January 25, 2023
January 25, 2023
The 2023 debut of the universal proxy card, following a US Securities and Exchange Commission (SEC) rule effective Jan. 31, 2022, making it easier for dissidents to campaign for a seat on a board, has inspired some boards to review and strengthen the change-of-control provisions in their bylaws or other corporate policies. One such provision is advance notice bylaws requiring shareholders to give timely notice to a company—in writing and in advance of the annual shareholder meeting—of their intention to submit proposals to nominate a board candidate or to vote on other matters. These bylaw provisions may also require advance notice of proposals on other matters, as long as the provisions are not in violation of the federal rule on proxy proposals (Rule 14a-8); this is a stipulation we see in The New York Times Co. advance notice provisions as updated in 2020.
What follows is a brief history of advance notice bylaws, followed by four recommendations to boards planning to adopt, amend, or defend them.
Directors of public companies are expected to represent the interests of all shareholders with due care and loyalty, but from time to time a company’s ownership base may include a small group of activists who believe that they can do a better job. These dissidents try to get themselves and their nominees on the board. A common way for them to achieve that goal is to wage a proxy fight by proposing a dissident slate for a vote at the next annual meeting. Advance notice bylaws give companies time to respond to such actions.
Advance notice bylaws have a long and distinguished history. They have been widely employed—and challenged—since at least the mid-1990s, when many companies adopted them in response to 1992 proxy voting reforms that empowered dissident shareholders in new ways. Now, more than two decades later, many, if not most, companies have advance notice bylaws. A Delaware judge in the 2020 BlackRock Credit Allocation Income Tr. v. Saba Cap. Master Fund case called them “commonplace.”
Challenges to advanced notice bylaws over recent decades have created a “density of jurisprudence,” as noted by the judge in the 2021 Rosenbaum v. CytoDyn Inc. case. Adding to this density will be Politan Capital Management’s recent shareholder legal challenge to Masimo Corp.’s 2022 bylaw amendments, which has made headlines as it exemplifies a hot new trend. Some have expressed concerns that the Masimo case could lead to curbs. Such an outcome seems unlikely, especially in Delaware, where courts defer to board judgment. However, there could be movement by shareholders themselves to submit and win proxy proposals to ban all bylaw amendments made by boards alone (the typical case), without shareholder approval. A 2017 resolution at Automatic Data Processing received a majority vote.
Plaintiffs challenging advance notice bylaws have objected to overly long notice periods (e.g., 120 days rather than 60 days) or overly detailed disclosure requirements (e.g., proxy-length biographical info for dissident director candidates). Although such super-protective policies have been in existence for at least a decade (Masimo, the company undergoing a high-profile challenge, has had such a policy since 2013), they are now getting challenged in court more frequently because a higher number of dissidents are trying to get on boards via universal proxies.
In the Rosenbaum case, the judge upheld advance notice provisions, as did the court in the aforementioned BlackRock case and in the 2007 Openwave Systems v. Harbinger Capital case. The Openwave decision also warned that courts will resolve any ambiguity by the company in favor of the stockholder’s electoral rights. An outlier in this series of pro-bylaws cases was the 2008 JANA Master Fund, Ltd. v. CNET Networks, Inc. case. In this case, the court put some restrictions on the use of advance notice bylaws, without forbidding them altogether.
First, boards must understand that they have a right to institute advance notice bylaws. If boards do not get adequate advance notice of shareholder intentions, they lose the opportunity to engage in focused dialogue on the issue in question, whether it is a director nomination or another matter. The universal proxy rule effective for this proxy season already requires a dissident to “provide the registrant with notice of the names of its nominees for director 60 days before the anniversary of the prior year’s annual shareholder meeting,” with adjustments if the time of the meeting has changed. Many advance notice provisions (both those adopted before this rule and after it) simply lengthen this timeframe. This makes sense because the information sought in such policies is necessary for all shareholders to know.
Second, advance notice provisions should be created in advance of any proxy fights with the help of legal counsel expert in current bylaw trends. A Sidley Austin article cautioned that these should be prepared on a “fair day” rather than a “rainy day” lest courts impugn them as mere devices of entrenchment.
Third, companies should be prepared to explain and defend their policies. The SEC issued guidance in December 2022 addressing the situation of a company that is sued over its advance notice bylaws. The SEC says that companies must make certain disclosures about the litigation and the possible ramifications, and should be prepared to change the date of the annual meeting if it cannot give shareholders enough notice.
Finally, while boards can demand transparency, they must also provide it. Advance notice bylaws exemplify a demand for transparency from dissident shareholders, because such bylaws request factual information about an important matter, be it a potential board member or another matter coming up for vote. Conversely, however, boards must also be transparent, constructing their bylaws in plain English without any ambiguity.
Given their long history, advance notice bylaws are highly unlikely to be declared illegal overnight by a judge. The court’s decision in Masimo and similar cases may, however, provide guidance on writing advance notice bylaws that can withstand judicial scrutiny.
Disclaimer: NACD does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. For such advice, readers should consult their own tax, legal, and accounting advisors.
Alexandra R. Lajoux is the chief knowledge officer emeritus at NACD.
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