Proactive Planning: Advance Notice Bylaws and Shareholder Right to Call Special Meeting

Many public companies have advance notice bylaw provisions requiring a shareholder to provide the company with advance notice of matters or board nominees the shareholder wants to put forth for a shareholder vote at a shareholders meeting, providing the company an opportunity to prepare to respond to such proposals. Advance notice bylaw provisions frequently are a key procedural defense that mutes the immediate impact of an activist threat.

As a related matter, just under 50% of public companies in the United States restrict a shareholder's ability to call special meetings, thus limiting the ability of shareholders to act outside the annual meeting context. When coupled with a prohibition on shareholder action by written consent, advance notice provisions and a limitation on a shareholder's ability to call a special meeting can be very effective tools in limiting the ability of an activist shareholder to launch a proxy contest. RiskMetrics, however, has indicated that it will be increasing scrutiny of companies that do not permit shareholders to call special meetings, and affording shareholders the right to call special meetings has become a popular subject of Rule 14a-8 shareholder proposals.

Core Case:

In JANA Master Fund, Ltd. v. CNET Networks, Inc., 947 A. 2d 1120 (Del. 2008) [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law], the Delaware Supreme Court affirmed the Delaware Court of Chancery's finding that the advance notice provision in the bylaws of CNET Networks, Inc. applied only to matters that shareholders seek to include in company proxy statements pursuant to the Rule 14a-8 shareholder proposal process, but did not apply to nominations or other business that shareholders might seek to put forth in their own proxy materials. Therefore, the plaintiff shareholder did not need to comply with the requirements of the advance notice bylaw in order to nominate directors or propose other business at CNET's annual meeting. Similarly, in Levitt Corp. v. Office Depot, Inc., 2008 Del. Ch. LEXIS 47 (Del. Ch. 2008) [enhanced version / unenhanced version], a shareholder of Office Depot, Inc. who did not comply with the company's advance notice bylaw was permitted to nominate a short slate of two directors at its annual meeting. The advance notice provisions in Office Depot's bylaws essentially provided that a shareholder must comply with the advance notice requirements in order to be properly bring business before the company's annual meeting, but did not expressly address director nominations. The plaintiff argued that director nominations did not constitute "business" for purposes of the advance notice provisions. The court disagreed, but nevertheless, ruled that the shareholder did not need to comply with the advance notice requirement because Office Depot, Inc.'s notice of meeting that was mailed to shareholders indicated that director elections would be an item of business at the annual meeting.

Strategic Point:

When an activist becomes interested in conducting a proxy fight, it will look first to the company's bylaws to determine what types of advance notice requirements are in place to bring matters before a company's annual meeting. As a result of the CNET and Office Depot decisions, a company should work with its counsel to review its bylaws to ensure that its advance notice provisions are clear and concise to avoid any similar disputes. A company also should consider whether such advance notice requirements should apply only to annual meetings or both annual and special meetings.

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