Corporate Governance

Advance Notice Bylaws, Corporate Governance, and Jana Masters v. CNET Networks (part 4)

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 contained an interesting discussion of Rule 14a-8 and the interrelationship between state and federal law in connection with the annual meeting process. The court described the exegesis of Rule 14a-8 this way: “To attempt to give shareholders a greater ability to bring proposals without the cost associated with a fully waged proxy contest, the Securities Exchange Commission [sic] in 1942 adopted Rule 14a-8.”

The point is a fair one but incomplete. It entails an examination of Rule 14a-8 through the lens of modern practice. Certainly, the rule today is primarily intended to minimize federal interference with the state law right allowing shareholders to make proposals, a purpose that makes the denial of access even more inexplicable.

But when it was adopted, the purpose was quite different, something explored at length The SEC, Corporate Governance, and Shareholder Access to the Boardroom. For one thing, shareholders only got the right to include a 100 word statement in the company's proxy statement when management opposed the proposal. See Exchange Act Release No. 3347 (Dec. 18, 1942) (“Stockholders making proposals for action which are opposed by management must be given not more than 100 words in the proxy in which to state their position, provided the security holder gives the management reasonable notice of his intention.”).  Management could, therefore, deny shareholders this additional right simply by not affirmatively objecting to the proposal.

For another, the proposal was largely a reflection of existing administrative practice and designed to assist management. The Commission staff already had, under the antifraud provisions, required companies to disclose any proposal that they knew would be made at the upcoming meeting.  See Exchange Act Release No. 2376 (Jan. 12, 1940)(Commission required management to notify shareholders of any proposal that it knew would be submitted by shareholders at a meeting, at least where it intended to cast proxy votes against the proposal or “for purposes of a quorum supporting such a vote.”).  But this left management with the obligation to describe the proposal.  The shareholder proposal rule instead shifted the impetus for proper disclosure to the shareholder making the proposal. 

Had the Commission simply wanted to permit shareholders to exercise their state law rights through the proxy process, it would have allowed for the inclusion of nominees in the company's proxy statement.  This was proposed in 1942 but not adopted.  As for the early benefit to shareholders of the rule, few used it.  In the first year of operation, a mere 13 statements were submitted by shareholders and most of them were by the same person, a number that remained small through much of the early decades of the rule.

Full post as published by The Race to the Bottom on April 15, 2008 (boomark / email).