The last three months have seen a jump in shareholder lawsuits challenging "advance notice" provisions in company bylaws.
Advance notice provisions are ubiquitous among
The cause of this growing trend of lawsuits is the
Vice
In the few months since Kellner, plaintiff firms have created a cottage industry out of challenging two types of provisions similar to the advance notice bylaws at issue in that case.They include:
- "wolf pack" provisions, which contemplate that stockholders are "acting in concert" if they act "in substantial parallel" with each other, even absent any express "agreement, arrangement or understanding"; and
- "daisy chain" provisions, which contemplate that two stockholders are "acting in concert" if they coordinate with the same third party regardless of whether they are coordinating with, or are even aware of, each other.
So far, companies have not sought to litigate the merits of these challenges but instead have opted to simply revise their bylaws to remove the challenged provisions and thereby moot the plaintiffs' claims. This inevitably leads to claims by the plaintiffs' attorneys for "mootness fees" on the theory that by spurring the proposed changes, they provided a benefit to the company and its stockholders.
In light of these increasing stockholder challenges and the potentially resulting fee awards, corporations should proactively review their advance notice bylaws and assess whether they are vulnerable to challenge as "unduly restrictive." While bylaws adopted in anticipation of proxy contests are particularly vulnerable, as in Kellner, those that include "wolf pack" and "daisy chain" provisions have now also become a target for lawsuits.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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