The Delaware Court of Chancery has narrowly interpreted an advance notice bylaw and left CNET Networks without the protection of this important provision in the context of a proxy fight. JANA Master Fund v. CNET Networks (March 13, 2008). U.S. public companies should review their advance notice bylaw provisions in light of the JANA decision to make sure they do not have the drafting problems that led the court to its narrow interpretation of CNET's bylaw.

In the JANA case, an investment fund gave notice to CNET that it intended to put before CNET shareholders at the upcoming annual meeting resolutions to (1) elect two dissident nominees to fill the two slots up for election on CNET's classified board, and (2) expand the board from eight to 13 members and elect five more dissident nominees to fill the new seats, thereby gaining majority control of the CNET board. JANA planned on soliciting its own proxies in support of these resolutions.

CNET argued that JANA's proposals could not be considered at the upcoming annual meeting because JANA did not comply with the advance notice provisions in CNET's bylaws which required, among other things, that a shareholder making a proposal have been the beneficial owner of at least $1,000 worth of CNET securities for at least one year at the time such a proposal was made. The full CNET bylaw provision read as follows:

"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."

Chancellor Chandler interpreted this provision as applying ONLY to proposals that a shareholder sought to include in management's proxy materials pursuant to SEC Rule 14a-8. Consequently, the Chancellor held that the beneficial ownership and advance notice requirements did not apply to JANA's proposal. He arrived at this narrow interpretation based on three factors:

  • Permissive language. The words "may seek" in the first sentence indicated coverage was limited to matters with respect to which a shareholder must seek permission or approval. Chancellor Chandler reasoned that, outside Rule 14a-8, shareholders do not need to seek permission to make a proposal. The permissive language therefore indicated the whole paragraph must be about Rule 14a-8 proposals.

  • Proxy-mailing deadline. The deadline for proposals keyed off the mailing of proxy materials the previous year. Chancellor Chandler reasoned that a deadline relating to mailing of proxy materials only made sense if the provision covered only proposals to be included in management's proxy materials. The Chancellor noted that no advance notice bylaw previously approved by Delaware courts had a proxy-mailing deadline. Instead, they had deadlines keying off the meeting date. See Openwave Systems Inc v Harbinger Capital Partners Master Fund, 924 A2d 228 (Del Ch 2007) (not less than 20 nor more than 90 days prior to first anniversary of preceding year's meeting date); Accipiter Life Sciences Fund v Helfer, 905 A2d 115 (Del Ch 2006) (within 10 days of announcement of annual meeting date). 

  • Reference to Rule 14a-8. The reference to Rule 14a-8 in the last sentence was unclear and appeared to apply all the requirements of Rule 14a-8 to all proposals subject to the paragraph. If the paragraph applied to all shareholder proposals, then all proposals would be laden with the full burden of Rule 14a-8. The Chancellor reasoned that such a reading not only did not make sense but also imposed a burden on such other proposals that ran against the Delaware "rule of construction in favor of franchise rights."

The JANA case should prompt public companies to re-examine their advance notice bylaw provisions to make sure they are clear and not inadvertently subject to a narrow reading. Advance notice provisions should clearly apply to all shareholder proposals and should be worded in mandatory terms. In light of JANA, companies should reconsider proxy-mailing deadlines in advance notice bylaws and should key deadlines instead off the meeting date. Any cross-reference to Rule 14a-8 should be clear and should be solely for the purpose of noting that proposals to be included in management's proxy must also meet the requirements of Rule 14a-8 and not for the purpose of extending Rule 14a-8 requirements to proposals that are not to be included in management's proxy.

The JANA case re-affirms that reasonable and well drafted advance notice provisions will be upheld by the Delaware courts. The role of such provisions in ensuring an orderly governance process is too important to be undermined by careless drafting.

Originally appeared in Dorsey's Corporate Update