Public company boards of directors have opened up a new front in their longstanding battle with hedge fund activists by rewriting the procedural rules governing board elections. Many boards now require shareholders to make long and complicated sets of disclosures in order to nominate candidates for board elections. These disclosure requirements—contained in advance notice bylaws (ANBs)—have come under fire in the Delaware courts for being drafted so expansively that they seem like “tripwires” intended to protect incumbents against even the possibility of a proxy contest.
In this paper, I analyze modern ANBs, drawing insights from a new dataset consisting of over 14,000 full sets of bylaws filed by more than 3,800 U.S. public companies from 2004 to 2023. During this time, ANBs have become longer and more complex market-wide, and variation in disclosure requirements across firms has increased. Additionally, firms with relatively few disclosure provisions have tended to add more provisions if they are targeted by an activist. These changes in drafting practice may have significant effects on corporate governance. When ANBs are long and complex with ambiguous requirements, it is more costly for activists to launch proxy contests, and boards are more insulated from outside pressure. This reduction in accountability is likely more severe for small firms and firms with high agency costs. However, modern ANBs also provide the benefit of filtering out campaigns by unsophisticated activists and bad actors.
Legal reforms could reduce the costs associated with modern ANBs without eliminating their benefits. These include (1) requiring shareholders to approve ANB amendments, (2) requiring companies to give activists time to cure deficient nomination notices, and (3) allowing shareholders to facially challenge ANBs under an “overbreadth” theory. Recent efforts by shareholders also suggest that private ordering may curb some of the effects of modern ANBs without outside intervention.
