Delaware Chancery Court Allows Activist Stockholder to Nominate Director Candidates without Complying with Advance-Notice Provision of Bylaws
April 16, 2008
On April 14, 2008, the Delaware Chancery Court issued an opinion that demonstrates again the close scrutiny and strict interpretation that the Delaware courts will apply when reviewing corporate documents, particularly a company's bylaws, meeting notices, and other important documents. Coming after a number of other highly publicized opinions that showed similar careful analysis (three of which were the focus of our April 9, 2008, Client Alert entitled "Delaware Chancery Court Issues a Trio of Opinions Reminding Boards and Corporate Counsel to Carefully Review Corporate Contracts and Documents"), these rulings make it clear that now is the time for corporate counsel to carefully review the company's important contracts and documents—including the company's bylaws, which can be amended by the board—to ensure that the specific provisions in these documents clearly reflect the goals of the board and eliminate any potential ambiguity.
In Levitt Corp. v. Office Depot, Inc. (Civil Action No. 3622-VCN (Del. Ch. April 14, 2008)), the Delaware Chancery Court held that Levitt Corp.'s (Levitt's) nomination of two candidates for election to the board of directors of Office Depot, Inc. (Office Depot) was not prohibited by Office Depot's bylaws even though Levitt did not follow the advance-notice provision contained in the bylaws. Specifically, the court ruled that Levitt was not required to give "advance notice" of its intent to nominate directors because the "business of electing and nominating directors before the Annual Meeting" was properly brought before Office Depot's shareholders by Office Depot's own annual meeting notice, which had put the general issue of election of directors before the stockholders.
The dispute arose out of Levitt's desire to replace two members of Office Depot's 12-member board. On March 14, 2008, Office Depot distributed a Notice of Annual Meeting of Shareholders (the notice), which included the date, time, and location of the annual meeting. The notice also included the following agenda item under an "items of business" heading: "1. To elect twelve (12) members of the Board of Directors for the term described in this Proxy Statement." The proxy materials that accompanied the notice disclosed, among other things, that the 12 current directors had been nominated for election.
On March 17, 2008, Levitt filed its own preliminary proxy statement soliciting proxies in support of its two nominees despite the fact that Levitt had not given advance notice pursuant to the bylaw provision of its intent to nominate candidates to the Office Depot board. The next day, Levitt filed a declaratory relief action in the Delaware Chancery Court asking the court to find that it was permitted to nominate its two candidates for election to the Office Depot board despite its failure to follow the advance-notice provision.
Office Depot's advance-notice provision states, in pertinent part: "At an annual meeting of 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 set forth in this Section. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary . . . To be timely, a stockholder's notice shall be received at the company's principal office . . ., not less than 120 calendar days before the date of the Company's proxy statement released to shareholders in connection with the previous year's annual meeting . . . ." The court noted that neither this provision nor any other provision of Office Depot's bylaws expressly mandated advance notice of competing director nominations.1
The court rejected Levitt's argument that the advance-notice provision did not encompass director nominations. Turning to the first sentence of the advance-notice provision, the court stated that the plain meaning of the term "business" in this context is an "affair" or "matter," and that the nomination of directors constitutes an affair or matter. The court held that Office Depot's advance-notice provision includes director nominations by stockholders because the nomination of directors is unambiguously within the purview of the term "business."
However, the court then rejected Office Depot's contention that Levitt was required to give advance notice in accordance with the bylaws of its intention to nominate directors. First, the court held that the business of electing directors had properly been brought before the annual meeting by Office Depot's notice, which stated that one item of business before the annual meeting was to "elect twelve (12) members of the Board of Directors." Second, the court analyzed whether the business of electing directors includes the nomination of directors. The court noted that neither the law nor the language of Office Depot's bylaws discussed or imposed limitations on the director-nomination process, and went on to state that it could not discern a "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." Consequently, the court held that "having properly brought the business of electing and nominating directors before the Annual Meeting through the Notice, Office Depot's Board cannot prevent Levitt from nominating candidates for election to the Office Depot Board at that meeting."2 Thus, "Levitt was relieved of complying with the advance notice provision because the business of nominating directors for election had already been properly brought before the meeting."
This ruling, particularly when considered in the context of the rulings that were the subject of our prior Client Alert, should serve as a call to action to corporate counsel to carefully review corporate documents—especially bylaws, which the court in Office Depot again emphasized are a form of contract between the company and its shareholders—to ensure that these documents clearly and unambiguously set forth the desired terms. Further, it is worth noting that given that documents such as bylaws are drafted by corporate counsel, there is a risk that ambiguities in these documents may be held against the drafter, particularly when the issue to be impacted involves the shareholder franchise.
1 The court further noted that, under Delaware law, no advance notice of a stockholder's intent to nominate directors at an annual meeting has to be given unless the corporation has properly imposed such a requirement.
2 In response to Office Depot's argument that its advance-notice provision would be "rendered a nullity in regard to director nominations" by the court's ruling, the court noted that "Office Depot, through careful drafting of the Notice, may have separated precisely the business of the election from the business of the nomination. If the Notice had so provided, a different result may have obtained."