The Worst Part About Advance Notice Bylaws...

...is how companies have sole control over their interpretation and application, and activists can only litigate that control in a courtroom. While it affects activists of all sizes and kinds, it matters more to smaller, first-time, or individual activists, and poses a real threat. They have no recourse at the SEC, the usual place to complain about company abuses, since bylaw interpretation remains a state-level matter.

We've seen a few situations so far in 2023 that show this:

• Legion Partners sued Primo Water (PRMW) over its advance notice bylaws
• Driver Management has the dubious distinction of needing to sue two different portfolio companies, First Foundation (FFWM) and Ameriserv (ASRV), over their advance notice bylaws
• An individual shareholder failed to comply with advance notice bylaw terms at Warner Music Group (WMG).

Only one of these situations landed in Delaware, FFWM. Driver sued ASRV in Pennsylvania, while Legion sued PRMW in Canada. The WMG shareholder will wait until 2024 rather than suing in Delaware, as there is little room for interpretation. Its bylaws require a shareholder to own registered shares, and she did not.

The petty nature of these rejections betrays company intentions. The Legion and Driver situations all turn on whether the activists disclosed enough about their nominees. Two of Legion's nominees did not disclose decades-old questionable allegations of abuses in Soviet-era Eastern Europe, which PRMW found out and weaponized against the candidates. Driver did not disclose an already-public podcast collaboration between two nominees (FFWM) or lending relationships between nominees and the company that the company already knew about (ASRV). Each time the activist responded quickly and rectified the oversight.

Larger, established hedge fund activists like Legion and Driver likely have the knowledge and means to contest how a company interprets and applies advance notice bylaw terms. They certainly don't relish spending the money needed to do so, but will as warranted.

Smaller, less experienced funds or individual investors will find themselves at the mercy of a company. A BoD can refuse a nomination for whatever reason it chooses, and dares the activist to challenge the decision. Then, the activist must know that it can do that, know how to do so, and prepare to spend a lot of time and money to pursue it.

Companies have a dominant advantage here. Normally, the SEC could step in to defend investors. Of course, these remain issues of state corporation law, where the SEC has no jurisdiction.

Worse, we don't know the extent of this problem. We see only the infrequent litigation and occasional announcements from companies. Insightia reports knowing about at least ten like these so far in 2023. We can't see how many times a company rejects a nomination, likely on a flimsy pretense if they're anything like the situations noted above. Then, the shareholder either doesn't know or know how to escalate, or doesn't have the means to litigate.

Legion and PRMW settled their differences, and will proceed to the actual proxy contest. Driver continues to litigate its matters with FFWM and ASRV. The pleadings in all three (linked above) merit a close read.