Advance Notice Bylaws And The Increasing Number Of Stockholder Director Nominations That Are Rejected By The Target Companies

• Published date: 06 September 2023
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Compliance, Corporate and Company Law, Shareholders
• Law Firm: Morrison & Foerster LLP
• Author: Spencer Klein, Joseph Sulzbach and Tyler Miller

This year's proxy season saw a significant increase in the number of companies rejecting director nominations by dissident stockholders due to purported non-compliance with the company's advance notice bylaws.

Although the reason for the increase is not entirely clear at this time, companies may be emboldened by recent Delaware case law upholding rejection of nominees at several companies. In any event, the increase underscores the importance of having state-of-art advance notice bylaws in place prior to a dissident surfacing. From the nominating stockholders' perspective, compliance with advance notice bylaws cannot be taken lightly.

It will be interesting to see if this increase becomes a new trend or just a one-year blip.

Stockholder Director Nomination Rejections

Advance notice bylaws require stockholders to submit a formal notice of their director nomination, along with detailed information about the stockholder and the nominee, within a specified period before the annual meeting. These provisions provide the board with sufficient time and relevant information to evaluate the candidates, allow board members to knowledgably make recommendations, and ensure that stockholders cast well-informed votes.

Between January 2022 and July 2023, 17 companies rejected stockholder director nominations for failure to comply with advance notice bylaws.¹ The most common reasons for the rejections were:²

• Failure to make required disclosures under the bylaws: For example, Primo Water Corporation rejected Legion Partners Asset Management, LLC's nomination due to its failure to disclose a pending lawsuit for fraud allegations against one of its nominees.
• Failure to correct omissions before close of advance notice window: For example, First Foundation Inc. rejected Driver Management Company LLC's director nomination. Despite being notified that its nomination notice was deficient, Driver failed to submit the required information before the close of the advance notice window.
• Misrepresentations: For example, George Norcross, Philip Norcross, and Gregory Braca provided the required notice under Republic First Bancorp Inc.'s bylaws to nominate director candidates but, among other things, misrepresented the identity of the record holder of the shares.

One potential reason for the rise in the number of nomination rejections for advance notice bylaw non-compliance: The increase in the number of first time or occasional activists. These are firms/individuals who do not have...