Activist Investor Report

May 7, 2010

We are pleased to introduce our latest newsletter, the Activist Investor Report. This newsletter will highlight selected key developments in U.S. securities laws and regulations and other legal developments affecting activist shareholders of publicly traded companies. If you know of anyone who may be interested in receiving this newsletter, please notify Royce Akiva (


NYSE Eliminates Discretionary Broker Voting

A recent change to the New York Stock Exchange’s (the “NYSE”) rules may impact activist shareholders’ ability to affect director elections. Amendments to NYSE Rule 452 eliminated discretionary broker votes for all elections of directors, contested and uncontested, at shareholder meetings held on or after January 1, 2010. Prior to this rule change, brokers were permitted to vote the shares held by them in “street name” for, among other proposals, uncontested director elections where the beneficial owner of the shares did not provide instructions ten days before the shareholder meeting. While not required, brokers’ discretionary votes have generally followed management recommendations.

Because NYSE Rule 452 applies to all U.S. brokers that are NYSE members, this amendment affects virtually all publicly traded domestic companies, except registered investment companies, even if not listed on the NYSE.

Given that a large percentage of retail shareholders fail to provide voting instructions to their brokers, the amended NYSE Rule 452 may have a significant impact on the outcome of director elections, particularly with respect to public companies that have broad retail shareholder bases. While contested director elections were not previously subject to discretionary voting, in uncontested elections this amendment is likely to significantly increase the chance of success of “Vote No” campaigns by eliminating the discretionary votes cast in support of management’s nominees. For the same reason, this amendment is also likely to significantly increase the importance of the recommendations of proxy advisory firms such as Risk Metrics that are often determinative of votes of institutional investors.

Shareholder Inspection Rights

Section 220 of the Delaware General Corporation Law provides Delaware company shareholders with the right to inspect the company’s books and records upon the satisfaction of certain procedural requirements. Several recent decisions of the Delaware Court of Chancery have indicated that the Court may be taking a more restrictive view of these inspection rights.

Section 220 Requirements

A shareholder seeking inspection rights must make a written demand under oath on the company at its registered office in Delaware or its principal place of business and must establish its status as a shareholder. The demand must also state the shareholder’s purpose for seeking the inspection.

Although inspection rights under Section 220 were originally limited to record shareholders, the statute was amended in 2003 to extend inspection rights to beneficial shareholders. While a shareholder of record will be established based on the company’s shareholder registry, beneficial shareholders must establish their holding through a certified copy of an account statement, brokerage statement or similar documentary evidence. If the shareholder is requesting to inspect only the company’s list of registered holders, the company must provide access to such list within five business days unless the company demonstrates that the request was made for an improper purpose. However, where the request extends beyond a registered shareholder list, the burden is on the shareholder to demonstrate that it has a “proper purpose” that is reasonably related to its interests as a shareholder. It is also generally accepted that companies may provide requested books and records subject to a confidentiality agreement limiting the use and disclosure of the documents to the stated purpose.

Recent Delaware Chancery Court Decisions

Disputes arising under Section 220, which under Delaware law may only be brought before the Delaware Court of Chancery, generally arise around the question of whether the shareholder has stated a “proper purpose.” Under the statute, the Court of Chancery will determine whether any proper purpose has been presented by the shareholder, and, if so, whether the scope of the inspection is limited to books and records that are “necessary, essential and sufficient” to permit the fulfillment of that purpose. Proper purposes under Section 220 have been found to include, among others, inspection in support of a contested proxy solicitation, determination of a director’s independence or whether a director is disinterested with respect to a specific transaction and valuations of one’s shareholdings in the company.

In Beiser v. PMC-Sierra, Inc., C.A. No. 3893-VCL, 2009 WL 483321 (Del. Ch. February 26, 2009) the court recognized that inspections for the purpose of determining wrongdoing by the company’s directors and officers in connection with a derivative suit may be a proper purpose. However, the Beiser court found that mere allegations of wrongdoing were not sufficient. Rather, to meet its burden of demonstrating a “proper purpose”, the plaintiff must specifically provide how it would utilize that information, such as bringing a shareholder derivative suit.

In Norfolk County Retirement System v. Jos. A. Banks Clothiers, Inc., C.A. No. 3443-VCP, 2009 WL 353746 (Del. Ch. Feb 12, 2009), the court found that the plaintiff had stated a “proper purpose” in seeking the books and records to bring a derivative action. However, in Norfolk County the court ultimately found the plaintiff had not adequately demonstrated its need to see documents in addition to what had already been provided to it, which included the report of an independent special litigation committee that investigated the alleged wrongdoing and evidence supporting the independence of the committee. The inspection of additional documents, the court reasoned, would require a reasonable showing that the committee report was not reliable, which the plaintiff did not do.

In addition to scrutinizing a shareholder’s stated purpose in requesting inspection rights, the Delaware Court of Chancery will also generally strictly adhere to the procedural requirements of Section 220. In Smith v. Horizon Lines, Inc., C.A. No. 4573-CC, 2009 WL 2913887 (Del. Ch. August 31, 2009), the court found that a shareholder had failed to provide sufficient documentary evidence to establish its status as a beneficial shareholder where it had provided a redacted account statement that showed only the owner’s last name and failed to show the date on which it purported to own the shares. The court held that the plaintiff’s failure to provide sufficient documentary evidence as required under the statute was not cured by the plaintiff’s sworn statement that the account statement was a “true and correct” copy.

In light of these recent decisions taking a narrow interpretation of shareholders’ inspections rights, companies are likely to take a more aggressive approach in contesting inspection requests. Accordingly, shareholders must carefully comply with the procedural requirements of the statute and have a specific and well supported purpose for such request. It is also noted that other jurisdictions have inspection statues similar to Delaware’s Section 220, and recent Delaware decisions may impact the application of these statutes affecting companies in other jurisdictions.


Seward & Kissel will continue to monitor the impact of the NYSE’s amendment to the discretionary voting rule, as well other initiatives and developments of significance to our activist shareholders, and advise our clients of further developments in future Activist Investor Reports.

If you have any questions regarding this Report or other activist investor matters, please contact the following Capital Markets Group partners: Robert Lustrin at (212) 574-1420 or Ted Horton at (212) 574-1265.