November 21, 2022

Advance Notice Bylaws: Battlelines are Drawn on Amendments Targeting Activists

Activists & their advisors are seeing red over some changes to advance notice bylaws being implemented by companies in response to the universal proxy rules.  In a recent “Open Letter” to directors & activist investors, Olshan warns boards against adopting advance bylaw amendments that add an array of new disclosure requirements that the firm argues aren’t necessary or appropriate responses to the universal proxy rule:

We urge you to be vigilant when reviewing and approving any new bylaws to avoid inadvertently adopting bylaw amendments that are predicated on misleading narratives and do not align with responsible corporate governance practices. In particular, be on the lookout for proposed amendments to nomination procedures requiring additional disclosure designed to make it more difficult, expensive or even impracticable to nominate directors or intended to chill permitted communications among shareholders such as provisions requiring disclosure of (i) the ownership interests of the nominating shareholder’s limited partners or distant family members in the company, competitors of the company or counterparties to any litigation involving the company, (ii) the nominating shareholder’s past or future plans to nominate directors at other public companies or (iii) the nominating shareholder’s prior communications with fellow shareholders concerning its plans or proposals relating to the company.

While Olshan doesn’t drop any names, the bylaw provisions it highlights are the same ones that Masimo Corporation implemented in response to a campaign by activist hedge fund Politan Capital Management. Those parties are currently brawling in Delaware Chancery Court over the legality of the amendments.

Why does the activist community have its nose out of joint over bylaw amendments like these? In a recent blog, Prof. John Coffee notes that identifying limited partners of an activist shareholder might prove embarrassing to certain of those partners, particularly public sector funds.  But he says there’s a bigger reason for their concern with these bylaws:

What most concerns the activist community appears to be the attempt of the Masimo bylaw to obtain disclosure about the recent track record of the activist seeking a board seat. What similar campaigns has it launched at other companies? To this end, the Masimo bylaw’s critical term – “Covered Person” – includes persons “Acting in Concert” (as defined) with the nominating shareholder, even though they do not have any express agreement.

In part, the intent here appears to have been to identify shareholders who have a special agenda (say, environmental activism) and have developed an ongoing association with the nominating person in order to pursue a common agenda (which may have little to do with the maximization of shareholder value). Corporate management’s apparent premise here is that, with universal proxy voting, such informal alliances with single-issue activists may become more common and that shareholders deserve information about such associations.

Coffee’s article takes a sympathetic view of the Masimo bylaw amendments, but if you’re interested in a different perspective, check out this blog from Prof. Lawrence Cunningham. Cunningham contends that Delaware courts are okay with advance notice bylaws so long as they don’t interfere with the exercise of the stockholders’ franchise.  He argues that the provisions of the Masimo bylaw “almost certainly cross the line, particularly in its call for a nominating shareholder to disclose its limited partners.”

John Jenkins