Corporate Governance

Advance Notice Bylaws, Corporate Governance, and Jana Masters v. CNET Networks (Part 1)

By J. Robert Brown

We are sometimes behind in legal developments but present nonetheless.  Earlier this month, the Delaware Chancery Court issued a decision that touched on an area that will grow in importance over time. In Jana Master Fund, Ltd. v. CNET Networks, Civ. Action No. 3447-CC (Del. Ch. March 13, 2008), the Chancery Court (Chancellor Chandler) considered the impact of a bylaw that required shareholders to own $1000 in securities for at least one year in order "to transact other business at the annual meeting".  The plaintiff, Jana Master Fund, owned approximately 11% of CNET but had not held the shares for the requisite one year period.  Jana wanted to nominate two directors for the board but was stymied by CNET's invocation of the bylaw.

In the corporate governance battleground, shareholders have increasingly focused on increase access to the board.  My paper on the topic, The SEC, Corporate Governance, and Shareholder Access to the Board Room, goes into considerable detail on the issue.  Sooner or later, the Commission will allow some level of shareholder access to the company's proxy statement for its nominees. 

When that occurs, attention shifts even more to state law.   Management will want to limit this ability as much as possible.  The current mechanism for doing so is an advance notice bylaw, requiring shareholders to inform management some specified time before the meeting of their intent to nominate directors or make other proposals.  The bylaws eliminate secrecy (something that helped the takeover of Take Two last year) and results in waiver of the right to nominate directors if the deadline is missed.  Courts have upheld advance notice bylaws that require notice as long as 90 days before the meeting.   

But these bylaws have limited use.  They do not actually prevent nominations (waiver aside).  Presumably management would at least sometimes prefer more substantive restrictions, such as a minimum percentage of stock ownership or a minimum holding period.  A shareholder not meeting the requirements would be precluded from making nominations and, presumably, precluded under Rule 14a-8 from inserting the nominee into the company's proxy statement (once they have that authority). 

But these restrictions interfere with the inherent right of shareholders to make nominations and proposals.  It was this type of restriction that appeared to be at issue in Jana Fund.  Moreover, the bylaws appear to be common (a memorandum from Cleary describes the one at issue in Jana as "a relatively standard advance notice by-law").  It is an open question whether these bylaws are per se invalid. But as cases like Unocal show, just because something is understood part of corporate (the inability to discriminate among shareholders of the same class of stock) doesn't mean that the courts will recognize it, particularly where it interferes with management.  

Jana Fund seemed to squarely present the issue.   The case ultimately found against CNET but on a narrow ground.  Nonetheless, the opinion contains a useful set of ideas and principles, relevant in the current corporate governance debate and relevant in the continued efforts to obtain access to the company's proxy statement for shareholder nominees under Rule 14a-8.  We will provide a series of posts on the decision.

Material on this case, including the briefs supporting and opposing the motion for judgment on the pleadings are posted on the DU Corporate Governance web site. 

Full post as published by The Race to the Bottom on April 09, 2008 (boomark / email).