As noted in this Cooley “Securities Litigation + Enforcement” blog penned by Sean Brownridge, Patrick Gibbs and Polina Demina, as most prepare for their director nomination window to open between December and February, the Delaware courts have delivered a timely reminder: Advance notice bylaws are important tools for boards facing shareholder activism, but only when their requirements are clear and their enforcement is grounded in the bylaws’ text.
Here are the key takeaways from that Cooley “Securities Litigation + Enforcement” blog:
- Draft bylaws with precision. Delaware courts will enforce clear advance notice bylaws, but they will not supply missing disclosure obligations. Stockholders are not expected to deduce disclosure requirements or “guess” what a board might interpret bylaws to require. Boards should consult with counsel to ensure that advance notice bylaws are clear, appropriately comprehensive and reasonably constructed so as not to inequitably interfere with the stockholder franchise.
- Use advance notice bylaws to inform stockholders, not to displace them. Advance notice bylaws help boards evaluate nominations and communicate with stockholders. They do not authorize incumbents to exclude nominees because they disagree with an activist’s strategy, incentives or expected business plan. Ultimately, advance notice bylaws cannot be misused to thwart stockholder choice or entrench existing directors.
- Make rejection decisions disciplined and record-based. Rejecting a nomination notice is a consequential step. It involves legal, reputational and strategic considerations. Boards should work closely with counsel to identify material deficiencies tethered to the bylaws’ plain language, document the specific grounds in the deficiency letter and avoid shifting theories later. In providing a rejection or deficiency letter to an activist, boards do well to provide a letter that is based in fact, even handed and prepared in good faith. As the court emphasized, “Advance notice bylaws are not moving targets.”
Authored by
Broc Romanek