Advance Notice Bylaws and Proxy Contests: A Balancing Act

At a Glance

• Advance notice bylaws have become a common feature in the corporate governance landscape of Delaware corporations. They establish timeframes within which stockholders must submit nominations for directors or proposals for business at annual meetings. While advance notice bylaws can promote orderly proxy contests and ensure that the current board has ample time to evaluate potential nominees, they also raise concerns about limiting stockholder voting rights.
• This guide provides a high-level summary of what advance notice bylaws are, why they are important, and the current state of the law.

What Exactly Are Advance Notice Bylaws?

Delaware General Corporation Law (DGCL) Section 211(d) provides the statutory framework for advance notice bylaws. Advance notice bylaws are an optional set of bylaw provisions that a public company can adopt to require stockholders to give advance notice (typically 30-120 days) of nominations or other proposals they would like to be voted on during an annual meeting.¹ Advance notice provisions aim to improve transparency by requesting specific information about a stockholder’s proposal before it is put to a vote.

Why Are Such Provisions Important?

They help protect company directors and other stockholders by ensuring they can make informed decisions.

One key benefit of advance notice bylaws is the time afforded to both the board of directors and other stockholders to consider the proposals. In the absence of advance notice bylaws, disgruntled stockholders may propose director nominations and/or business proposals at annual meetings with no notice, meaning that the proposals and nomination slates will be omitted from the proxy card, which details the topics stockholders will vote on at the meeting. Without advance notice bylaws, a company will be vulnerable to proxy contests.

For those new to the world of corporate governance, proxy contests refer to situations where a group of dissatisfied stockholders join forces to either vote out members of the board of directors or lay the groundwork for a hostile takeover.² Without advance notice bylaws, dissatisfied stockholders can garner support for their proposals secretly before the annual meeting, while most stockholders and the company’s management will be blindsided by the proposed director slate or proposals, but will have to vote on them immediately (and after hearing about them for the first time). Given that possibility, Delaware courts have long recognized the benefit of advance notice bylaws, agreeing that they serve the “proper purpose of assuring that stockholders and directors will have a reasonable opportunity to thoughtfully consider nominations . . . and to allow for full information to be distributed to stockholders.”³ After all, directors of public companies are tasked with representing the best interests of all stockholders, and advance notice bylaws afford directors the time to be thoughtful about decisions that will impact the company.

However, advance notice bylaws do not give companies free reign to encroach upon a dissatisfied stockholders' rights.

While disputes concerning advance notice bylaws often focus on management’s transparency with stockholders, the need for clarity goes both ways. In Openwave Systems v. Harbinger Capital Openwave Systems v. Harbinger Capital, 924 A.2d 228 (Del. Ch. 2007), the Court of Chancery held that when a company’s advance notice bylaws are unambiguous, courts will give them the force and effect required. But where there are ambiguities in the language or the timing of adopting the advance notice bylaws, Delaware courts will interpret the language in favor of a stockholder’s electoral rights so as not to limit those rights based on unintelligible or overreaching language adopted at a questionable time.

What is the Current State of the Law?

Delaware courts have issued several significant decisions interpreting DGCL Section 211(d), establishing the standards for reviewing challenges to advance notice bylaws, reiterating Delaware’s approach to those provisions. Relevant to those decisions is that courts analyze advance notice bylaws differently based on whether the provision is being challenged (a) on its face or in the abstract (a facial challenge) or (b) in the context of an impending proxy contest. One of the most recent and influential decisions is Kellner v. AIM ImmunoTech Inc. 320 A.3d 239 (Del. 2024) which was decided on July 11, 2024.

In Kellner, the Delaware Supreme Court clarified the standards for reviewing challenges to advance notice bylaws: (1) a facial challenge or (2) an as-applied challenge (to a proxy contest). In a facial challenge, the language and framing of the bylaw is challenged without reference to a specific proxy contest and the trial court applies the business judgment standard to that review. That means that the bylaw is presumed valid unless the stockholder challenging it can demonstrate that the bylaw “couldn’t operate lawfully under any set of circumstances.”⁴ When a bylaw is challenged during an actual proxy contest, the court applies an enhanced scrutiny standard, which requires the board to identify and describe the threat to corporate interest that existed when the advance notice by law was adopted and prove that the bylaw was a reasonable response to the threat and did not unduly restrict stockholder voting rights.

Traditionally, Delaware courts have shown that the “clearest state of cases” in favor of invalidating an advance notice provision is when a board is “aware of an imminent proxy contest” and adopts advance notice bylaws stringent enough to “make compliance impossible or extremely difficult.”⁵ Such a scenario is sometimes referred to as adopting the advance notice bylaw on a “rainy day” (as a response to an imminent threat). The standard remains the same regardless of if the threat is credible. Ultimately, this enhanced scrutiny standard allows courts to strike a balance between protecting corporate interests and preserving stockholder rights from unnecessary limitation or interference.

Key Takeaway

Advance notice bylaws remain a common feature in the corporate governance landscape of Delaware corporations. To honor the role of a company’s board of directors while protecting the stockholder franchise, Delaware law incentivizes companies to (1) adopt advance notice bylaws in the absence of threats (on a clear day); (2) use clear language in the provisions; and (3) ensure that the advance notice bylaw is appropriate for the issue or threat it is meant to address.

When evaluating challenges to advance notice bylaws, the Court of Chancery will consider several factors, including:

• Nature of the threat: The severity and immediacy of the threat that the board faced when adopting the bylaw.
• Reasonableness of the response: The extent to which the bylaw’s restrictions on stockholder voting rights are reasonably tailored to address the identified threat.
• Burden on stockholder voting rights: The impact of the bylaw on stockholder voting rights, including the potential for it to discourage or prevent stockholders from exercising their rights.
• Consistency with corporate governance principles: Whether the bylaw is consistent with sound corporate governance principles, such as promoting informed decision-making and protecting stockholder interests.

By understanding the factors that Delaware courts consider when evaluating advance notice bylaws, parties can better assess the risks and benefits associated with adopting or challenging those provisions. As Delaware law continues to evolve on this issue, it is essential for corporations and their stockholders to stay informed about the latest developments in this area or to engage counsel that pays attention to these matters.