Davis Polk & Wardwell Newsflash

Delaware Case Highlights Need to Include Advance Notice for Board Nominations in Bylaws

April 16, 2008

Companies having “advance notice” provisions should make sure that the provisions in their bylaws designed to provide advance notice of stockholder proposals specifically address both stockholder-proposed board nominations as well as stockholder-proposed business generally.  Advance notice bylaws generally require that any stockholder intending to propose business and/or nominate candidates to a company’s board give timely notice (and related information) concerning the proposal, including information regarding the stockholder making the proposal. 

In Levitt Corp. v. Office Depot, Inc., Vice Chancellor Noble cleared the way for Levitt, a real estate company owning just over 1% of the stock of Office Depot, to nominate two candidates to Office Depot’s board at the company’s 2008 annual shareholders meeting without providing the advance notice set forth in the bylaws.  Section 14 of Office Depot’s bylaws provided that in order for an item of business to be considered at an annual meeting, it must be properly brought before the meeting through (i) inclusion in the company’s notice, (ii) otherwise at the direction of the board, or (iii) by a stockholder in compliance with certain advance notice procedures.

Emphasizing that Office Depot’s bylaws did not specifically address the procedures related to stockholder-proposed nominations of directors, Vice Chancellor Noble applied Section 14 of the company’s bylaws, pertaining to stockholder proposals of business at annual meetings, to board nominations.  In ruling that Levitt’s director nominations were proper, the Vice Chancellor interpreted the meaning of “business” broadly to include director nominations and held that it was not necessary for Levitt to comply with the advance notice provision in the bylaws because the company’s notice, which generally informed shareholders of the business of electing directors, “. . . established that the business of electing directors, unrestricted by any limiting qualification, had been properly brought before the Annual Meeting” (emphasis added). 

While neither Levitt nor the recent Delaware decision in JANA v. CNET (March 13, 2008) invalidated advance notice bylaws, both decisions construed these bylaws in the narrowest of terms. We believe Delaware courts will continue to examine advance notice provisions narrowly. As these provisions serve as an effective early warning for companies of potentially unwanted proposals, we reiterate our recommendation made after JANA, that companies review their advance notice bylaws carefully in light of this recent scrutiny by the Delaware courts.

If you have any questions regarding this newsflash, please call your Davis Polk contact.

Davis Polk & Wardwell