Corporate Governance

Advance Notice Bylaws, Corporate Governance, and Jana Masters v. CNET Networks (part 6)

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 court noted that the “significant procedural prerequisites” imposed under Rule 14a-8 were justified “because corporate proxy machinery needed to be protected from abuse by self-serving shareholders.”   The characterization of "self serving" is undefined but plainly pejorative.  There is some evidence that the restrictions were designed to reduce the volume of shareholder proposals.  See Exchange Act Release No. 20091 (Aug. 16, 1983)("Many of those commentators expressed the view that abuse of the security holder proposal rule could be curtailed by requiring shareholders who put the company and other shareholders to the expense of including a proposal in a proxy statement to have some measured economic stake or investment interest in the corporation. The Commission believes that there is merit to those views and is adopting the eligibility requirement as proposed.").  But nothing suggests a "self serving" motivation, only a desire by management to reduce the number of proposals.   

During most of the history of the shareholder proposal rule, duration and quantity restrictions did not exist.  They were only put in place in 1982.  Moreover, the limits border on insignificant, requiring only a one year holding period and a small amount of stock.  As a result, they likely reduce the number of shareholder proposals by only a modest amount.  Moreover, there is nothing in the restrictions that address "self-serving" behavior.  Nor, frankly, is there any real evidence suggesting that the minimal requirements in fact reduce the number of proposals in any appreciable numbers. 

In fact, what reduces the number of proposals from actually appearing in the proxy statement is probably the process of SEC review.  Companies opt to delete the proposal.  Those submitted by shareholders with small holdings are often artfully drafted.  They are therefore open to arguments that they contain more than one proposal or violate the antifraud provisions.   Thus, even proposals in areas long accepted by the Commission staff as appropriate for Rule 14a-8 are subject to challenge.  Once the company opts to delete the proposal, it triggers a review process with the Commission staff, one where the company will have counsel, possibly legal opinions, and the individual shareholder typically will not.  See Rule 14a-8(j).  In this process, smaller shareholders are at a decided disadvantage.  

But even in those circumstances, it is unlikely that the system separates the "self serving" from the non-self serving.  It is a characterization that illustrates the attitude about shareholder proposals by the Delaware courts.  They don't like them.

Full post as published by The Race to the Bottom on April 16, 2008 (boomark / email).