The Delaware Supreme Court has affirmed a lower court decision that may make it easier for dissident stockholders to solicit proxies from other stockholders to, for example, take control of the corporation– a ruling that may affect publicly-held companies nationwide.
Delaware case law is often cited as persuasive authority in corporate disputes in other jurisdictions, so Colorado-incorporated public companies may also want to review and consider amending their bylaws as a “pre-emptive” precaution.”
The decision was based on a reading of one of the bylaws of CNET Networks, Inc., a Delaware corporation. As a result of this ruling, we recommend that public corporations incorporated in Delaware examine their bylaws with their counsel and, if warranted, make changes to the language of certain of their bylaws to try to prevent the result in the case, CNET Networks, Inc. v. JANA Master Fund, Ltd.
JANA Master Fund, Ltd. and its affiliates owned approximately 11% of the stock of CNET. Dissatisfied with CNET’s stock performance, JANA notified CNET in writing that it would seek control of the CNET board. JANA requested a list of CNET stockholders so that it could commence its own solicitation of proxies from CNET stockholders, and CNET refused to provide the list, arguing that JANA was not qualified under its bylaws to seek the proxies.
The CNET bylaws contain a typical advance-notice provision stating that any stockholder who has been a stockholder for more than a year “may seek to transact other corporate business-law at the annual meeting, provided that such business-law is set forth in a written notice” that must be mailed to the corporation prior to a specified date. The bylaw also provides that “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 . . . .” CNET argued that, since JANA had been a stockholder for only 8 months, it was not entitled to seek to transact business-law at the next stockholder meeting. Jana countered that the advance notice bylaw requirements apply only to proxy solicitations under SEC Rule 14a-8, which permits stockholders to piggyback their own proposals in the proxy solicitation materials delivered to stockholders by management. As JANA was planning to conduct its own proxy solicitation at its own expense, it argued that the bylaw provision was not applicable.
The Delaware Court of Chancery agreed with JANA, and the Delaware Supreme Court affirmed the decision of the Chancery Court, thus making it easier for JANA to get its nominees elected to a majority of the CNET board positions. In reaching its decision, the Chancery Court carefully parsed the particular language of the CNET advance-notice bylaw and gave three separate grounds for its agreement with JANA’s interpretation.
The bylaw at issue in CNET is probably similar to the advance-notice bylaw of many Delaware corporations, and the Chancery Court’s opinion, as affirmed by the Delaware Supreme Court, no doubt surprised many corporate practitioners and court observers. Accordingly, we recommend that public corporations subject to SEC proxy rules and incorporated in Delaware examine their bylaws with their counsel and, if warranted, amend them to try to prevent the result in the CNET case. Public corporations incorporated in Colorado should undertake a similar review, to be prepared in the event that Colorado courts adopt the result in CNET.