For the second time in recent weeks, the Delaware Court of Chancery has narrowly construed an advance notice bylaw and left a public company without the protection of this important provision in the context of a proxy fight. Levitt Corp v Office Depot, Inc. (CA No. 3622-VCN, April 14, 2008). U.S. public companies should review their advance notice bylaw provisions in light of the Levitt case as well as the recent JANA case (discussed in our Corporate Update, dated March 17, 2008) to make sure they do not have the drafting problems that led the court to its narrow interpretations in those cases.
In the Levitt case, Office Depot had an advance notice bylaw providing that:
"At an annual meeting . . ., only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of the meeting . . . given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise properly brought before the meeting by a stockholder of the corporation who was a stockholder of record at the time of giving notice . . ., who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section."
The bylaw then went on to require that, in order to be properly brought before an annual meeting, a stockholder notice of business had to be submitted “not less than 120 calendar days before the date of Company’s proxy statement released to [stockholders] in connection with the previous year’s annual meeting” and had to be accompanied by prescribed information.
Levitt submitted two dissident director nominations for election at the Office Depot annual meeting after the notice deadline and brought suit in the Delaware Chancery Court when Office Depot rejected the submission as being too late.
Levitt made a number of arguments to the effect that its nominations were not governed by the advance notice bylaw, including the argument that the generic term “business” did not cover board nominations and elections and the argument, based on the JANA case, that the proxy-mailing deadline for notice meant that the bylaw applied only to stockholder proposals to be included in the company’s proxy materials under SEC Rule 14a-8.
Vice Chancellor Noble concluded that director nominations and elections were included within the plain meaning of the term "business" to be conducted at the meeting. The Vice Chancellor ruled, however, that the "business" of director nominations and elections had already been brought before the annual meeting by Office Depot’s notice to stockholders that one of the matters to be addressed at the meeting would be "to elect twelve (12) members of the Board of Directors." The Vice Chancellor reasoned that Levitt was proposing additional nominees with respect to "business" that was already properly before the meeting and consequently did not have to comply with the advance notice requirement relating to "business" that a stockholder was first proposing.
Office Depot argued that the Vice Chancellor’s interpretation effectively made the advance notice bylaw inapplicable to director nominations because such "business" would always be put before stockholders by the company’s notice and proxy materials relating to an annual meeting. In a footnote, Vice Chancellor Noble noted that the result might have been different if the wording in Office Depot’s notice and proxy materials had made it clear that the "business" in question was limited to election of the 12 nominees named in the proxy materials only (as opposed to nomination and election of 12 board members generally).
The Levitt case should prompt U.S. public companies to re-examine their advance notice bylaw provisions to make sure they are clear and not subject to a similarly narrow reading. Advance notice requirements should explicitly apply to all stockholder-generated business, proposals and director nominations. Using a broad, generic term like "business" to cover everything can lead to serious problems. Making coverage of the advance notice requirement clear in the bylaws is preferable to attempting to delimit the concept of "business" as it relates to director election in the notice and proxy materials.
U.S. public companies should also review their advance notice bylaws in light of the JANA case to make sure they are not susceptible to a reading limiting such bylaws to Rule 14a-8 proposals.
The Delaware courts have repeatedly indicated that they will uphold reasonable and well drafted advance notice provisions. The Levitt and JANA cases, however, demonstrate that the Delaware courts will scrutinize such provisions closely and generally interpret ambiguity in favor of dissident stockholders. The role of such advance notice provisions in ensuring an orderly governance process is too important to be undermined by careless drafting.
Originally appeared in Dorsey's Corporate Update