The flurry of activity, this week, surrounding CNET (NSDQ: CNET) and a group of activist investors, may prove nothing more than the opening skirmish of a long, protracted war. On Monday, when Jana Partners announced its intention to run a slate of seven candidates for the company’s board, it noted it had filed suit in Delaware court against the company to prevent it from invoking certain bylaws that would block the nomination. At the Deal Professor blog (an intriguing new sub-site of NYT’s popular Dealbook), law prof Steven M. Davidoff, analyzes the relevant bylaws and the prospects for getting them overturned:
— First, Jana is attempting to exploit a “flaw” in CNET’s board nomination rules. Typically, only two directors stand for election each year, a system designed to make it difficult to pack the board. But if anyone can get support from two-thirds of the shareholders, the by-laws can be amended and the two-per-year rule can be tossed. So getting that support is the first challenge, although even if it fails to clear that mark, it can still nominate two directors, which is a start. Much more in the extended entry…
— But remember that CNET has described this whole endeavor as “improper” because Jana and its partners are deemed to be short-term shareholders without standing. This is the crux of the legal issue, and (of course) is where things get complicated. CNET’s bylaws state that to have standing, the nominating shareholder is required to have held $1,000 worth of stock for at least a year. Jana acquired its stake in October, far short of this requirement. Of course, that’s not the end of the story. Jana is complaining about the exact wording (see post) and the application of the relevant bylaws, claiming that they’re “discriminatory” and violate shareholder’s rights, per Delaware law.
— The exact arguments are rather technical, though CNET may be able to argue that its bylaws are legitimate. But there’s a twist: Davidoff notes that under the law, there’s the equivalent of a “tie goes to the runner” principle, or more precisely: “ambiguity is to be determined in favor of the stockholders.” So Jana could win if it can successfully introduce ambiguity surround the meaning of the bylaws in question. Ultimately, neither side appears to have a sure thing and the courts could give some kind of split decision, allowing Jana to submit directors, but only to replace the two that are coming up for election this year. And of course, the legal side is only a slice of the whole battle, because Jana would still need to rally shareholders around its cause and then begin the task of making whatever changes it has in mind.