In Levitt Corp. v. Office Depot, Inc., 2008 WL 1724244 (Del. Ch. Apr. 18, 2008), the Delaware Chancery Court held that a company’s advance notice provision did not preclude a dissident shareholder from nominating its own slate of directors. Levitt is part of a trio of cases recently issued by the Delaware Chancery Court that address the issue of the voting rights of shareholders. Consistent with JANA Master Fund v. CNET Networks, Inc., 2008 WL 660556 (Del. Ch. Mar. 13, 2008), aff’d, 2008 WL 2031337 (Del. May 13, 2008) [See blog article] and In re IAC/Interactive Corp., 2008 WL 2462767 (Del. Ch. Mar. 22, 2008) [See blog article], the Levitt court held that an advance notice provision that purported to require shareholders to give notice 120 days before nominating directors instead allowed shareholders to nominate directors without any independent notice.
Levitt involved a proxy contest by Levitt, the plaintiff, to gain influence over Office Depot, the defendant corporation. Through a proxy, Levitt controlled 300,000 shares of Office Depot stock. Believing that there were performance problems with the leadership of Office Depot, Levitt sought to replace two members of Office Depot’s board. Levitt properly filed its preliminary proxy statement with the SEC. Office Depot, however, argued that Levitt had failed to give notice 120 days in advance of bringing “business” before the stockholders at the annual meeting. The Chancery Court agreed, holding that the term “business” was not ambiguous because business “encompasses the election of directors” and that Levitt had failed to give 120 days notice of its intent to nominate its own candidates for election to the board.
Levitt, however, argued that even if it failed to comply with the notice requirement, it was still entitled to nominate directors because Office Depot’s own notice informed stockholders that one of the agenda items at the meeting was to “elect” twelve members of the board of directors. By including the word “elect,” Levitt argued, Office Depot had effectively notified stockholders of Levitt’s right to nominate alternative directors for those positions. The court adopted Levitt’s position in whole.
The court noted that “[o]f course, nominating candidates and voting for preferred candidates are separate steps.” Nonetheless, the court held that the two are inextricably intertwined. “[N]omination is a critical part of the election process,” the court held, because without being able to nominate their own slate of candidates “the stockholder constituency has no electoral choice as between candidates; instead, the shareholders are left with only an ‘up or down’ vote on the company sponsored candidates.” Noting that the Delaware General Corporation Law and Office Depot’s own bylaws were silent as to the issue, the court could “discern no persuasive reason why the business of electing directors should not include the subsidiary business of nominating directors for election.” As a result, the court held that Levitt could nominate its own directors to contest the election for two spots on the board.
In two key footnotes, however, the court suggested that, had Office Depot been more careful in drafting its notice provision to stockholders, the result might have been different. Had Office Depot “separated precisely the business of election from the business of nomination, a different result may have obtained,” i.e., Levitt might have been precluded from nominating its own slate of directors.
The court here signaled an important lesson of corporate governance: if a board wishes to deter the nomination by dissident stockholders of an alterative slate of directors, the notice to stockholders must be “clear and unambiguous” in separating the nomination process from the election process. A company seeking to require dissident shareholders who wish to nominate directors to give advance notice of such nominations, must expressly identify the nomination of directors as one of the items that needs to comply with the advance notice provision.
This is consistent with the Chancery Court’s decision in JANA, which allowed an independently funded proxy solicitation despite a bylaw that sought to prevent such solicitations from shareholders who had held the company’s stock for less than one year. In short, Delaware courts seem poised to construe carefully any bylaw that purports to limit the right of shareholders to exercise the right to vote against the company that drafted the bylaw. As such, Delaware courts have signaled to companies that they must clearly draft provisions that seek to place limitations of the shareholder right to vote and participate.
For further information, please contact John Stigi at (213) 617-5589.