May 27, 2008
In the past two months, the Delaware courts have decided two cases addressing the scope of advance notice bylaws, in both cases holding that stockholders did not have to comply with the companies’ advance notice provisions in order to nominate directors. Advance notice bylaw provisions require a stockholder who wants to propose nominations or have other business considered at a meeting of stockholders to submit information to the company about the nominations or business by a specified date prior to the meeting. These provisions implicate the complex interaction of state corporate law and federal securities laws, serving the important objective of providing adequate notice of matters that a stockholder intends to present at a meeting so that a company and its other stockholders have a fair opportunity to evaluate all the matters to be voted upon and the company can address those matters in its own proxy statement.
In addition to the recent Delaware court decisions, a number of other significant developments highlight the need for companies to review their advance notice bylaws to assess whether they are appropriately drafted to minimize any potential ambiguity and clearly outline the processes that stockholders must follow and the information they must provide when proposing director nominations or other business.
Recent Case Law Developments Affecting Advance Notice Bylaws
On March 13, 2008, in JANA Master Fund, Ltd. v. CNET Networks, Inc.,[1] the Delaware Court of Chancery found that the advance notice provision in the bylaws of CNET Networks, Inc. applied only to matters that stockholders seek to include in company proxy statements pursuant to the Securities and Exchange Commission’s Rule 14a-8 stockholder proposal process. The bylaw at issue contained the same timing and stock ownership requirements as Rule 14a-8, and stated that proposals had to comply with the federal securities laws establishing the requirements for proposals required to be included in the company’s proxy statement, but the bylaw was not expressly limited to proposals submitted pursuant to Rule 14a-8. Instead of addressing whether the ownership, timing and other conditions set forth in the bylaw were enforceable, the court held that the bylaw did not apply to nominations or other business that stockholders might seek to put forth in their own proxy materials. As a result, the Court further held that the plaintiff stockholder did not need to comply with the requirements of the advance notice bylaw in order to nominate directors or propose other business at CNET’s annual meeting. On May 13, 2008, in a one-page memorandum decision, the Delaware Supreme Court affirmed the Court of Chancery’s decision.[2]
In April 2008, in Levitt Corp. v. Office Depot, Inc.,[3] the Delaware Court of Chancery ruled that a stockholder of Office Depot, Inc. who failed to comply with the company’s advance notice bylaw nevertheless could nominate a short slate of two directors at the annual meeting. Office Depot’s bylaws contained a provision stating that to be properly brought before an annual meeting, business must be specified in the company’s notice of meeting, otherwise properly brought before the meeting by or at the direction of the Board, or properly brought before the meeting by a stockholder who complied with the advance notice provisions in the bylaws. The bylaw did not otherwise expressly address director nominations. The Court first rejected the argument that the advance notice bylaw did not apply to director nominations because the bylaw referred only to “business” and concluded that the term “business” was sufficiently broad to encompass director nominations. In reaching this conclusion, the Court relied in part on the language of Section 211(b) of the Delaware General Corporation Law, which states that “an annual meeting of stockholders shall be held for the election of directors” and that “[a]ny other proper business may be transacted at the annual meeting.” However, the Court then ruled that the plaintiff stockholder did not need to comply with the advance notice bylaw because the company’s notice of meeting included with its proxy statement indicated that director elections would be an item of business at the annual meeting.
Other Recent Developments Affecting Advance Notice Bylaws
The CNET and Office Depot decisions are but two recent developments affecting advance notice bylaw provisions. Other recent developments include:
In considering the appropriate time frames for inclusion in an advance notice bylaw, companies should bear in mind that Delaware courts generally have upheld the validity of advance notice bylaws, except in egregious circumstances (for example, in situations where a company provides notice of a meeting after the advance notice deadline has already passed). Typically, time frames range from 45 to 120 days.[4] A different deadline, tied to the public announcement of the meeting, generally applies when a company moves its annual meeting date more than a certain number of days (typically, more than 30 days) from the anniversary of the prior year’s meeting. In CNET, the Delaware Court of Chancery concluded that the fact that CNET’s advance notice bylaw provision tied the deadlines to the mailing date of the company’s prior-year proxy statement suggested that the bylaw was designed to govern stockholder proposals under Rule 14a-8 rather than to operate as an advance notice bylaw. In light of this, it may be preferable for advance notice bylaws to require notice to the company by a specified deadline before the anniversary date of the prior year’s annual meeting.
In addition, many companies over the past several years have adopted bylaw provisions that provide for majority voting in uncontested elections of directors, while plurality voting continues to apply in contested elections. Majority voting bylaw provisions typically have a cut-off date for determining whether an election is contested or not. Cut-off dates vary, with many companies using the record date or a specified number of days before the filing or printing of the proxy statement. A company’s advance notice bylaw should include deadlines that precede, or fall on the same date as, the deadline for determining whether an election will be contested or uncontested. That way, the company will have notice of any nominations that stockholders timely submitted through the advance notice process before the company must determine whether or not an election will be contested.
What Companies Should Do Now
Both the CNET and Office Depot cases illustrate that Delaware courts will construe ambiguous advance notice bylaws in a manner favoring stockholders’ ability to make nominations and introduce matters at an annual meeting. Accordingly, companies should review their bylaws in light of the considerations outlined below. Specifically, companies should:
__________________
[4] According to sharkrepellent.net, as of April 30, 2008, approximately 60% of S&P 500 companies and approximately 47% of S&P 1500 companies used deadlines of at least 90 days.
Gibson, Dunn & Crutcher’s Securities Regulation and Corporate Governance Practice Group and its Mergers and Acquisitions Practice Group are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
John F. Olson (202-955-8522, jolson@gibsondunn.com),
Brian J. Lane (202-887-3646, blane@gibsondunn.com),
Ronald O. Mueller (202-955-8671, rmueller@gibsondunn.com),
Amy L. Goodman (202-955-8653, agoodman@gibsondunn.com),
Dennis J. Friedman (212-351-3900, dfriedman@gibsondunn.com),
Jonathan K. Layne (310-552-8641, jlayne@gibsondunn.com),
David M. Hernand (310-552-8559, dhernand@gibsondunn.com),
Eduardo Gallardo (212-351-3847, egallardo@gibsondunn.com) or
Gillian McPhee (202-955-8230, gmcphee@gibsondunn.com).
© 2008 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.