Corporate Governance at a Crossroads: Legal Shifts and the Battle for Board Control in 2025

The corporate governance landscape in 2025 is being reshaped by a collision of legal and regulatory forces that are redefining the balance of power between institutional investors, management, and activist shareholders. At the heart of this transformation lies the U.S. Securities and Exchange Commission's (SEC) revised Compliance and Disclosure Interpretations (C&DIs) under Exchange Act Sections 13(d) and 13(g). These rules, enacted in early 2025, have fundamentally altered how institutional investors engage with companies, chilling discussions on governance, ESG policies, and executive compensation. For investors, this shift is not merely procedural—it is a seismic change in the mechanics of shareholder value creation and risk management.

The SEC's “Chilling Effect” on Investor Engagement

The SEC's C&DIs define when an investor is deemed to have the “purpose or effect of changing or influencing control of the issuer.” This reinterpretation has forced major institutional investors—BlackRock, Vanguard, and State Street—to revise their engagement strategies. For example, State Street now explicitly disclaims any intent to influence board composition, while Institutional Shareholder Services (ISS) has halted its consideration of racial and ethnic diversity in director voting recommendations. These changes are not just semantic; they signal a retreat from proactive governance advocacy, reducing the influence of large passive investors in proxy contests.

The implications for board control are profound. In 2024, the Big Three supported management nominees in 63.6% of small-cap contests but only 25% of large-cap contests. However, the new C&DIs have created a compliance burden that discourages even the most well-intentioned engagement. As a result, companies may find themselves with less oversight on critical issues like executive pay, ESG disclosures, and board diversity—areas where institutional investors once played a gatekeeping role.

Delaware's Legal Amendments: A New Era of Shareholder Power

While the SEC's rules are tightening the screws on institutional investors, Delaware's legislative changes are empowering activists and controllers. The enactment of DGCL Section 122(18) allows corporations to transfer board powers to shareholders via agreements, bypassing the need for shareholder approval. This provision, coupled with proposed Senate Bill 21, is poised to further erode traditional governance checks. SB 21 would reduce the voting threshold for controller transactions and restrict access to corporate records under Section 220, making it harder for shareholders to investigate managerial misconduct.

These changes create an uneven playing field. Smaller shareholders, unburdened by the SEC's new rules, can engage more freely, while larger institutional investors face a compliance quagmire. The result? Activists and controllers gain disproportionate leverage in proxy contests, potentially leading to a surge in settlement-driven board restructurings.

Activist Strategies in a Regulatory Vacuum

The regulatory uncertainty has also spurred creative tactics from activists. The “zero slate proxy campaign” employed by groups like the AFL-CIO in 2024, which leveraged universal proxy rules to submit multiple proposals without director nominees, is a case in point. Meanwhile, the use of Rule 14a-4—allowing shareholders to submit unlimited proposals without word limits—has become a cost-effective tool for activists to bypass exclusionary rules.

However, the success rate of these campaigns remains low. In 2024, activists won only 6 of 49 board seats through proxy contests, and proxy advisory firms like ISS and Glass Lewis saw their influence wane, with only 45% of their recommended candidates elected. This suggests that while activists are adapting to the new rules, institutional investors remain cautious about supporting disruptive campaigns.

Investor Confidence: A Double-Edged Sword

The regulatory environment is a mixed bag for investor confidence. On one hand, universal proxy cards and digital voting platforms have enhanced transparency, empowering shareholders to engage more directly with companies. On the other, the volatility of proxy contests—particularly in hostile takeovers or activist campaigns—has introduced uncertainty. For instance, the 2024 surge in operational activism (25% of campaigns) led to a record 27 CEO resignations, underscoring the potential for governance instability.

For investors, the key risk lies in the erosion of institutional oversight. With the Big Three scaling back engagement, companies may lack the external scrutiny needed to align executive decisions with long-term value creation. This is particularly concerning in sectors reliant on ESG metrics, where regulatory rollbacks have already weakened disclosure standards.

Strategic Implications for Investors

1. Sector Diversification: Prioritize companies with robust governance frameworks that can withstand activist pressure. Sectors like technology and industrials, where AI oversight and operational efficiency are critical, may offer better risk-adjusted returns.
2. Activist Exposure: Consider thematic investments in activist-friendly industries (e.g., energy, retail) where regulatory changes may favor controllers. However, balance this with hedging against governance risks through ESG-focused funds.
3. Proxy Voting Tools: Monitor proxy advisory firm recommendations closely. The declining influence of ISS and Glass Lewis means investors must rely more on independent analysis.
4. Legal Preparedness: Companies should review their bylaws and defensive measures (e.g., advance notice provisions) to ensure compliance with Delaware's evolving standards.

Conclusion: Navigating the New Governance Terrain

The interplay of regulatory shifts and activist strategies is creating a governance landscape that is both dynamic and unpredictable. For investors, the challenge lies in balancing the opportunities presented by a more activist-friendly environment with the risks of reduced institutional oversight. The 2025 proxy season will likely see a continuation of this tension, with companies and shareholders navigating a regulatory maze that prioritizes speed and flexibility over transparency and accountability.

In this climate, the winners will be those who adapt—investors who can identify governance risks early and companies that proactively align with evolving regulatory expectations. The boardroom is no longer a static arena; it is a battlefield where legal and regulatory forces dictate the rules of engagement.