A timely reminder on advance notice by-laws

As another proxy season draws to a close, the Delaware Court of Chancery has published a decision on the increasing use of advance notice by-laws to moderate activist shareholder campaigns. While the case was ultimately dismissed on procedural grounds, the decision should remind corporations it is important to implement and routinely revisit advance notice by-laws to ensure there are modern, defensible procedures in place.

Background on Siegel v. Morse

In Siegel v. Morse, the plaintiff (an individual shareholder) challenged amendments made to a company’s advance notice by-laws. The amendments added, among other things, provisions related to the definition of “acting in concert” and requirements for nominating shareholders to disclose additional information about themselves, their nominees and anyone they were working with. Additional disclosure requirements included any compensation arrangements between nominating shareholders and their nominees, information about the nominating shareholders’ equity interests in the company and ownership history and any material relationship or interest in any “principal competitor” of the company.

The plaintiff argued that the amendments served to prevent equitable shareholder participation in the company’s director election processes and its directors therefore breached their fiduciary duties in approving the amendment. 

The Delaware Court of Chancery dismissed the plaintiff’s challenge on the grounds it was “unripe,” referencing the US legal principle that federal courts will not review disputes in the absence of a live controversy requiring resolution. The plaintiff had not sought to nominate a director and was not able to identify other shareholders deterred by the amended by-laws. Since the only claims before them were hypothetical, the court therefore declined to weigh in on the substance of such claims.

Advance Notice By-Law 2.0

While we continue to wait for a substantive decision on disclosure obligations in advance notice by-laws, corporations should take this opportunity to implement or modernize their own. We recently published guidance on advance notice by-laws and proposed “Advance Notice By-Law 2.0.” As noted in our guidance, the recommendations introduce key improvements to traditional advance notice requirements, including:

• Extended Notice Periods – Advance Notice By-Law 2.0 extends the deadline for submitting director nominations from its typical length of 30 days (before annual shareholder meetings) to a minimum of 60 days.
• Updated Disclosure Requirements for Director Nominees – Advance Notice By-Law 2.0 updates the director nomination disclosure requirements to include: (i) sources of financial or monetary compensation for serving as a director or nominee; and (ii) agreements, arrangements, understandings, or commitments with another party requiring the nominee to vote or act in a specific way. 
• Updated Disclosure Requirements for Nominating Shareholders – Advance Notice By-Law 2.0 also updates the director nomination disclosure requirements to include: (i) agreements, commitments, arrangements, or understandings between the nominating shareholder and another party related to the nomination; (ii) individuals or entities known to the nominating shareholder that financially or materially support the nomination; and (iii) proxies, agreements, commitments, arrangements, or relationships granting the nominating shareholder voting rights over the issuer’s shares.

Key takeaways for corporations

While the Siegel v. Morse decision was procedural in nature, it should remind corporations of the need to:

• implement advance notice by-laws if they have not already done so;
• periodically update advance notice by-laws to align with evolving best practices; and
• ensure their by-laws are well reasoned and defensible in the event of legal challenges.

Our Advance Notice By-Law 2.0 introduced a modern approach to advance notice that allows boards to make informed recommendations on director nominees and shareholders the opportunity to vote in an informed and timely manner.

For additional insights about Advance Notice By-Law 2.0, watch our webinar on demand. For further inquiries or to request a copy of the full text of Advance Notice By-Law 2.0, reach out to a member of our Special Situations Team.