Levitt Corp. v. Office Depot, Inc., 2008 WL 1724244 ( Del. Ch., April 14, 2008), read opinion here. The Delaware Chancery Court was presented in this case with differing interpretations of an "advance notice bylaw" and the argument by Office Depot that Levitt did not comply with the requirements of the bylaw related to Levitt’s attempt to nominate new directors to the board in connection with a self-funded proxy contest.
One of the issues addressed in the court’s opinion was the interface between the concepts of "electing" directors as compared with "nominating" directors. The money quote follows:
The remaining question is whether the business of electing directors includes the nomination of directors. Of course, nominating candidates and voting for preferred candidates are separate steps. Levitt has recognized as much. Notwithstanding this difference, nomination is a critical part of the election process-in the absence of other nominations, the stockholder constituency has no electoral choice as between candidates; instead, the shareholders are left with only an “up or down” vote on the company sponsored candidates. Despite the role of nominations in giving substance to elections, i.e., providing shareholders with a selection of candidates, neither Subchapter VII of the Delaware General Corporation Law, FN41, nor any provision of Office Depot’s Bylaws discusses or imposes limitations on the nomination process.FN42 Perhaps the best explanation for this silence is that the concept of nominations is included within the broader category of elections. Typically, the election process is understood as spanning from nomination to voting to vote tabulation to announcement and certification of the results. Given that the Notice speaks generally of “elect[ing] … Directors,” an item of business that contemplates putting forth individuals for stockholder consideration, the Court can discern no persuasive reason why the business of electing directors should not include the subsidiary business of nominating directors for election, especially where no guidance on the nomination process is found in Office Depot’s Bylaws or in the Delaware General Corporation Law.FN43
FN41. Subchapter VII addresses shareholder meetings, elections, voting, and notice.
FN42. See 8 Del. C. §§ 211-233.
Although it was not necessary to the court’s conclusion, the issue arose as to the interplay between the federal securities regulations and the disputed corporate bylaw provisions, a point that was addressed in a recent Chancery Court opinion in JANA Master Fund Ltd. v. CNET Networks, Inc., 2008 WL 660556 (Del. Ch. Mar. 13, 2008), expedited appeal granted, No. 141, 2008 (Del., Mar. 19, 2008) , summarized here on this blog.
Nor did the court need to address what impact the longstanding tradition in Delaware law of being solicitous about the sacrosanct shareholder franchise, would have on an interpretation of the bylaw in terms of the right to nominate directors. Nonetheless, in footnote 44 of the opinion, the Court made the following observation:
Accordingly, the Court need not pass on Levitt’s arguments that Section 14 [of the Bylaws at issue], does not apply to shareholder-funded proposals or that its advance notice period is unreasonably long.
Another way of viewing the outcome is to recognize that Office Depot’s description of the business to come before the Annual Meeting (i.e., whether “election” subsumes nomination) was not clear and unambiguous. With that, the protection afforded the shareholder franchise, see, e.g., Openwave Sys., 924 A.2d at 239, [ Openwave Sys., Inc. v. Harbinger Capital P’ners Master Fund I, Ltd., 924 A.2d 228, 239 (Del.2007)], which includes the right to nominate competing board candidates, is properly implemented in this instance.
UPDATE: Steve Haas provides a summary here via the Harvard Corporate Governance Blog.