The SEC's Advance Notice Bylaw

In the heated debate about advance notice bylaws, we sometimes overlook how SEC already requires a comprehensive advance notice from an activist. The SEC's form suits shareholders well. It provides shareholders with sufficient information about an activist and its BoD nominees, and does so far enough before an ASM to assure an orderly shareholder meeting.

Of course, the SEC doesn't have a "bylaw". We merely refer to companies' onerous demands of activists to nominate director candidates, found in corporate bylaws. Instead, the SEC regulates communication between an activist and shareholders, in the proxy solicitation rules. There, the SEC requires extensive disclosure from an activist, and now requires it well in advance of a company ASM.

We explain this here to make a simple point. The SEC "bylaw" makes company advance notice bylaw demands unnecessary.

Plenty of information

The SEC requires an activist that pursues proxy contest to disclose some meaty stuff to the shareholders of a portfolio company. It has these requirements for the activist as shareholder and for the BoD nominees.

The specific regulation, Section 14A, is highly technical and obscure, difficult to interpret or even read. Below is our lay summary that hits the highlights. Please consult your favorite securities attorney for an authoritative take.

As a shareholder, an activist discloses basic identifying information, its shareholdings, dealings with the company, and any criminal history:

• Personal contact information
• Current occupation and employer contact information
• Shares owned, trades in the past two years, and amounts borrowed to purchase shares, both by the activist and certain "associates"
• Any "arrangements" with other parties, mostly related to derivative securities in the company or to voting the activist's shares
• Any contracts with the company, for employment with the company, or for transactions exceeding $120,000 in the past year
• Any criminal convictions in the past ten years.

An activist's BoD nominees disclose some essentials, too:

• Experience and qualifications to serve
• Any "arrangements" with the activist, say for compensation to serve as a nominee
• All public company director roles in the past five years
• Any legal proceedings in the past ten years.

This list provides shareholders with plenty of useful information for voting. Shareholders that desire more can easily ask.

Company advance notice bylaw terms cover these items and much more. Almost all such terms explicitly require an activist to disclose to the company basically "what the SEC requires in Section 14A", and then many other items that only the company finds useful.

Plenty of time

Advance notice also pertains to when shareholders receive this information, not only what they receive. As part of the universal proxy card rules, the SEC now requires an activist to send this information to shareholders about a month before the ASM. Previously, there was no deadline for this disclosure.

In contrast, company advance notice bylaw terms typically require this disclosure 3-5 months before the ASM, long before most shareholders even begin to think about voting. Worse, companies don't usually provide this information to shareholders, except of course if it can hurt the activist.

Plenty of hassle

We can and probably should debate what information the SEC requires in proxy statements, and when activists should disclose that information to shareholders. At the very least the SEC needs to make the regulation readable.

Companies just make life harder for activists, without any benefit for voting shareholders, by adding to the SEC list of disclosures.