Corporate Governance

Delaware Courts and Advance Notice Bylaws: Levitt v. Office Depot

By J. Robert Brown

The Delaware courts have for the second time in as many months addressed the impact of advance notice bylaws. Shareholders have won both cases and been allowed to go forward with their nominees. With the exception of language in Jana indicating that all shareholders have an inherent right to make nominations and proposals at meetings, the cases have provided little in the way of guiding principals, instead turning on largely inartful language in the relevant bylaw.

The latest salvo was fired by VC Noble in Levitt Corp. v. Office Depot, CA No 3622, Ch. Court, April 14, 2008. In that case the advance notice bylaw that applied to "business . . . properly brought before the meeting."  Properly brought required timely notice, something defined in the bylaw as at least 120 calendar days before the date of the proxy statement distributed in the prior year. The bylaw otherwise said nothing specifically about the nomination of directors. Had Levitt conformed with the requirement, it would have had to provide notice 141 days before the annual meeting.

In construing the bylaw, the court agreed that "business" included the nomination of directors. As the opinion noted:

• Because of the common meaning of “business,” any affair or matter to be conducted or considered at an annual meeting must be properly brought before the meeting, and because the nomination of directors is an affair or matter, it follows that Section 14 requires the nomination of directors to be “properly brought.” Contrary to Levitt’s contention, this interpretation does not require the Court to imply or impose terms; instead, it merely affords the section’s words their plain meaning. (footnote omitted).

Nonetheless, the court concluded that the requirement was met by the decision of Office Depot to specify in the notice of the meeting "the business of the meeting would include electing directors." The election of directors included the nomination of directors. As the court noted:

• Typically, the election process is understood as spanning from nomination to voting to vote tabulation to announcement and certification of the results. Given that the Notice speaks generally of “elect[ing] . . . Directors,” an item of business that contemplates putting forth individuals for stockholder consideration, the Court can discern no persuasive reason why the business of electing directors should not include the subsidiary business of nominating directors for election, especially where no guidance on the nomination process is found in Office Depot’s Bylaws or in the Delaware General Corporation Law.

The conclusion is odd and a bit circuitous.  Because annual meetings require the election of directors, it will invariably be the case that the notice will always include this matter.  Shareholders wanting to nominate a competing slate of directors, therefore, need not provide advance notice.  For all intents and purposes, therefore, the bylaw applies only to proposals that do not involve the election of directors.  It seems odd to find an intent to apply the bylaw to elections, then read the requirement out of the bylaw, all based upon "plain language." 

The conclusion turns on the particular language in the bylaw.  It will be easy enough for issuers to correct the problem by including specific language governing the nomination of directors, providing that they may only be made at a shareholder meeting if submitted to management within the specified time period.

The holding, however, allowed the court to duck the more important issue.  Assuming a shareholder had to submit nominees to management in advance of the meeting, a time period of almost five months before the shareholder meeting is excessive.  In effect, shareholders would not be able to react to developments that occur a reasonable time before the meeting.  Moreover, it is likely that in most cases, shareholders would not have the benefit of the year end earnings before deciding whether to nominate a competing slate.  Ultimately, the courts will not be able to rely on unclear language to duck the issue.  One way or another it will have to resolve the degree to which management can deprive a shareholder of the right to nominate directors through the use of advance notice bylaws. 

Pleadings and briefs, as well as the opinion in this case, are available on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on April 23, 2008 (boomark / email).