Advance Notice in Bylaws

Companies have a number of ways to assure that shareholder meetings are “orderly”. These include limiting who can attend, monitoring votes at meetings, and vesting significant power in the BoD Chair, who runs the meeting and is frequently the CEO. A more cynical view of these and other ways suggests rather than impose order, they seek to thwart shareholder efforts to influence company affairs, and entrench directors and executives. Either way, some of these ways matter greatly to an activist investor who wishes to so influence a company.

One of the most prominent, important, and confusing ways is through advance notice provisions that govern how a shareholder can propose items for a shareholder meeting (both annual and special meeting) agenda. Company bylaws prescribe the process by which a shareholder proposes these items, which include BoD nominations, bylaw amendments, and non-binding resolutions.

The company bylaws that set forth that process can get detailed and complex. One model bylaw has 16 pages of dense prose. Overall, though, this process requires a shareholder to notify the company of the intention to propose an agenda item at a shareholder meeting well in advance of the meeting. These provisions prevent a shareholder from simply showing up at the meeting and moving to consider a BoD nominee, bylaw amendment, or non-binding resolution.

State corporation law, in particular Delaware, neither specifically allows nor prohibits advance notice provisions. Section 211(b) of the Delaware General Corporate Law has a vague sentence how shareholders can propose agenda items (“business”). Numerous Delaware court cases over many decades have allowed corporations to impose advance notice requirements, if they do not disenfranchise shareholders. And, Delaware courts have high standards for what constitutes “disenfranchisement”.

Notice of intent is not the same as actually proposing. After notifying the company, a shareholder must attend the shareholder meeting, stand before the assembled investors, and move to consider the BoD nomination, bylaw amendment, or resolution.

Also, notice of intent is not the same as the notice needed to include the matter in company proxy materials. These frequently have the same timing. But, there are some differences. SEC regulations, rather than state law, dictate the process for including or excluding proposals from proxy materials. Under these regulations, companies need not include BoD nominations in company proxy materials. SEC regulations also have some specific requirements for the contents of the notice for proxy materials.

Advance notice provisions generally have two components: timing and content. Further, these provisions generally require shareholders to update notices between the first notice and the meeting.

Timing: The Window

Advance notice provisions typically set forth a date by which a shareholder must notify the company of the intent to propose the matter. These can range from 30-120 days before the shareholder meeting.

Companies rarely announce the exact date of the annual shareholder meeting in a given year very far in advance, even two or three months in advance. For example, for an annual meeting in May, the company might announce the date sometime in February or March. For this reason, bylaws frequently set the advance notice date as a number of days before the one-year anniversary of the previous years’ annual meeting. If the date of the annual meeting varies considerably from the one-year anniversary, then a separate deadline (typically 90 days before the advanced or postponed meeting date) applies.

Companies can also set a date after which a shareholder must submit proposals. For example, a shareholder can submit a proposal no earlier than 120 or 150 days before the shareholder meeting. This prevents shareholders from submitting a “standing” resolution or bylaw amendment, which would always meet the timing limits of advance notice provisions.

The first and second dates thus create a “window” within which a shareholder must notify the company of the intent to nominate a director or propose a bylaw amendment or resolution.

Content: The Laundry List

Advance notice provisions also set forth a (long, onerous) list of data and documents that shareholders must submit with the notice. These include information about the shareholder that proposes the matter, and as applicable information about a BoD nominee.

Shareholder information includes:

❖Name and address
❖Type and number of shares owned, including derivatives
❖Pending litigation between the shareholder and the company
❖Relationships between the shareholder and the company or its competitors.

Proposal information includes:

❖Description and text of the proposal (resolution or bylaw amendment)
❖Any material relationships between and among shareholders or others that the proposal affects.

BoD nominee information includes:

❖Shareholder information (above)
❖Information the SEC requires in proxy materials, including biographical, other BoDs, conflicts, etc.
❖Completed questionnaire with extensive other requirements
❖Agreement to comply with company policies.

Updates: Frequently

Advanced notice provisions also require shareholders to update the original notice, to reflect any changes in the information that the shareholder submitted. Companies impose at least two update times: within five days after the record date for the shareholder meeting, and within eight days of the shareholder meeting.

Read and Comply

A shareholder can find every term of the advance notice provisions for a given company in the company bylaws. A careful read reveals the generalities and detail.

A company can find flaws in a notice on one or more of many grounds: timely notice, incomplete or inaccurate content, or failure to update earlier notice. If this happens, the company can then declare the proposal or nomination out of order. Don’t let this happen to you.