The Delaware Court of Chancery recently held in Levitt Corp. v. Office Depot, Inc., that a bylaw restricting business that could be conducted at annual meetings to (i) matters contained in the meeting notice and (ii) matters otherwise properly brought by the board or by stockholders (in accordance with advance notice provisions) did not preclude a dissident who failed to give advance notice from nominating directors at the company’s upcoming annual meeting. Vice Chancellor John W. Noble reasoned that the stockholder did not have to give advance notice of its director nominations because the annual meeting notice stated broadly that the business of director elections would be considered. Levitt follows last months’ decision in JANA as the second recent Delaware opinion finding holes in advance notice bylaws. Jim Morphy’s analysis of JANA is available here.
In Levitt, the court began with the threshold matter of interpreting a bylaw providing that “only such business shall be conducted as shall have been properly brought before the meeting.” The dissident argued that the term “business” did not apply to director elections. The court concluded, however, that the plain meaning of “business” included both stockholder proposals and stockholder director-nominations. As a result, the dissident’s director nominations were required to comply with the bylaw provision governing the conduct of annual meetings.
The court then turned to the key bylaw provision at issue, which stated that “[t]o be properly brought before an annual meeting, business must be (i) specified in the notice of the meeting… (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… who complied with the notice procedures [including a 120-day advance notice requirement] set forth in this Section.” The corporation argued that the dissident stockholder failed to comply with the advance notice requirement and, therefore, the stockholder nominations would not be business “properly brought” before the meeting. The dissident responded that the nominations would be proper because, under clause (i) of the bylaw, the corporation’s notice of the annual meeting stated that one of the items of business was to “elect twelve (12) members of the Board of Directors.” The court agreed with the dissident, finding that the notice was sufficiently broad to allow for all director nominations—not just those on management’s slate. In other words, because the company “specified in the notice of the meeting” that director elections generally would be a matter of business, all stockholder nominations of directors will be “properly brought before the meeting” in accordance with the bylaws.
The court observed that the notice could have been drafted to avoid this outcome. Presumably, this means that the notice should have said, for example, that the stockholders would vote on the twelve nominees proposed by the nominating committee or specifically identified in the company’s proxy statement. The court also noted that the bylaws did not otherwise expressly address the director nomination process. Thus, a corporation whose bylaws have separate sections addressing stockholder proposals and stockholder director nominations may not need to change the generic language regarding director elections in its annual meeting notice. That corporation may want to make clear, however, that its bylaws distinguish between “director elections” and “business other than the election of directors.” This would avoid any ambiguity created by the court’s finding that “business” meant both director nominations and other proposals.
The Levittt opinion is available here and may be appealed to the Delaware Supreme Court.