Advance Notice Bylaws, Corporate Governance, and Jana Masters v. CNET Networks (part 2)

We are discussing Jana Master Fund, Ltd. v. CNET Networks , Civ. Action No. 3447-CC (Del. Ch. March 13, 2008), a case interpreting an advance notice bylaw that imposed ownership and holding period restrictions on shareholders seeking to "transact other corporate business at the annual meeting."

Jana owned about 11% of CNET’s shares. With CNET having a staggered board and electing two directors at the upcoming meeting, Jana sought to nominate a competing slate. Jana, however, had held the shares for less than a year. According to a corporate bylaw:

• 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 . . . 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.

The bylaw, therefore, imposed a one year holding period, disqualifying a shareholder from transacting “other corporate business” at the meeting. CNET argued that this applied to the nominees submitted by Jana.  The case seemed to raise squarely the issue of whether companies could impose holding periods that limited the right of shareholders to nominate directors or otherwise make proposals at the shareholder meeting.

The court concluded that the bylaw was unambiguous (permitting judgment on the pleadings) and that it only applied to proposals submitted for inclusion in the company’s proxy statement under Rule 14a-8. The court noted that the language “may seek” to transact business applied to proposals where management’s permission was required, something applicable to Rule 14a-8 proposals but not proposals made at the meeting itself. The court also noted that the bylaw tied notice to the time periods similar to those used in the shareholder proposals rule.  Finally, the reference in the bylaw to the need for the notice to comply with the requirements of the proxy rules “reminds shareholders seeking to make proposals under the bylaw that Rule 14a-8 sets requirements in addition to those laid out in the bylaw itself.”

Because the bylaw only applied to proposals submitted under Rule 14a-8, it did not apply to the proposed nominees for the board by Jana Master Fund.  The rule was unavailable for the nominees and, in any event, Jana Master Fund intended to circulate its own proxy statement containing the nominees.  Jana Master Fund was not, therefore, subject to the holding period and could make its nominees.  Left unanswered, of course, was the validity of a bylaw that imposed a holding period requirement on shareholder proposals or nominees made not under Rule 14a-8 but at the meeting itself.