Corporate Governance

Advance Notice Bylaws, Corporate Governance, and Jana Masters v. CNET Networks (part 3)

By J. Robert Brown

We are discussing Jana Master Fund, Ltd. v. CNET Networks , Civ. Action No. 3447-CC (Del. Ch. March 13, 2008), a case interpreting an advance notice bylaw that imposed ownership and holding period restrictions on shareholders seeking to "transact other corporate business at the annual meeting."

The opinion contains some observations that bear on the corporate governance process.  It discusses the role of shareholders in the governance process, particularly the decline in the importance of the shareholder meetings.  As Chancellor Chandler notes:

• Shareholders, however, are generally passive and may exercise their rights usually once a year by voting at the corporation's annual meeting.
  
• Yet, even with only this single task, most shareholders are rationally apathetic, the prevailing wisdom explains. Individual investors have too little "skin in the game" to rationally devote the time and energy necessary to keep themselves aware of the details of the corporation's performance or to campaign for corporate change. Furthermore, with ownership diffused among so many holders, there exists a problem of collective action. Although the rise of institutional investment may have significantly narrowed the "gulf between management and ownership . . .  the simple fact remains that most shareholders have better things to do than attend a company's annual meeting. Nevertheless, these shareholders--be they individual or institutional--may vote via proxy. (footnotes omitted)

In other words, the annual meeting has been supplanted by the proxy process.  Moreover, shareholders seeking to engage in a proxy solicitation operate under a substantial disadvantage.  As the opinion notes, solicitations are expensive and, unlike management's efforts, shareholders do not typically receive reimbursement for the costs. 

• the real action in corporate elections is in the proxy solicitation process, and that process is heavily regulated by both state and federal law. More importantly, the solicitation process is extraordinarily expensive. The traditional proxy contest "involve[s] a fight between management and insurgent shareholders over the control of the corporation in the annual election of directors." Generally, although management is reimbursed for its proxy expenses from the corporate coffers, insurgent shareholders finance their own bid and can hope for reimbursement only if that bid is successful. Such a rule undoubtedly proves intimidating and likely discourages many shareholders from attempting to wage a proxy contest. (footnotes omitted)

Its a blunt and accurate depiction of the limits imposed on shareholders who want to engage in solicitations in opposition of management.  It frankly explains why so few proxy contests actually occur and why access under Rule 14a-8 for shareholder nominations is so important.

Full post as published by The Race to the Bottom on April 14, 2008 (boomark / email).