Client Alert

In two recent cases, JANA Master Fund, Ltd. v. CNET Networks, Inc.¹ and Levitt Corp. v. Office Depot, Inc.,² the Delaware Court of Chancery has allowed dissident stockholders to nominate candidates for the board of directors, despite the stockholders' alleged failure to comply with the corporation’s advance notice bylaw provisions. Advance notice bylaw provisions require stockholders wishing to make nominations or proposals at a corporation's annual meeting to give advance notice to the corporation of their intention to do so. In both of these recent cases, the court construed ambiguities in the advance notice bylaw provisions in favor of the stockholder franchise. As a result, corporations – especially Delaware corporations - should carefully review their bylaws to ensure that any advance notice provisions could withstand a challenge based on these cases.

JANA Master Fund, Ltd. v. CNET Networks, Inc.
JANA Master Fund, an investment fund holding stock in CNET Networks, sought to replace two of CNET's directors, expand the size of the board from eight to thirteen and nominate five directors to fill the newly created positions. On December 26, 2007, JANA advised CNET of its intention to solicit proxies in favor of its nominees and proposals. CNET alleged that JANA's proposed proxy solicitation violated the corporation's bylaws because JANA had only been a CNET stockholder for eight months.

CNET's bylaws provide that any stockholder that has been the beneficial owner of at least $1,000 worth of CNET stock for at least one year "may seek to transact other corporate business" at the annual meeting, provided (1) that notice is given to the corporation 120 days before the one-year anniversary of the mailing of the prior year's proxy statement and (2) that such notice complies 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." JANA argued that this bylaw provision only applies to nominations and proposals a stockholder desires to have included in management's proxy materials, as governed by Rule 14a-8 under the Securities Exchange Act of 1934. Because JANA intended to finance its own proxy materials, it claimed that CNET's bylaw provision is inapplicable.

The court agreed with JANA and held that the advance notice bylaw provision only applies to stockholder proposals to be included in the corporation's proxy statement pursuant to Rule 14a-8. First, the language providing that a stockholder "may seek" to bring a proposal is consistent with Rule 14a-8, which sets forth the conditions under which a stockholder may request inclusion of a proposal in a corporation's proxy materials. A stockholder wishing to solicit proxies independently is not required to seek permission to do so. Second, the court reasoned that the 120-day deadline was designed to allow management time to include the proposal in the corporation's proxy materials. Finally, the court held that the reference to "applicable federal securities laws" limits the advance notice provision to Rule 14a-8 proposals. Thus, the court concluded that CNET's advance notice bylaw does not apply to shareholder proposals and nominations brought outside Rule 14a-8. The Delaware Supreme Court affirmed the Chancery Court’s decision last month.   

Levitt Corp. v. Office Depot, Inc.
Levitt Corporation owned just over one percent of Office Depot’s outstanding common stock and desired to replace two members of Office Depot’s board with two of its own nominees. On March 14, 2008, Office Depot distributed its Notice of Annual Meeting of Stockholders, which included as an item of “business” the election of “twelve members of the Board of Directors.” Three days later, Levitt filed its own proxy statement soliciting proxies in support of its two nominees without attempting to give advance notice of its nominations to Office Depot. Office Depot contended that the bylaws required Levitt to provide advance notice of its nominees.

Office Depot’s bylaws provide that only business properly brought before an annual meeting of stockholders will be conducted at the meeting. To be properly brought before an annual meeting, business must be (1) specified in the notice of annual meeting given by the Board; (2) otherwise properly brought before meeting by or at the direction of the Board; or (3) otherwise properly brought before the meeting by a stockholder who gives notice in writing to the secretary not less than 120 calendar days before the company’s proxy statement is released to shareholders. The bylaws did not specifically require advance notice of competing director nominations.³

The court first agreed with Office Depot and concluded that "business" to be conducted at an annual meeting includes the nomination of directors, and, thus, stockholder nominations must be properly before the meeting in accordance with Office Depot's bylaws. The court next concluded that the business of elections was properly before the meeting because the Board included the election - generally, and without qualifications - in the Notice of Annual Meeting. Finally, the court held that the business of electing directors includes the business of nominating directors for elections. Because the business of elections was properly before the meeting and is broad enough to include nominations, the court concluded that Levitt was not required to give advance notice of its intention to nominate directors.   

Discussion

Advance notice bylaws are being construed broadly and in favor of the stockholder franchise. In the absence of clear, unambiguous and specific language in a corporation’s bylaws, general descriptions of business to be conducted at a meeting (e.g., “election of directors” instead of “election of the board’s nominees”) may permit stockholders to bring other business items before the meeting without advance notice to the board of directors.   Companies should consider reviewing their advance notice provisions with counsel to ensure that items such as stockholder nominations and stockholder proposals are clearly addressed.

Contact Information
If you have any questions regarding your company's advance notice bylaw provisions or any other matters addressed in these rulings, please contact Meredith Burbank or Chris Gyves, the principal drafters of this client alert, or you may contact the Womble Carlyle attorney with whom you usually work or one of our Corporate and Securities attorneys.

Notes
¹ 2008 WL 660556 (Del. Ch. March 13, 2008), aff'd 2008 WL 2031337 (Del. S. Ct. May 13, 2008).
² 2008 WL 1724244 (Del. Ch. April 14, 2008).
³ The court noted that an earlier version of Office Depot's bylaws included a provision specifically requiring advance notice for director nominations.