In JANA Master Fund v. CNET Networks, Inc., 2008 WL 660556 (Del. Ch. Mar. 13, 2008), aff’d, 2008 WL 2031337 (Del. May 13, 2008), the Delaware Chancery Court held that CNET’s advance notice bylaw did not preclude JANA from financing and issuing its own proxy solicitation. This case, in combination with Levitt Corp. v. Office Depot, Inc., 2008 WL 1724244 (Del. Ch. Apr. 18, 2008) [See blog article], and In re IAC/Interactive Corp., 2008 WL 2462767 (Del. Ch. Mar. 22, 2008) [See blog article], serves to remind companies that advance notice provisions will be narrowly construed under Delaware law, particularly where the franchise of the stockholder is at stake.
The case itself involved a proxy contest between JANA, the plaintiff and insurgent stockholder, and CNET, the defendant company. JANA, at the time a holder of 11% of CNET’s outstanding common stock, sought to (1) replace two current directors of CNET, (2) expand the size of the board from eight to thirteen, (3) nominate five individuals to fill the new board positions. JANA wrote CNET of its intention to submit this proxy. CNET informed JANA that it could not submit the proxy because the proxy violated CNET’s notice bylaws. CNET’s notice bylaw provided that:
[A]ny stockholder that has been the beneficial owner . . . for at least one year may seek to transact other corporate business at the annual meeting, provided that such business is set forth in a written notice and mailed . . . and received . . . no later than 120 days in advance of the date of the Corporation’s proxy statement. . . . Notwithstanding the foregoing, such notice must also comply with federal securities law . . . .
CNET contended that this provision precluded JANA from submitting a proxy because it had not held CNET stock for one year (JANA, at the time of the proxy, had held CNET stock for only eight months). JANA contended that the provision only applied to proxies submitted under Rule 14a-8 of the Exchange Act — which mandates that a company must include a shareholder’s proposal with its own materials under certain circumstances — not to proxies submitted at its own expense. The court agreed with JANA, holding that JANA could finance its own proxy statement despite not holding CNET stock for a year prior to the Annual Meeting.
Noting that the rule of construction “favor[s] . . . franchise rights” and “in the manner most favorable to the free exercise of traditional electoral rights” the court set out three reasons why the notice bylaw did not preclude JANA from submitting its own proxy solicitation.
First, the court noted the precatory nature of the phrase “may seek to transact.” The court held that the phrase “may seek” by its terms meant that “a shareholder must ask for permission or approval” to submit a proxy. This would make sense within the confines of 14a-8, but “outside that rule . . . a shareholder simply makes a proposal.” The fact that JANA intended to finance its own proxy placed it outside of the requirement of seeking approval prior to issuing its proxy solicitation.
Second, the court noted that the deadline in CNET’s notice bylaw was tied “explicitly to the release of CNET’s proxy materials.” The “most reasonable” explanation for this was “to allow management time to include the shareholder proposal in its own proxy materials.” This, in turn, suggested that the notice proposal was designed to “govern shareholder proposals under Rule 14a-8 rather than to operate as an advance notice bylaw.”
Third, and “most persuasively,” the court held that the statement that the bylaw was to “comply with any applicable federal securities laws” cemented the notion that the bylaw was only intended to apply to proposals that shareholders intended to have included on the company’s proxy materials. The only reason for the inclusion of the phrase “such notice” would be to inform shareholders that “Rule 14a-8 sets requirements in addition to those laid out in the bylaw itself.”
For these reasons, the court concluded that JANA could finance its own proxy statement despite not being a CNET shareholder for one year. Stated simply, the notice bylaw did not apply to JANA’s proxy solicitation. CNET argued that the effect of a decision such as this would be to allow “any of CNET’s thousands of stockholders . . . to raise for the first time and present any proposals they desire at the Annual Meeting.” The court did not disagree, holding that “[a]lthough this may sound daunting, it is the default rule in Delaware.”
For companies incorporated in Delaware the lesson of JANA seems clear: companies should pay particular attention to their own advance notice bylaws or they risk the “daunting” proposition of allowing shareholders to raise proposals for the first time at their annual meetings. JANA suggests that careful drafting of notice bylaws can effectively limit the potential for this proxy chaos. Failure to draft carefully, however, can have the opposite effect; it can render a notice bylaw relatively meaningless, particularly in the face of self-funded proxy solicitations.
For further information, please contact John Stigi at (213) 617-5589.