Corporate Governance

Advance Notice Bylaws, Corporate Governance, and Jana Masters v. CNET Networks (part 5)

By J. Robert Brown

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."

The court discussed the language in Rule 14a-8 including the limitations on the shareholder eligibility.  Shareholders could only insert a proposal in the company's proxy statement if meeting the mandatory holding period (one year) and minimum ownership requirement.  These restrictions, however, applied only to accessibility to the proxy statement.  The restrictions in no way limited shareholder rights under state law.  “[B]ut what a shareholder may do under Rule 14a-8 is far different than what a shareholder may do on his or her own.”  

Under state law, the default rule was that all shareholders could make proposals, without meeting any duration or quantity restrictions.  As the court conceded, “thousands of stockholders are free to raise for the first time and present any proposal they desire at the Annual Meeting."  The court noted that while this “may sound daunting, it is the default rule in Delaware.”

In other words, as even the Delaware courts observe, the Commission has added restrictions on access to the proxy statement that do not exist under state law.  Moreover, these restrictions have not been present in the rule since inception.  In fact, they were a relatively recent adoption, having only been put in place in 1982. For a discussion, see The SEC, Corporate Governance, and Shareholder Access to the Board Room.  Said another way, the Commission is using Rule 14a-8 to deny shareholders their rights under state law.  Removal of restrictions under the proxy rules would shift the focus back to state law and require the state courts to sort out what if any restrictions can be imposed on the right of shareholders to make proposals or nominate directors.

In any event, it is the Commission that is acting to deny shareholders the state law right to nominate directors through a denial of access.  This is an unfortunate position for the Commission to be in and one that is inconsistent with its mission of shareholder protection. 

Full post as published by The Race to the Bottom on April 15, 2008 (boomark / email).