Jones Apparel Grp. v. Maxwell Shoe Co. - 883 A.2d 837 (Del. Ch. 2004)

Rule:

Section 213(b) of the Delaware General Corporation Law specifies a method by which the record date for a consent solicitation may be set, expressly providing that the board "may" set the record date, and that if the board does not, then the record date shall be set by one of two "alternative" means depending on whether the action to be taken by written consent requires prior board action. Where prior board action is required -- such as in the context of mergers, or charter amendments, -- the record date is the date that the board adopts the resolution taking that action. But, where no prior board action is required -- such as in the amendment of bylaws, or the removal of directors,-- the record date is the date that the first signed written consent is delivered to the corporation.

Facts:

Plaintiff Jones is a Pennsylvania corporation that formed plaintiff MSC Acquisition Corp., an indirect subsidiary of Jones, for the purpose of acquiring defendant Maxwell, a Delaware corporation. In November 2003, Jones approached Maxwell about the possibility of a negotiated acquisition of Maxwell. Informal negotiations ensued, but never resulted in a formal offer. On February 25, 2004, Jones publicly announced that it had made a proposal to acquire all of Maxwell's shares at a price of $ 20 per share. On March 12, 2004, Maxwell announced that its board had unanimously deemed that offer inadequate. On March 23, 2004, Jones filed its federal Schedule TO commencing a tender offer to acquire, among other Maxwell securities, all the outstanding shares of Maxwell's Class A Common Stock at $ 20 per share in cash, and also filed a preliminary consent solicitation statement on Schedule 14A stating that Jones was considering proposing the removal of Maxwell's directors who would be elected at Maxwell's 2004 annual meeting on April 8, 2004. By April 19, 2004 -- the time the offer was scheduled to expire -- only 2% of Maxwell's shares had tendered into the offer, and Jones therefore extended its offer until May 17, 2004.

On March 25, 2004, Maxwell announced that its board had "set a record date of March 25, 2004 in connection with Jones Apparel Group, Inc.'s consent solicitation" and that "only stockholders of record as of the close of business on [March 25, 2004] will be entitled to execute, withhold, or revoke consents." The announcement was silent as to whether Maxwell had received any signed written consent in connection with Jones's consent solicitation. The reason this silence is critical is that Article VII of Maxwell's charter, central to the present dispute, provides in relevant part: “Any election of directors or other action by the stockholders may be effected at an annual or special meeting of stockholders or by written consent in lieu of such a meeting. The record date with respect to the determination of stockholders entitled to consent in writing to any action shall be the first date on which a signed written consent setting forth the action to be taken or proposed to be taken is delivered to the corporation x x x.” On March 26, 2004, Jones sent a letter to Maxwell's CEO demanding to inspect certain books and records relating to, among other things, the setting of the record date, pursuant to § 220 of the DGCL. Maxwell refused Jones's demand for information about that issue, and on March 30, 2004, Jones filed a § 220 action in this court. Jones then filed this suit on March 31, 2004, alleging, among other things, that the Maxwell board's decision to set the record date before it had received any written consent in connection with Jones's consent solicitation violated Article VII of Maxwell's charter. On April 7, 2004, hours before a scheduled teleconference, Maxwell wrote to the court and stated that they had not received any written consent, but had set the March 25, 2004 record date pursuant to 8 Del. C. § 213(b), which they contended granted the board the authority to set the record date in connection with any written consent solicitation whether or not the Maxwell charter purported to deprive the board of that authority.

In order to resolve this narrow statutory argument on an expedited basis, Jones agreed to dismiss, without prejudice, its § 220 action as well as all of its claims in this action other than Count II of the complaint, which alleges that Maxwell's board violated Article VII of Maxwell's charter by setting the March 25, 2004 record date in the absence of receipt of a valid written stockholder consent. Accordingly, Maxwell filed a motion to dismiss.

Issue:

Does Article VII of Maxwell's charter preclude Maxwell's board from setting the record date in connection with Jones's consent solicitation?

Answer:

Yes.

Conclusion:

By its terms, Article VII states that the record date in connection with any consent solicitation "shall be the first date on which a signed written consent setting forth the action to be taken or proposed to be taken is delivered to the corporation." This language is plainly mandatory and does not admit of any exception that would permit the record date to be set by any other method, including by a decision of Maxwell's board. Nonetheless, Maxwell suggests that Article VII can be interpreted to permit its board to set the record date in this case. Specifically, Maxwell argues that Article VII can be read to apply only where the board has already abdicated its authority to set the record date. The difficulty with this interpretation is that it is plainly inconsistent with the clear terms of Article VII. Article VII simply does not include the proviso that Maxwell wishes to read into it. That Article does not merely address itself to situations where the board has failed to set a record date, but rather by its unambiguous terms lays out the exclusive method by which the record date "shall be" set in connection with "any action" by written consent. The failure of the drafters of Article VII to include any provision expressly authorizing the board to set the record date is all the more striking in light of the fact that they were not writing on a blank slate. Section 213(b) of the DGCL already specified a method as to how the record date for a consent solicitation may be set. The drafters of Article VII, for reasons not reflected in the record, eschewed the procedure laid out in § 213(b) in favor of a system by which the record date in all cases is set upon the delivery of a written consent to the corporation. The question of whether the statutory method may be altered by charter was discussed in a separate issue in the opinion, but what is important for purposes of interpreting Article VII is the fact that the drafters could have simply tracked the language of the statute, but did not. That choice cannot be seen as anything other than intentional, reinforcing the conclusion that to read a proviso back into Article VII allowing the board to set the record date would contravene the plain meaning of that provision.

Nor does 8 Del. C. § 394, which provides that "this chapter and all amendments thereof shall be a part of the charter or certificate of incorporation of every corporation," support Maxwell's attempt to read ambiguity into Article VII. The substantive effect of § 394 is to engraft the statutory rules provided in the DGCL onto every charter, to relieve drafters of charters of the burden of explicitly specifying every single one of those rules that they wish to adopt. Thus, had Maxwell's charter not included any provision at all governing the setting of record dates for consent solicitations, § 394 would incorporate the terms of § 213(b) into the charter. But, Article VII does provide a method for setting the record date. Section 394 does not create ambiguity where there is none, and does not incorporate statutory terms back into a charter provision when the drafters have chosen to deviate from those terms.

Finally, contrary to Maxwell's contention, enforcing the plain terms of Article VII would not lead to an "illogical result" of any kind. Maxwell argues that it "makes no sense" to divest the board of authority to set the record date even in connection with actions that require board approval, such as mergers. The court failed to see this absurdity. For example, if the board adopts a resolution approving a merger and the first written consent is delivered to the corporation several days later, that later date would be the record date under Article VII. If a written consent is delivered before the board resolution is adopted, then the written consent is altogether invalid because the board's statutorily required approval has not yet been granted and no record date would be set by that delivery. There is nothing illogical in this scheme. More generally, it is rational for directors and stockholders to choose a clear rule -- indeed, one endorsed by statute -- to govern an area like record dates. They might well prefer a certain rule over having the matter left to the directors' discretionary choice, even within the statutory mandate. This clarity sets clear rules of the game for stockholders and directors; moreover, it avoids the need for the board to enmesh itself in a record-date setting process that can give rise -- as the earlier claims in this case show -- to equitable claims under Schnell and its important progeny, Blasius.