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SEC No-Action Positions Significantly Increase Potential for Combined Short Slates

January 1, 0001

 

The SEC’s Division of Corporation Finance recently granted identical no-action letters to each of Icahn Associates Corp. and Eastbourne Capital, L.L.C. that substantially change the playing field for dissident shareholders running short slates of nominees for election as directors at a shareholder meeting.

The Icahn and Eastbourne no-action letters dealt with a situation in which two unaffiliated groups of dissident shareholders were each running short slates for the board of directors of the same public company. In the no-action letters, the SEC took the view that the two unaffiliated groups of dissident shareholders were permitted to “round out” their short slates of director nominees with nominees of the other dissident shareholder group. This represents a significant change, as it eased the prior position that a shareholder running a short slate of director nominees was permitted to round out its short slate with company nominees only.

Background

In 1992, the SEC eased the requirements for shareholders conducting an election contest in a non-control context by revising Exchange Act Rule 14a-4(d), enabling shareholders to vote for minority representation of dissident shareholders by filling out a partial or “short” slate of shareholder nominees with management nominees. In the Icahn and Eastbourne no-action letters, the Division addressed the situation where the dissident shareholders, Icahn and Eastbourne, each sought to nominate 5 candidates for election to the twelve member board of Amylin Pharmaceuticals, Inc. Amylin had nominated its own full slate of twelve nominees for election to the board.

Generally speaking, in the past, shareholders voting in the Amylin board of director election would have had the choice of voting one of three proxy cards. Those three proxy cards would have presented the following three separate choices:

  • the Amylin card would have permitted shareholders to vote for the entire Amylin slate;
  • the Icahn card would have permitted shareholders to vote for the Icahn short slate of nominees, with that slate rounded out with nominees from the Amylin slate; and
  • the Eastbourne card would have permitted shareholders to vote for the Eastbourne short slate of nominees, with that slate rounded out with nominees from the Amylin slate.

The new position articulated by the Division will allow shareholders voting in the Amylin board of directors election to vote for nominees from either dissident slate and round out that slate with nominees of either the Amylin slate or the other dissident slate. As such, the three proxy cards may now present the following choices:

  • the Amylin card will continue to permit shareholders to vote for the entire Amylin slate;
  • the Icahn card will continue to permit shareholders to vote for the Icahn short slate of nominees, but that short slate may now be rounded out with some combination of nominees from the Amylin slate and nominees from the Eastbourne slate; and
  • the Eastbourne card will continue to permit shareholders to vote for the Eastbourne short slate of nominees, but that short slate may now be rounded out with some combination of nominees from the Amylin slate and nominees from the Icahn slate.

This position raises obvious concerns about the effects of the relief granted in a control context. Accordingly, the Division conditioned its position on representations by each of Icahn and Eastbourne that:

  • they had not expressly or impliedly agreed to form a “group” for purposes of Regulation 13D or 13G;
  • each of them would not actively recommend, and would direct their proxy solicitors not to actively recommend, the election of the other’s nominees; and
  • each of them would only state its intention to vote for the other’s expected nominees other than those nominees specifically named on its proxy card (e.g., Eastbourne would only state its intention to vote for the Icahn nominees other than those nominees specifically named on Eastbourne’s proxy card).

Potential Effects

These no-action positions significantly increase the usefulness of short slates as a means for shareholders to influence the composition of the boards of directors of public companies. In addition to the impact of the no-action positions on the basic operation of side-by-side short slates, the no-action positions have the following potential effects:

  • side-by-side short slates may now result in a change of control, as the combined slates could result in a majority of an issuer’s incumbent directors not being re-elected -- issuers should consider whether they need to revise their poison pill or default provisions to contemplate this new possibility; and
  • the no-action positions contemplate the use of side-by-side proxy cards -- it is unclear whether a later-dated proxy card would continue to control in a situation where the proxy cards do not conflict.