This article is a reply to the post appearing in the Harvard Law School Corporate Governance Forum authored by Marc Weingarten and Erin Magnor of Schulte, Roth & Zabel on March 17, 2009 and entitled “Second Generation Advance Notice Bylaws.” That post is available here.
Introduction
The past year has been marked by a wave of new or revised advance notice bylaws and a similar but smaller surge in adoption or amendment of poison pills to accomplish one or both of the following goals:
Second generation advance notice bylaws and poison pills did not appear spontaneously. Rather, each is a response to a growing phenomenon in the market for corporate control, not just in the United States, but also in Europe, Asia and Australia. The pioneering literature that exposed the use of derivatives and “empty voting” in corporate control contexts was a product of the academic legal community, particularly Professors Henry Hu, Bernard Black, Edward Rock and Marcel Kahan, who have written a number of articles about the phenomena of “empty voting,” “morphable” equity ownership, “decoupling of economic and voting interests,” “record date capture” and other uses of derivatives and market mechanics to separate the voting rights of stock ownership from its economic attributes and to divide the economic attributes[1] of ownership into a bundle of rights and obligations that can be separated, just as the voting rights can be separated from economic attributes. Moreover, the academic observers were not abstractly speculating about behavior that could revolutionize the markets for corporate control. They were reporting on existing methodologies, frequently but not always practiced by event driven hedge funds and other activist investors in control contexts.[2]
The second phenomenon of utilizing wolf pack behavior to avoid aggregation for purposes of equity reporting requirements, such as Section 13(d), has not generated as much academic interest, but certainly has galvanized target companies, and in many countries financial market regulators or even the political establishment, by its successful end-running of customary concepts such as the “group” definition under the 1934 Act and the European, Asian and Australian “acting in concert” or “concert party” concepts in the equivalent share ownership disclosure regimes in many of the world’s more developed equity markets.[3] It is also notable that, unlike the use of equity derivatives to decouple attributes of share ownership which arose in the context of, and was driven by, trading strategies and economic considerations unrelated to change of control campaigns, the wolf pack has been used virtually exclusively by the activist investor community in campaigns against companies, often culminating in successful proxy contests or other change of control events.
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