will also enter into an agreement with each other participant pursuant to which he or she agrees to be named as a nominee and to serve as director if elected.

When an adversarial proxy solicitation is initiated, legal counsel will play a much more significant role in the solicitation process. In addition to the activist's attorneys, securities lawyers will have primary responsibility for preparing the proxy statement, ensuring its compliance with SEC and company-imposed requirements and managing the SEC review and clearance process of the proxy statement. In certain instances, local counsel in the company's home jurisdiction may also be required to advise on local law. However, in the adversarial context of a proxy contest, it is not uncommon for the target company to object to the shareholder's conduct of the solicitation campaign on procedural grounds. While such objections usually have a legitimate basis, they are often motivated by the desire to derail the hostile solicitation. For those initiating adversarial proxy solicitations, it is therefore important that litigation counsel be involved early in the process to be able to respond promptly to any challenge. In addition to securities lawyers, in an adversarial contest, a proxy solicitor is always retained to solicit shareholder votes. Because the proxy solicitor is a key element of any contested proxy fight, the solicitor is chosen based on its ability to contribute to the entire solicitation process. In addition to its capabilities in soliciting votes, a solicitor is expected to leverage its experience to assess the target company's shareholder base and assist in developing an efficient solicitation strategy, provide advice on the proxy statement itself and monitor the solicitation process in advance of the vote. As the primary disclosure document relating to the shareholder's solicitation, the proxy statement and any related "fight letters" must be drafted both to satisfy applicable SEC disclosure requirements as well as to present a compelling argument for change. In most proxy solicitations contests, the final proxy statement (together with the proxy voting card itself) is the only document that is sent to each shareholder of the company. While the proxy statement and any related fight letters must present the argument for change, they must also satisfy the SEC's disclosure requirements, both in order to clear the SEC comment process and to protect participants from potential liability. In particular, a proxy statement, and any other solicitation materials used by solicitation participants, is subject to the SEC's standard anti-fraud provisions that prohibit false or misleading statements or the omission of material information. A violation of these provisions may result in the SEC requiring a shareholder to amend its proxy materials, prohibit the use of the proxy statement altogether or invalidate any votes received based on alleged false or misleading information or, in extreme cases, the institution of an enforcement action. The SEC will typically provide written or verbal comments to both company and activist preliminary proxy statements within 10 days of filing. Before the actual solicitation of proxies from other shareholders can commence, any SEC comments must be addressed and the final proxy statement, together with the form of written proxy, must be distributed to the shareholder base. While the SEC will not assess the substance of a shareholder's argument for change, typical SEC comments ask participants to include required information that the SEC does not believe was adequately provided in accordance with SEC forms and rules or to delete or modify unauthorized information such as forecasts or insufficiently substantiated assertions. In addition, the SEC may address any concerns with the proxy statement that the opposing side may identify and raise with the SEC. The cost of mounting an adversarial proxy contest depends on a number of factors and typically include legal fees and expenses, the fees and expenses of the solicitor, and printing and mailing costs. While not dependent on the shareholder base, legal fees will also vary widely depending on, among other factors, the proposals included in the proxy, the extent of SEC comments to the proxy statement, the jurisdiction and applicable law governing the solicitation and the defense mounted by the company, including whether the company raises legal challenges to the solicitation based on alleged failures to meet certain procedural requirements. Such challenges, which are a common defensive tactic of a target company, usually result in protracted litigation even before the actual solicitation begins and can significantly increase the total cost of the adversarial proxy campaign. Solicitation, printing and mailing fees and costs are dependent on the company's shareholder base. It is not unusual for aggregate costs to exceed $1 million. While the activist shareholder(s) must be prepared to bear all of these costs, both Delaware and New York law permit a shareholder to seek reimbursement of its expenses, subject to shareholder approval, which not surprisingly will typically depend on the ultimate success of the solicitation. Under both Delaware and New York law, the company's incumbent management is entitled to reimbursement of reasonable expenses incurred in connection with the defense of a contested proxy contest. Activist investors who take on a company in an adversarial, contested proxy contest, must recognize that every filing made during the period leading up to and in the course of the solicitation is likely to be subject to heightened scrutiny, both by the SEC, the target company and other investors.