Advance notice bylaws: what IR needs to know
Shareholder activism has become a major concern for publicly traded companies of all sizes in Canada. A key way activists have been moving forward an agenda at a company is to nominate new directors at the annual meeting, either via a proxy battle prepared in advance, in secret, or by nominating new directors right off the floor in an ambush. Often these dissident acts involve a clean sweep of the entire board.
Advance notice bylaws seek to remove the element of surprise from these nominations and give a company time to prepare. This new tool also makes the entire nomination process more equitable for all shareholders and ensures annual meetings progress efficiently. Here’s what you need to know about this new rule.
What is it?
An advance notice bylaw sets a deadline for shareholders to submit a notice of director nomination to a public company’s management in advance of the annual meeting. The bylaw also stipulates what information must be contained in that notice.
Usually, a bylaw requires anyone seeking to nominate a board member to offer no less than 30 days’ notice and no more than 65 days’ notice to management. That person must also provide detailed information about the nominee: who the person is, what he/she does and other information pertinent to regulators regarding the nominee’s eligibility to be a director of the company.
Who’s using it?
About one third of Canadian companies have already put advance notice bylaws in place; about 800 companies adopted them in 2013.
The Canadian Proxy Contest Study conducted by Fasken Martineau, which was released in 2013 and updated in early 2014, reports that proxy battles are on the rise in Canada. ‘It’s happening to all types of companies. It doesn’t matter what industry you’re in or your market cap, we found all types of companies being targeted,’ says Bradley Freelan, a partner with Fasken Martineau who specializes in corporate and securities law.
Companies are increasingly seeking to reduce this threat using advance notice bylaws as they become tested in the market. The 2012 British Columbia court case Northern Minerals Investment Corp vs Mundoro Capital Inc resulted in a favorable decision regarding advance notice bylaws. In that decision, the judge concluded that such a rule was reasonable and did not infringe shareholders’ rights.
Both ISS and Glass Lewis have endorsed the implementation of bylaws and issued their own guidelines. These bylaws have also been in use in the US for 20 years and have been adopted by the likes of JPMorgan Chase and Citigroup.
‘There have been no downsides to adopting advance notice bylaws,’ says Freelan.
A company wishing to adopt such bylaws can find standard wording through its legal team and via ISS and Glass Lewis. The bylaw must then be approved by resolution by the company’s directors, after which it goes into effect immediately.
While it’s not required by law, investor relations professionals should consider issuing a news release to inform shareholders of the company about the new rule, provide a link to the bylaw itself, and announce that it will be put to a vote at the next meeting of shareholders. The bylaw should also be announced in the proxy circular for the next shareholders’ meeting.
The bylaw must be brought to this next meeting, or it becomes null. Ideally, advance notice bylaws are not voted on during the same meeting at which their stipulations must be enacted (ie, a proxy battle).
In British Columbia, under the Business Corporations Act, such a change requires an amendment to the articles of the company, not a bylaw. It can be approved by the board or put to shareholders, the latter choice being the current preference of the legal community.
Such bylaws do not necessarily prevent activist shareholders from seeking nominations and sweeping the board at the annual meeting. ‘It forces the process to be more public,’ says Freelan. It dispenses with the element of surprise in a proxy battle and eliminates ambush nominations. Notice allows a company to develop its own strategy in advance of the meeting and may up the ante ‒ and cost ‒ of a proxy battle, which might be abandoned due to the need for more resources. It’s not a perfect tool, but it’s a fair one that levels the playing field for a company and its investors alike.
Nicole Guillot is president and CEO of CNW, the Canada-based news release service.