Advance Notice Provisions
In two recent decisions, the Delaware Court of Chancery addressed the scope of advance notice provisions in bylaws, in both cases deciding that the provisions in the bylaws were ineffective in preventing stockholders from nominating directors. Although these cases apply only to Delaware corporations, corporations and other entities, such as limited liability companies and partnerships organized under Indiana and other state corporation laws, should review their own organizational documents in view of these decisions.
In Jana Master Fund, Ltd. v. CNET Networks, Inc., an advance notice provision was construed to apply only to stockholder proposals made pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, as amended, and not to proposals submitted as part of an independently financed proxy solicitation. In Levitt Corp v. Office Depot, Inc., the court permitted a dissident stockholder to nominate director candidates from the floor of the annual meeting, despite the presence of an advance notice of business by-law provision.
In light of the Delaware court's narrow interpretation of these provisions along with increasing shareholder activism, we recommend that all companies review their advance notice provisions. The following are suggestions for removing any ambiguity in advance notice bylaw provisions that could be construed against the company and in favor of activist shareholders:
- Clarify that the advance notice requirements apply to all stockholder proposals and nominations, for both annual and special meetings of shareholders;
- Specify that the advance notice provisions are separate from and in addition to the requirements under Rule 14a-8 of the federal proxy rules;
- Expand the information required to be provided by any shareholder who nominates a candidate for election to the Board of Directors or submits a shareholder proposal, including beneficial ownership of the company’s securities, such as derivative positions and hedging transactions; and
- Require any person proposed to be nominated for election to provide the same information required to be disclosed by other nominees.
Indemnification and Expense Advancement Provisions
In another Delaware case, Schoon v. Troy Corporation, the Court of Chancery denied expense advancement to a former director based upon a bylaw amendment by the current Board of Directors, holding that the former director's right to advancement did not attach until an indemnifiable claim was asserted and prior to the assertion of such a claim, the corporation could amend its bylaws to eliminate the former director's right to advancement of expenses.
While the Schoon decision is still subject to appeal, we recommend that all corporations and other forms of business entities review their indemnification and expense advancement provisions to ensure they are providing management with their intended level of protection. The following are suggestions to strengthen director and officer indemnification and advancement rights:
- Provide that indemnification and advancement provisions are a contract between the corporation and the indemnified person;
- Prohibit the retroactive amendment of indemnification and advancement provisions that would diminish or qualify previously granted rights;
- Clarify that any advancement rights provided in the bylaws apply to expenses incurred in connection with the proceeding for which indemnification is provided;
- Enter into a separate written indemnification agreement with indemnified persons that cannot be amended without their consent; and
- Maintain adequate coverage and director and officer liability insurance.