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RiskMetrics Report: Advance Notice RequirementsSubmitted by: Stephanie Mullette, U.S. Research

Until recently, advance notice bylaws garnered modest attention, with most viewing the rules as little more than a means to ensure orderly shareholder meetings, rather than as a strategic defense. Indeed, courts had generally upheld advance notice requirements giving companies little cause for concern. But that thinking changed when, early last year, the Delaware courts handed down two noteworthy decisions that read together suggest a judicial move towards a narrower interpretation of such provisions. Shortly thereafter, a federal district court in New York rendered an opinion stressing the importance of derivative ownership disclosure in a company?s advance notice bylaws. As a result, issuers and corporate law firms have sharpened their focus on language contained in such provisions and the provisions? broader intent.

Against this backdrop, RiskMetrics? recently released 2009 Governance Background Report: Advance Notice Requirements provides an overview of the purpose of advance notice bylaws, recent legal decisions tied to such requirements, and the reaction of corporations to address potential deficiencies in such provisions.

Key takeaways from the report include the following:

--Hedging and derivative disclosure requirements in advance notice bylaws provide useful information to management, the board and shareholders about the extent to which a shareholder proponent's economic interest in the company's shares are aligned with the economic interests of other shareholders, provided they are not overly restrictive;

--RiskMetrics reviewed regulatory filings for 25 S&P 500 companies with annual meeting dates between Jan. 1 and March 1, 2009, of which 11, or 44 percent, had made amendments to their advance notice bylaws over the previous year. However, none of the companies sought shareholder approval;

--Of the 11 companies that made amendments to their advance notice bylaws, five included language requiring a director nominee to fill out a questionnaire; and

--Recently, the UK?s Financial Services Authority adopted rules requiring the disclosure of holdings, including derivatives, effective June 1. The FSA?s actions may lead to calls for similar reforms across the Atlantic.

To purchase a copy of the report, please visit the ?New Titles? section of RiskMetrics? online bookstore.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on April 09, 2009 (boomark / email).