On Monday, the Delaware Court of Chancery ruled on another advance by-law case (here is a blog about the other case). Here is some analysis from Travis Laster: If the recent JANA Partners v. CNET decision (currently on expedited appeal) wasn’t enough to make corporations review and update their advanced notice bylaws, the attached opinion should do the trick. In Levitt Corp. v. Office Depot, Inc.,, Vice Chancellor Noble holds that (i) a bylaw requiring advanced notice of “business” to be proposed at an annual meeting extends to director elections and director nominations, but that (ii) the advanced notice bylaw was not applicable because the corporation had given notice that the election of directors would be an item of business at the meeting. In light of the second holding, the Court concluded that the stockholder did not have to give advance notice of its intent to run a short slate. As with CNET, this is a decision that will likely prompt an appeal.
On March 14, 2008, Office Depot sent out its notice of annual meeting. Item 1 on the list of items of business was “To elect twelve (12) members of the Board of Directors for the term described in this Proxy Statement.” The proxy statement contained standard Rule 14(a) disclosures regarding how votes would be tabulated in an uncontested versus a contested election. On March 17, 2008, Levitt filed its own proxy statement seeking to nominate two candidates for director.
Office Depot had a relatively standard advanced notice bylaw which provided that “business” could be brought before the annual meeting if (i) specified in the notice, (ii) otherwise properly brought before the meeting by the board, or (iii) proposed by a stockholder in compliance with advanced notice requirements. The time period for advanced notice was “not less than 120 calendar days before the date of the Company’s proxy statement released to shareholders in connection with the previous year’s annual meeting.” The bylaw required the stockholder proposing business to provide standard information, including basic stockholder information and a brief description of the business to be conducted.
Levitt did not try to comply with the advance notice bylaw. Office Depot rejected Levitt’s nominations for failure to comply.
In granting judgment on the pleadings for Levitt, Vice Chancellor Noble first held that the scope of “business” under the Office Depot advanced notice bylaw extended to director nominations by stockholders. The Court construed the plain meaning of the term “business” broadly to include all “affairs” or “matters” that could be considered at an annual meeting. This included director elections. (11-12). The Court also relied on Section 211(b) of the DGCL, which provides for an annual meeting to elect directors “and other business.” As a matter of plain language, the Court held that this section indicated that electing directors was “business.” (13)
This holding makes sense as a matter of contractual interpretation, but it conflicts with widespread corporate practice. Many corporations have separate advance notice bylaw requirements, one for “nominations” and another for “business.” The information requested for the former is typically different than the latter. The advance notice windows are also often different, with the former including additional windows for issues such as an increase in the size of the board. The Levitt decision could render the bylaws of companies with dual structures ambiguous, as nominations now arguably will be covered by two competing sections. It would be prudent to clarify when “business” means “all business, including nominations of candidates for and the election of directors” versus “all business other than nominations of candidates for and the election of directors.” Interestingly, the opinion indicates that Office Depot previously had a dual structure, but eliminated its “nomination” bylaw. The Court declined to give significance to the amendment.
Based on this first holding, one would think that the Office Depot advanced notice bylaw would apply to Levitt’s nominations. But the Court then went in a different direction. The Court instead agreed with Levitt that because Office Depot had sent out a notice of meeting saying that the business of the meeting would include the election of directors, that item of business was properly before the meeting under the advanced notice bylaw and the stockholder did not have to separately give advance notice. (15-16). The Court rejected the argument that the notice of meeting contemplated only a vote on the corporation’s nominees for directors, finding that it was not supported by the text of the notice (which referred generally to “elections of directors”). In support of its interpretation that the notice also contemplated a contested election, the Court cited the standard Rule 14(a) language on contested elections that appeared in the Office Depot proxy statement.
As in JANA, the Levitt decision effectively left the corporation without any advance notice protection whatsoever for director nominations. This, of course, is an odd result for a company that nominally has an advance notice structure in place. In support of this outcome, the Court observed that “neither Subchapter VII of the [DGCL] nor any provision of Office Depot’s Bylaws discusses or imposes limitations on the nomination process.” The Court did not explain how it reached this conclusion given its prior holding that the term “business” in Office Depot’s advanced notice bylaw included director elections and nominations.
In light of the Levitt decision, corporations should make sure that their bylaws explicitly discuss “nominations.” Corporations also may wish to consider changing the historic and ubiquitous language that appears in notices of annual meetings and identifies the first item of business as “election of directors.” One alternative to avoid the Levitt problem would be to say “election of the Board of Directors’ nominees.” Because all candidates are voted on as a single item of business, however, the better route is likely to be to maintain the historic language in the notice of meeting and instead make sure that the bylaws have a specific advance notice structure for stockholder nominations.