Advance Notice Bylaws

Are Bad!

So, let's stop normalizing them, ok?

We've seen much discussion and debate lately about advance notice terms in company bylaws. Deal Point Data reports almost 400 US companies amended them in November and December 2022. Activist Politan Capital sued portfolio company Masimo (MASI) over them, in a closely-watched case. BoD attorneys fight over how far corporate clients should go in screwing them down.

Recently, we've seen and participated in discussions where we talk through the finer points - which terms are worse than others, how activists should respond, what might companies do next to make them worse. Inevitably, an attorney or advisor defends a company's advance notice bylaws, claiming everyone does it, Delaware is ok with them, and BoDs want shareholder meetings to go well. Activists nod quietly, focus on the worst of them, and let the rest slide.

This is wrong! They exist solely to make life difficult for activists, and in the process disenfranchise shareholders.

Quick Refresher

For those that don't know, advance notice bylaw terms require two things:

• An activist must notify a company of BoD nominees long before a shareholder meeting, typically three to four months.
• In the notice, an activist discloses extensive detail about itself and its candidates.

See our earlier resource for more about the basics.

Much of the current debate pertains to the second thing: what additional detail a company can or should demand as a condition of allowing an activist to nominate BoD candidates. Some companies now require disclosure of an activist's fund investors, past and future activist projects, and discussions of activist projects among family members (spouses, children, etc.).

In all this debate, we forget one central truth: advance notice bylaws exist only as an obstacle to activists. They allow BoDs and management to resist or oppose a proxy contest, without any meaningful benefit to a company's shareholders.

What Companies Say

Companies argue for advance notice on two grounds:

• They can run an orderly shareholder meeting, since the BoD knows what business to expect on the meeting agenda.
• Shareholders want extensive, detailed information about activist BoD candidates.

We haven't heard shareholders complain about either problem. We've attended our share of annual meetings, and are usually one of the few stockholders that aren't a director, executive, employee, or advisor. Seems like an orderly meeting makes life easier mostly for the company.

Activists also disclose abundant information about themselves and nominees, without needing to comply with bylaw terms that require that information. If shareholders want more, they know where to call (activist, proxy solicitor).

Also, we've never seen a company include information about activist candidates in company proxy materials. If they collect that information from an activist for shareholders, then they certainly don't provide it to them where shareholders typically look for it.

Furthermore, the SEC already has a form of advance notice, addressing both the content and timing of these disclosures. The proxy solicitation rules require an activist to distribute a proxy statement with the essentials about itself and the nominees. These work well enough that most company advance notice bylaws require an activist to disclose to the company what it would include in the proxy statement. And, under the new universal proxy rules, the SEC now requires a reasonable notice period: an activist must send this information to shareholders about a month before the shareholder meeting.

What Companies Mean

How, then, do advance notice bylaw terms help the company? In many ways:

• Warn the BoD about potential nominees, so they can get ahead of an activist in communicating with shareholders to counter an activist's arguments for its candidates
• Provide the BoD with a form of opposition research, so it might use the disclosures to discredit the activist or its nominees
• Dissuade all but the most determined activist from compiling and submitting the growing pile of information the BoD demands
• Seek to disqualify an activist from nominating candidates based on failure to comply with one or another arcane or trivial detail in the extensive list of needed disclosures.

How do companies defend this? They point to Delaware Chancery Court, which frequently allows all manner of restrictive advance notice bylaw terms. Sure, it might be legal, but it doesn't make it better or right. It mostly means Delaware defers to BoDs, not that it helps shareholders to understand candidate qualifications and vote in an orderly way.

Why Even Care?

As companies find new and innovative ways to hamper activists, we continually must remind ourselves about the fundamental purpose of these bylaw terms.

The current debate over advance notice bylaws bears a striking resemblance to the one over shareholder rights plans starting in the 1980s. Then, companies sought to use a poison pill only to resist a coercive tender offer. They grew out of control, and became a standard if still-controversial way to limit what shareholders can own and therefore accomplish at a company.

Then, the fundamental purpose of a poison pill was to make life harder for an activist. Today, we can say the same for advance notice bylaw terms. Activists should keep this in mind as we think about and debate the nuances of these terms.