Delaware Chancery Court Narrowly Interprets Advance Notice Bylaws

In each of two recent decisions, JANA Master Fund, Ltd. v. CNET Networks, Inc. and Levitt Corp. v. Office Depot, Inc., the Delaware Court of Chancery held that a dissident stockholder was entitled to propose business and/or nominate directors at a company’s annual meeting without providing advance notice pursuant to the company’s bylaws.  These decisions suggest that the Delaware courts are likely to construe advance notice bylaws in an extremely narrow manner.  Accordingly, companies should review their bylaws to ensure that their advance notice provisions are sufficiently clear and comprehensive to serve their intended purpose. 

JANA v. CNET

In the JANA case, the insurgent stockholder sought to gain control of CNET’s board, primarily by proposing, at CNET’s 2008 annual meeting, to expand the size of the board and to elect five individuals to fill the newly created positions.  CNET took the position that JANA’s proposed course of action was impermissible under the advance notice provisions of CNET’s bylaws because JANA had not owned CNET stock for at least one year, as the bylaws required.  The bylaws provide, in part, that:

[a]ny stockholder of the Corporation that has been the beneficial owner of at least $1,000 of securities entitled to vote at an annual meeting for at least one year may seek to transact … corporate business at the annual meeting, provided that such business is set forth in a written notice and mailed by certified mail to the Secretary of the Corporation and received no later than 120 calendar days in advance of the date of the Corporation’s proxy statement released to securityholders in connection with the previous year’s annual meeting of security holders….  [S]uch notice must also comply with any applicable federal securities laws establishing the circumstances under which the Corporation is required to include the proposal in its proxy statement or form of proxy.

Notwithstanding the absence of any explicit reference in the bylaws to proposals submitted for inclusion in CNET’s proxy statement pursuant to SEC Rule 14a-8, the court held that they applied only to such proposals.  The court found that the bylaws’ permissive language (specifically, the passage indicating that a stockholder “may seek to transact … business”) suggested that they were meant to apply only to Rule 14a-8 proposals, which are included in a company’s proxy statement only if certain substantive and procedural requirements are met.  According to the court, the fact that the bylaws’ 120 day deadline was keyed to the release of the company’s proxy statement for the preceding year also suggested that their application was limited to Rule 14a-8 proposals, as the apparent purpose of the requirement was to allow the company adequate time to include a stockholders’ proposal in its own proxy materials.  Finally, the court found that the last sentence in the passage quoted above effectively incorporated the substantive notice requirements of Rule 14a-8, again suggesting that the bylaws applied only to proposals made under the rule.  Because JANA intended to finance its own proxy solicitation rather than use the Rule 14a-8 process, the court held that the bylaws did not apply to its proposals.  CNET has appealed the decision to the Delaware Supreme Court.

Levitt Corp. v. Office Depot, Inc.

The background of the Levitt decision is as follows.  Office Depot distributed proxy materials relating to its 2008 annual meeting on March 14, 2008.  Its notice of meeting included the election of directors as an agenda item and indicated that all of the current directors had been nominated for re-election.  Three days later, Levitt Corp. filed its own proxy statement soliciting proxies in support of two director nominees it supported.  Levitt did not attempt to comply with the advance notice provisions of Office Depot’s bylaws.  Office Depot contended that the Levitt nominees were therefore ineligible for election at the annual meeting.  The bylaws state, in pertinent part, that:

[a]t an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting.  To be properly brought before an annual meeting, business must be … specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board of Directors … or otherwise properly brought before the meeting by a stockholder of the corporation….  For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary….  To be timely, a stockholder’s notice shall be received at the company’s principal office . . . not less than 120 calendar days before the date of the Company’s proxy statement released to shareholders in connection with the previous year’s annual meeting….

The court held that Levitt’s nominations were timely.  The court first rejected Levitt’s argument that because the bylaws referred only to “business” generally, rather than director nominations specifically, they did not apply to the latter.  However, according to the court, the business of electing directors was properly brought before the meeting pursuant to Office Depot’s notice of meeting.  Office Depot argued that the notice related only to the re-election of its current board members, not to new nominations made by stockholders.  The court disagreed, noting the absence of language in Office Depot’s bylaws or its notice of meeting expressly stating the limitation it suggested. 

*          *          *          *          *

At least until the Delaware Supreme Court provides additional guidance in this area, companies should assume that the Delaware courts will read advance notice bylaws in a very restrictive manner.  Because advance notice bylaws are an important means by which companies can ensure that stockholder proposals are made in an orderly manner with adequate time for consideration and response, companies would be well advised to review and, when appropriate, amend their bylaws to eliminate possible loopholes.  In particular, companies should ensure that their bylaws unambiguously apply to all stockholder proposals and that they explicitly address director nominations as well as corporate “business” generally.

April 28, 2008

CONTRIBUTING AUTHORS:

John A. Elofson
Sara J. Stanley

_________________________

Davis Graham & Stubbs LLP
1550 17th St., Suite 500
Denver, CO 80202

303.892.9400
303.893.1379 fax

CorporateNews@dgslaw.com