DealLawyers.com Blog

Michael Levin’s The Activist Investor newsletter recently flagged an academic paper by Ben Bates of Harvard Law School on advance notice bylaws, “Rewriting the Rules for Corporate Elections.” The paper analyzes advance notice bylaws from 2004 to 2023 using a dataset of 14,000+ bylaws from 3,800+ public companies. Wow! The findings prove something we already knew — that advance notice bylaws have become longer and more complex while drafting variability has increased — but the methods employed to prove this and the paper’s insights on market-wide and firm-specific events that prompted changes in advance notice bylaws over the years are worth spending time on.

The paper used absolute length (word count) and individual components (disclosures required of activists) to assess complexity. The paper identified the following categories of individual components:

Agreements, arrangements, and understandings – between an activist and related parties, such as director nominees or other investors
Affiliates – of the activist
Associates – of the activist
Acting in concert – any other parties with which the activist might collaborate
Competitors – any investment or interest in competitors of the company
Derivatives – investment in derivative securities of the company, and possibly of competitors
Family members – extend various disclosure obligations to family members of the activist and its BoD nominees, and possibly affiliates or associates
Known supporters – of the activist, such as other shareholders
Performance fees – for the activist, say based on company performance or the outcome of the activist project
Questionnaire – whether the company requires director nominees to complete one of these
SEC Reg S-K Item 404 disclosures
SEC Schedule 13D disclosures

The paper says there were two big waves of amendments to advance notice bylaws. The first coincided with the 2008 financial crisis and an increase in campaigns by hedge funds against the firms included in the data set. The second, unsurprisingly, followed the universal proxy card rules. In the last few years, most bylaw amendments both accounted for the use of UPC and added additional substantive disclosure requirements.

The paper claims that variability in advance notice bylaws is the biggest issue — in terms of cost to shareholders — and points to features of Delaware law that may promote this variation. These include the relative lack of power of shareholders in amending corporate bylaws, Delaware courts’ willingness to blue pencil bylaw provisions and the very high standard Delaware courts apply for facial invalidity. It suggests three potential reforms to promote “standardization”:

– Amend the DGCL to require a shareholder vote on all amendments of bylaw provisions that govern board elections or nomination procedures

– Delaware courts could use their equitable powers to start requiring companies to give shareholders some time to cure disclosure deficiencies, particularly for deficiencies in responding to ambiguous and contestable ANB provisions

– Courts could lower the standard for finding ANBs to be facially invalid

– Meredith Ervine