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Empirical Analysis of Advance Notice Provisions in Company Bylaws

Originally published in the Harvard Law School Forum on Corporate Governance and Financial Regulation - https://corpgov.law.harvard.edu/2016/11/10/empirical-analysis-of-advance-notice-provisions-in-company-bylaws/

Historically, corporate bylaws have been the “sleepy hollow” of a corporation’s constitution. They typically specify the offices that comprise the corporation’s leadership team, the corporation’s fiscal year and signing officers for the corporation. Bylaws have tended to be uncontroversial. Today, however, in an era of increased shareholder activism, bylaws have become a venue for corporate governance reform.


In recent years, firms have implemented advance notice provisions (ANPs) in their bylaws. ANPs require shareholders to comply with certain procedures and disclosure requirements if they intend to nominate directors at a shareholders’ meeting. In other words, an ANP places additional burdens on shareholders who seek to implement changes to the composition of the Board.


The empirical literature on corporate bylaws is sparse; no study surveys the frequency and types of bylaw amendments on a systematic basis. While additions to bylaws have been more common in the United States than Canada, the prevalence and substantive elements of bylaw amendments remain unclear. Our study sheds light on these empirical questions by examining ANPs in Canadian public companies. In particular, we hand collected a list of proposed and passed bylaw amendments in 1,156 Canadian firms listed on the Toronto Stock Exchange. Ours is the first study to examine bylaw amendments from an empirical standpoint, shedding light on the prevalence of ANPs and the types of firms that are likely to implement an ANP.


Our summary statistics on bylaw amendments demonstrate that the proposal of ANPs into corporate bylaws increased dramatically beginning in late 2012. While no ANPs were implemented before 2012, as of year end 2015, almost half (47%) of the companies listed in the Toronto Stock Exchange have implemented ANPs into their bylaws. Indeed, the most prevalent type of bylaw amendment over our sample period consists of the implementation of ANPs.


Using our hand-collected database, our paper then examines two related research questions: which firms are most likely to propose an ANP in their bylaws and why do these firms seek to implement an ANP?


In analyzing the first question, we posit two sets of hypotheses. First, we set forth the “vulnerability hypotheses,” arguing that the more vulnerable the firm to a takeover bid or proxy contest, the more likely it is to propose an ANP. ANPs were designed to ensure that shareholder meetings run smoothly, especially when shareholders put forth alternative slates of directors. Firms that are more vulnerable to proxy contests or hostile takeovers would be more likely to benefit from an ANP, which ensures that shareholders will give notice of nominations and standardizes the director nomination process. Assessing firms’ vulnerability aids in drawing out potential factors that make firms more (or less) likely to implement an ANP. Second, we posit the “trend hypothesis,” which postulates that firms monitor (and perhaps mimic) their peers and therefore implement ANPs in lock step with others in their industry.


In univariate and multivariate analysis, we find support for the vulnerability hypothesis along several measures of vulnerability. Our vulnerability hypothesis found statistically significant support for our ‘clear day’ and ‘spillover’ explanations. The clear day scenario posits that a firm that does not experience a proxy contest or hostile takeover attempt is least likely to propose an ANP to its shareholders than a firm that does experience such an event. The ‘spillover’ theory posts that firms whose peers have have not been subject to a proxy contest or hostile takeover bid are less likely to propose an ANP.


These findings suggest that firms operating in ‘riskier’ industries, or who have been vulnerable to changes in control in the past, are more likely to propose an ANP. We also found support for our trend hypothesis—statistically, a firm in an industry with higher ANP adoption is statistically more likely to propose an ANP itself. This is perhaps best seen in the mining industry, as firms in mining are significantly more likely to propose an ANP to their shareholders, while firms in the manufacturing, real estate, and finance are less likely to propose an ANP.


We then turn to our second question, examining reasons that firms would implement an ANP. Under the first rationale, which is universally propounded among firms proposing an ANP, management and the board would like meetings to proceed in an organized fashion. We refer to this as the “Administrative Ease Rationale” (AER): firms do not want to be “ambushed” at meetings by shareholders making nominations from the floor. Firms also believe that shareholders themselves can more effectively evaluate the nominees’ qualifications if shareholders are provided with information in advance of the meeting. Under the second “Board Entrenchment Rationale” (BER), the board of directors may wish to deter shareholder nominations from the floor. ANPs increase the cost of making director nominations because they place a burden on shareholders to review and comply with the relevant procedures and informational requirements specified in the bylaws.


The AER and the BER are not mutually exclusive. That is, management and the board may seek to ensure that shareholder meetings run in an orderly manner but they may also implicitly seek to entrench themselves. In order to test these rationales, we run an event study to examine the market reaction to ANP announcements. In all specifications of the event study, the sample cumulative abnormal return is negative, though the results are not statistically significant. The results are slightly more negative when we include in the sample only firms whose peers have been subject to a proxy contest or hostile takeover bid or when we include only firms whose ANP proposal subsequently failed. The results do not allow us to reject either rationale; it is possible that both effects are occurring concurrently and that shareholders consider both in deciding whether to vote in favour or against the ANP proposal


We believe this analysis highlights those vulnerable firms seeking to impede a change of control implement ANPs. We find that factors that make a firm more vulnerable, including peer exposure to a proxy contest or takeover bid, industry, and various measures of shareholder dispersion, make a firm more likely to propose an ANP to its shareholders. Stepping back from the data, our study also demonstrates that bylaws are no longer a “sleepy hollow” and have indeed become a locus for corporate governance reforms.


The complete article is available for download here.


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