Ben Batesis a Research Fellow at the Harvard Law School Program on Corporate Governance. This post is based on his recentpaper.
For the last decade and a half, boards of directors have been gradually rewriting their companies’ election bylaws. Specifically, boards have gradually added more and more disclosure requirements that shareholders must meet in order to nominate alternative board candidates. These changes have made it more costly for shareholders, such as activist hedge funds, to launch election contests. Boards have also reserved to themselves the power to unilaterally reject nominations made by shareholders who do not meet these requirements. If a board improperly rejects a shareholder’s nomination, the shareholder’s only recourse is to challenge the board’s decision in court.
This large-scale rewriting of election bylaws—which are commonly referred to as “advance notice bylaws” (ANBs)—began with a largely unnoticed wave of amendments around the time of the Financial Crisis, and it continued without fanfare for more than a decade. That changed in 2022 when the health-tech company Masimo Corporation adopted ANB amendments in the face of an activist threat that were so onerous that they were all but impossible to comply with. Masimo’s bold amendments elicited the praise and scorn of various academics and pages upon pages of law firm memos. It also earned Masimo a lawsuit in Delaware, filed by hedge fund activist Politan Capital. The lawsuit was ultimately resolved when Masimo agreed to walk back its controversial amendments.
Since the Masimo case brought ANBs into the spotlight, ANBs have been a focal point in public conversations about shareholder activism and in legal disputes between boards and shareholders. A prominent former member of the Delaware judiciary, speaking at a corporate law conference, recently compared complying with modern ANBs to “submit[ting] to a colonoscopy by the incumbents.” Additionally, Delaware courts have seen a steady stream of cases challenging companies’ ANBs on the grounds that they unduly restrict shareholders’ voting rights. At the same time, the last few years have seen hundreds of public companies update and strengthen their ANBs in response to the SEC’s new universal proxy rules.
Despite the attention that they currently command from practitioners, ANBs have been subject to only limited academic scrutiny. In a new working paper, I provide a foundational empirical and policy analysis of ANBs. My analysis leverages a new dataset I have compiled that contains over 14,000 sets of bylaws filed by more than 3,800 U.S. companies, and it focuses on answering three primary questions about ANBs:
(1) How have ANBs evolved over the past twenty years?
(2) What market-wide and firm-specific factors have affected ANB innovations?
(3) What legal reforms, if any, would be beneficial in response to these changes?
I begin by explaining the structure of modern ANBs, which serve two main functions: First, they set a nomination window during which shareholders are allowed to nominate director candidates for an upcoming annual meeting. Second, they require shareholders to make a set of disclosures to the incumbent board in order to submit a valid nomination. I also describe the types of disclosure requirements that tend to be included in modern ANBs. These requirements range from straightforward requests for information about the nominating shareholder and their nominees (e.g., name, address, and shares owned) to much less clearly defined requests for information about “affiliates,” “associates,” or “family members” of the nominating shareholder or parties “acting in concert” with them. Using economic logic, I argue that vague and complex disclosure provisions, or disclosure provisions that vary widely across firms, increase the cost to shareholders of exercising their nomination rights and should be expected to decrease the amount of shareholder activism. I also briefly summarize the Delaware caselaw that outlines the limits on boards’ authority to adopt burdensome ANBs.
Turning to the data, I show that enhanced ANBs disclosure provisions have increased significantly in length and complexity market wide over the past twenty years. I also show that two waves of amendments have propelled the proliferation of disclosure requirements, the first occurring in 2008–09 and the second occurring in 2022–23. This empirical evidence lines up with anecdotal accounts from law firms reporting that many companies amended their ANBs in response to changes in hedge fund activism around the time of the Financial Crisis and again in response to the SEC’s universal proxy rules.
Next, I examine the level of adoption over time of 16 different ANB provisions, twelve of which are disclosure provisions. I show that, while firms have on average increased the number of disclosure requirements in their ANBs over time, there is a large (and potentially growing) amount of variation across firms in the individual provisions they choose to adopt. In contrast, I show that firms have by-and-large converged on a standard way of drafting their nomination windows.
I also explore firm-specific factors that are correlated with the strength of firms’ ANB disclosure requirements. First, I show that firm size is strongly correlated with having more disclosure requirements. On average across my sample period, the largest 20 percent of firms in a given year have two more of the twelve disclosure provisions I track than the smallest 20 percent of firms. This difference is substantial given that firms had adopted, on average, only five of twelve provisions in 2023.
Second, I show that firms who have recently been targeted by an activist also generally have more disclosure requirements than other firms in a given year. Alone, this correlation is merely suggestive evidence that firms adopt tougher ANBs in response to the threat of activism. To further test whether being targeted causes firms to add disclosure requirements to their ANBs, I use an event study specification that examines changes in firms’ ANB strength before and after they are targeted by an activist hedge fund. I use propensity score matching to identify suitable “control” firms in an attempt to mitigate selection bias. Through this analysis, I find that being targeted by an activist does appear to cause firms to strengthen their ANBs. The effect is statistically significant but relatively small: firms add only 0.2 disclosure provisions on average in the years after they are targeted, relative to comparable firms.
I conclude by considering the policy implications of this empirical evidence. I focus on the costs associated with the high level of variation across firms’ disclosure requirements. I argue that the high level of drafting variation makes it more costly for shareholders to both (1) nominate directors and (2) monitor incumbents’ decision-making when they adopt ANBs or reject shareholders’ nominees. These costs are not offset by clear benefits to shareholders. I suggest three possible legal reforms that could either lead to greater drafting uniformity over time or at least reduce the costs of variability: (1) requiring shareholders to vote on all election-related bylaw amendments, (2) requiring boards to give shareholders time to “cure” deficient nomination notices, and (3) allowing shareholders to facially challenge ANBs for overbreadth or vagueness. Each approach has strengths and weaknesses, which I discuss in detail in the paper.
By providing a thorough empirical and policy analysis of ANBs, this paper should provide a valuable resource to aid institutional investors, practitioners, and policymakers seeking to understand the current state of ANB practice and related policy issues. It is also my hope that this paper will provide a foundation for future academic work aimed at studying modern tactics used by boards to control corporate elections.
The paper is available here. I welcome comments and feedback.
