In a recent and somewhat surprising decision, the Delaware Court of Chancery
narrowly constructed an advance notice bylaw provision and ruled that it applies
only to proposals that a shareholder attempts to include on the company’s proxy
statement pursuant to SEC Rule 14a-8 and not to other proposals such as those
advanced via independently financed proxy materials. JANA Master Fund, Ltd.
v. CNET Networks, Inc., No. 3447-CC (March 13, 2008). As a result, the
company’s stockholders are now able to make proposals without any advance notice
requirement, including proposals from the floor of the meeting. This decision
raises questions about the scope of advance notice bylaw provisions in place at
many public companies, including companies incorporated in jurisdictions outside
of Delaware, and could leave those companies vulnerable to proposals made from
the floor at a meeting. In the wake of this decision, companies should review
their advance notice bylaws and consider amendments to make certain their
advance notice provisions apply to all shareholder proposals.
The lawsuit arose in connection with a proxy contest to gain control of a
company’s board of directors. JANA Master Fund, Ltd., a hedge fund owning
approximately 11% of CNET Networks, Inc.’s outstanding common stock, sought to
gain control of the CNET board by means of an independently financed proxy
contest to: (1) replace two directors up for re-election at the annual meeting,
(ii) expand the size of the board from eight to thirteen directors, and (iii)
nominate five directors to fill the newly created seats. CNET argued this proxy
solicitation failed to comply with CNET’s advance notice bylaw provision, which
Any 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 other 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 security holders in connection with the previous
year's annual meeting of security holders (or, if no annual meeting was held
in the previous year or the date of the annual meeting has been changed by
more than 30 calendar days from the date contemplated at the time of the
previous year's proxy statement, a reasonable time before the solicitation
is made). Notwithstanding the foregoing, such 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.
CNET believed that JANA’s proposals could not be considered at the annual
meeting because JANA had not held CNET stock for the requisite one year period.
JANA brought suit against CNET, contending that the advance notice bylaw
provision only applies to Rule 14a-8 shareholder proposals and not to
independently financed proxy solicitations.
The Court’s Decision
The Court held that CNET’s advance notice bylaw provision applies only to
proposals included on the company’s proxy statement pursuant to Rule 14a-8. The
decision, which is currently on appeal to the Delaware Supreme Court, is based
on an interpretation of three elements of CNET’s advance notice bylaw provision.
- “Any stockholder . . . may seek to transact other corporate business
at the annual meeting”
In the Court’s view, this language does not make sense outside the context
of Rule 14a-8. Shareholders are not generally required under Delaware or
federal securities law to seek management or board approval to make a
proposal unless such proposal is to be included in the company’s proxy
statement. The “may seek” language thus implies the entire advance notice
bylaw provision only relates to Rule 14a-8 proposals.
- “provided that such business is set forth in a written notice . . .
and received no later than 120 calendar days in advance of the date of the
Corporation’s proxy statement released to security holders in connection
with the previous year’s annual meeting of security holders”
This deadline is tied to the mailing date of CNET’s proxy statement rather
than the date of the annual meeting. According to the Court’s logic, it
suggests that the provision is designed to give the company time to
incorporate the proposal in the company’s proxy statement. Thus, this
deadline only makes sense for proposals that are to be included in the
company’s proxy statement. The Court also noted that it could not find a
permissible advance bylaw provision that set the notice requirement by
reference to the release of the company’s proxy statement.
- “Notwithstanding the foregoing, such notice must also comply with any
applicable federal securities laws establish the circumstances under which
the Corporation is required to include the proposal in its proxy statement
or form of proxy.”
In the Court’s view, this last sentence applies all of the Rule 14a-8
requirements to shareholder proposals covered by this provision. In
addition, Delaware law includes a “rule of construction in favor of
franchise rights” which instructs the court to interpret bylaw provisions
“in the manner most favorable to the free exercise of traditional electoral
rights.” The Court reasoned that an advance notice bylaw provision extending
the requirements of Rule 14a-8 to all shareholder proposals would “unduly
restrict the stockholder franchise.” As such, the provision should be
interpreted to only apply to Rule 14a-8 proposals.
It is important to note that this decision does not necessarily limit
otherwise properly drafted advance notice provision bylaws. However, we
recommend companies review, and if necessary amend, their advance notice bylaw
provisions in light of this decision to ensure they do not include any of the
defects found in the CNET provision. It may be advisable to amend the bylaws
even while the case is on appeal in order to eliminate the risks this case
raises. Companies incorporated outside of Delaware should also review their
bylaws. In the absence of statutory or relevant case law, Delaware law could
influence the outcome of similar cases filed elsewhere in the country, including
states whose corporate law is based on the Model Business Corporation Act and
not on Delaware law (examples include Florida, Georgia, Virginia and North
Companies should consider the following when reviewing their advance notice
- Is the provision explicitly applicable to all shareholder proposals and
nominations? If not, consider adding an explicit statement to that effect.
- Does the advance notice provision incorporate Rule 14a-8 requirements
without setting them forth? If so, consider amending the provision to
specify the information that must be provided to the company without
reference to federal securities laws.
- Is the deadline based on the date of the company’s proxy statement? Is
it more than a month ahead of the date the company typically files its proxy
materials? If either is so, consider revising the deadline so it is based on
the date of the annual meeting and appropriate in light of the typical
schedule for preparation of a proxy statement. On this point the deadline in
Rule 14a-4 regarding discretionary voting may be instructive. Rule 14a-4
confers discretionary voting authority if a company did not have notice of
the matter at least 45 days before the date on which the company first sent
its proxy materials for the prior year’s annual meeting date. Taking all of
these matters into consideration, a deadline of not less than 60 nor more
than 90 days prior to the first anniversary of the preceding year’s annual
meeting date is appropriate.
- Does the provision contain language requiring management approval
outside the context of Rule 14a-8 proposals? If so, consider removing the
management approval requirement.
- Does the provision require a holding period for ownership of a specific
amount of the company’s securities? The CNET bylaw required a shareholder to
beneficially own $1,000 of securities for at least one year. While the JANA
Court did not specifically indicate that this type of requirement is
problematic, it may have contributed to the Court’s concern with the CNET
bylaw provision. We think it is certainly appropriate to require that the
shareholder own stock at the time of the proposal and at the time of the
annual meeting; however, going beyond this and requiring a holding period
may raise questions that the advance notice bylaw provision “unduly
restricts the shareholder franchise.” If a company chooses to include a
stock ownership and holding period requirement, it is advisable to look to a
source other than Rule 14a-8 so that the advance notice provision is not
interpreted as applying only to Rule 14a-8 proposals. One way to avoid
confusion between the advance notice bylaw requirement and Rule 14a-8 is to
use a threshold requirement under state law for shareholder access to
records. In Virginia, for example, any shareholder who has been a
shareholder of record for at least six months, or any 5% shareholder, is
entitled to access records for a proper purpose.
If a public company decides to amend its advance notice bylaw provision, the
company is required to disclose such amendment on a current report on Form 8-K.
As noted, the JANA case is on appeal, and could be reversed. We will
continue to monitor the case and provide information on any subsequent
developments to our clients and via our e-news.
McGuireWoods LLP regularly assists public and private companies with a full
range of corporate governance matters, including proxy voting, drafting bylaws,
director elections and other issues relating to annual meetings, shareholder
relations and other matters.