As boards and shareholders plan and pursue proxy contests, one board defense appears to be off the battlefield: the Draconian advance notice bylaw, which one company just pulled amid intense criticism from the investment community and signals from a state court judge.
The company is Masimo Corporation, an $8 billion medical device maker founded by billionaire Joe Kiani, who also serves as chairman and CEO. Late last year, Politan Capital, a hedge fund run by veteran shareholder activist Quentin Koffey, disclosed an 8.8% stake in Masimo.
Soon thereafter, the Masimo board adopted bylaws imposing two conditions on stockholder nominations of new directors. They required anyone nominating directors to disclose (1) any limited partners they have and (2) any plans to nominate directors at other companies.
These conditions could be show-stoppers since limited partners invariably insist that their identity be kept confidential, and shareholder plans for director nominations at other companies must be kept confidential during the planning process. They do not seem necessary to achieve the goals of valid advance notice bylaws, which are to avoid last minute surprise nominations and help directors advise other shareholders and provide required disclosure to them.
Besides the new bylaws, Masimo’s board had already created another deterrent to anyone considering nominating new directors: a platinum parachute payment to the founder—running to one billion dollars—is due if shareholders ever elect two new directors or if the board designates a lead independent director. In addition, Masimo has a traditional poison pill and staggered director terms.
The investment community, and especially activist shareholders, criticized these new bylaws as Draconian—a term courts use to describe defensive devices that thwart exercise of the shareholder franchise. To level the playing field, Politan sued the Masimo board in Delaware Chancery Court. During the case, the Vice Chancellor signaled substantial concern about the terms of the golden parachute and denied Masimo’s motion to dismiss that claim.
Ahead of that ruling, Masimo’s board unilaterally rescinded their advance notice bylaw. The company did not explain way, only disclosing the fact in its securities filings accompanied by a terse note. One can therefore only speculate, but it seems that a combination of condemnation by the investing community and judicial signals played a role. The fate of the parachute and other devices remains to be seen.
For now, the saga suggests preliminary lessons for boards and shareholders. For boards, advance notice bylaws remain valid when designed to help administer shareholder meetings and enable directors discharge their disclosure and other duties. But board-adopted bylaws patently intended to stop shareholder nominations are more likely to backfire. For shareholders wishing to nominate directors, be prepared to comply with such bylaws, even those that seem burdensome, but don’t take Draconian ones at face value.