Delaware Decision Highlights Importance of Explicit Reference to Stockholder Nominations for Director in Advance Notice Bylaw

A recent ruling from the Delaware Chancery Court in Levitt Corp. v. Office Depot, Inc.[1] permitted a stockholder to nominate directors at a company's annual meeting without providing advance notice by holding that the company, through its notice of annual meeting, had properly brought the "business" of nominating directors before the annual meeting. This decision and the recent JANA Master Fund, Ltd. v. CNET Networks, Inc.[2] decision (discussed in our Client Alert, dated March 28, 2008), highlight the need for companies to review their advance notice bylaw provisions to ensure that they are carefully drafted to avoid being construed in a manner that could invalidate the intended effect of those provisions.

Background

On March 14, 2008, Office Depot sent its stockholders a notice of annual meeting. That notice included the following as an agenda item: "To elect twelve (12) members of the Board of Directors." Office Depot's proxy statement included voting procedures for both uncontested and contested elections. Levitt, a real estate development company that owned just over 1% of Office Depot's stock, filed its own preliminary proxy statement on March 17, 2008, soliciting proxies in support of its two nominees, without providing Office Depot any advance notice. Office Depot argued that Levitt should have provided Office Depot with advance notice of its intention to propose its nominees, in accordance with Office Depot's advance notice bylaw. Office Depot's advance notice bylaw stated:

At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise properly brought before the meeting by a stockholder of the corporation who was a stockholder of record at the time of giving of notice provided for in this Section, who is entitled to vote at the meeting and who complied with the notice procedures forth in this Section.

A separate provision of the bylaw stated that for business to be properly brought before an annual meeting by a stockholder, a stockholder's notice had to be received at Office Depot's principal office not less than 120 calendar days before the date of its proxy statement for the previous year's annual meeting.

Levitt contended that the term "business" in such advance notice bylaw did not expressly include the nomination of directors and therefore no advance notice was required. Levitt argued alternatively that the reference in Office Depot's notice to the election of directors as an agenda item had properly brought director nominations before the annual meeting and consequently no advance notice was required.

Summary of Decision

The Chancery Court held that "business" in Office Depot's bylaw included director nominations but that Levitt did not need to provide advance notice of its intention to nominate directors because the "business" of director nominations had been properly brought before the annual meeting through Office Depot's notice of annual meeting.

"Business" Includes Director Nominations -- The Court reasoned that "business" should be construed broadly to include any "affair or matter"[3] and, as "the nomination of directors is an affair or matter" the nomination of directors is "business" that must be properly brought before an annual meeting. The Court also reasoned that the language in Section 211(b) of the Delaware General Corporation Law that "an annual meeting of stockholders shall be held for the election of directors" and that "[a]ny other proper business may be transacted at the annual meeting" strongly implied that "business" as used in the Delaware General Corporation Law, "encompasses the election of directors."[4]

"Business" of Director Nominations Had Been Brought Before Annual Meeting Through the Office Depot Notice of Annual Meeting -- Office Depot's advance notice bylaw stated that business may be properly brought before a meeting if it was "specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board of Directors." The Court concluded that Office Depot's notice of annual meeting, through its reference to the election of directors as an agenda item had properly brought the business of electing directors before the annual meeting. In reaching this conclusion, the Court rejected Office Depot's argument that the notice brought before the annual meeting only the narrow business of voting for or against Office Depot's slate of directors. In this regard, the Court found no support for Office Depot's argument, as the notice broadly referred to "elec[ting] … members of the Board of Directors" and was "unrestricted by any limiting qualification."[5] The Court also noted that the proxy materials described the mechanics of a contested election, "an inclusion at odds with the assertion that no other nominations would be possible because of the advance notice provision."[6] Although Office Depot's notice of annual meeting did not specify the nomination of directors, the Court noted that "nomination is a critical part of the election process"[7] and that "the concept of nominations is included within the broader category of elections."[8]

Responding to the Levitt Decision -- Companies Should Review Their Advance Notice Bylaw

In light of the Levitt decision, companies should carefully review their advance notice bylaw provisions to ensure that they expressly include stockholder nominations and do not merely contain a general reference to business. As in the JANA decision, the Court did not call into question the validity of advance notice bylaw provisions and those provisions continue to play an important role for companies to receive notice of upcoming proposals and nominations prior to their annual meeting. However, this decision emphasizes the continuing scrutiny and narrow interpretation that Delaware courts are applying to advance notice bylaw provisions, in favor of stockholder franchise rights.

Footnotes:

1. C.A. No. 3622-VCN (Del. Ch. Apr. 14, 2008).

2. Civil Action No. 3447-CC (Del. Ch. Mar. 13, 2008).

3. Levitt Corp. v. Office Depot, Inc., at p. 12.

4. Id., at p. 13.

5. Id., at p. 16.

6. Id., footnote 40 at p. 16.

7. Id., at p. 16.

8. Id., at p. 17.

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This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Martin Dunn, an O'Melveny partner licensed to practice law in the District of Columbia, and Su Lian Lu, an O'Melveny counsel licensed to practice law in California and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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