New Paper Discusses the Rise of Advance Notice Provisions in Canadian Corporate Bylaws

In recent years many Canadian firms have amended their corporate bylaws to include advance notice provisions (ANPs). ANPs provide for advance disclosure from shareholders who propose to nominate directors at a shareholders’ meeting. As recently as 2011, no Toronto Stock Exchange (TSX)-listed firm had adopted an ANP. Fast forward to today, and nearly half of all firms on the TSX have added an ANP in their bylaws.

What are ANPs and what accounts for their rapid adoption by Canadian public firms? A recent study and paper, An Empirical Analysis of Advance Notice Provisions in Corporate Bylaws: Evidence from Canada, by Anita Anand and Michele Dathan of the University of Toronto’s Faculty of Law and its School of Management, respectively, provides insight into the recent ANP trend. The authors analyze a sample of 1,156 TSX-listed firms to identify the shared characteristics and rationale among firms that have adopted ANPs.

What are ANPs?

ANPs are corporate bylaw provisions that stipulate advance disclosure requirements from shareholders who propose to nominate directors at a shareholders’ meeting. The disclosure must be circulated to all shareholders (typically at least 30 days in advance of the meeting), and pertain to information about the nominating shareholder and the proposed director or directors. The information required may include the nominating shareholder and proposed director’s name, occupation, residency, shareholdings in the company, descriptions of key agreements or arrangements between the nominating shareholder and proposed director, their relationship with competitors, as well as information that would be required in a dissident proxy circular.

What characterizes a firm likely to propose an ANP?

The Paper hypothesizes and tests two theories to explain which firms are more likely to propose an ANP. The first, a “vulnerability hypothesis”, is that firms threatened by an unsolicited takeover bid or proxy contest are more likely to propose an ANP. The second, a “trend hypothesis”, predicts that a firm is more likely to propose an ANP where there is a trend to do so among firms in their industry.

According to the vulnerability hypothesis, a vulnerable firm would propose an ANP to prevent shareholders from unexpectedly nominating directors from the meeting floor. The authors find statistical support for this theory, with evidence that a firm is more likely to propose an ANP when it meets certain indicia of vulnerability. In particular, these are firms who operate in an industry in which a competitor has faced a proxy contest or unsolicited takeover bid, firms in an industry where takeover activity is relatively common (e.g., mining), or firms more susceptible to activist initiatives due to their dispersed shareholdings.

The authors also found statistical support for the trend hypothesis, namely, that firms in industries with higher ANP adoption (e.g., mining) are more likely to propose an ANP.

Reasons for Proposing Advance Notice Provisions

In addition to identifying characteristics which make a firm more likely to adopt ANPs, the Paper discusses and examines two reasons, based on explicit and anecdotal evidence, as to why firms implement an ANP. These reasons are the administrative ease rationale and the board entrenchment rationale. The Paper’s findings as to which reason predominates, however, is inconclusive.

The administrative ease rationale is universally advanced by management when explaining their reasons for proposing an ANP. Management usually argues that an ANP will allow the meeting to proceed in a more organized fashion by allowing shareholders and managers alike to evaluate all proposed nominees, while eliminating surprise nominations from the meeting floor. By contrast, the board entrenchment rationale, although not necessarily mutually exclusive from the administrative ease rationale, is based on anecdotal accounts that the existing board and management’s interest are the primary consideration for proposing ANPs in certain instances. The thinking is that an ANP allows current directors and management to entrench their position by deterring advance nominations through cumbersome disclosure requirements, as well as eliminating surprise nominations from the floor.

To test the explanatory value of these rationales, the authors examine the market’s reaction to ANP announcements. The expectation is that the administrative ease rationale would have a positive or neutral effect on the firm’s stock price, while the board entrenchment rationale would negatively impact the stock’s price. While the Paper’s research suggests that the effect on stock prices is cumulatively negative, it concludes that the results are insignificant, and that neither rationale can be fully accepted or rejected as the primary reason that firms adopt ANPs.

Conclusions

While the primary reasons that Canadian firms adopt ANPs is inconclusive based on the evidence examined, the Paper identifies certain firm characteristics that make the adoption of ANPs more likely. In addition, the Paper provides the legal and historical context of Canadian corporate bylaws generally, and ANPs in particular. Ultimately what the Paper makes clear is that the ANP has become an important new topic in the Canadian corporate governance landscape.