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UPDATE 3-CNET may appeal court ruling on board nominee case

(Rewrites first paragraph to reflect CNET news; adds closing share price, background)

SAN FRANCISCO, March 13 (Reuters) - Online media company CNET Networks Inc CNET.O said on Thursday it may appeal a court ruling issued earlier in the day that allows a group of investors to nominate seven directors to its board.

The Delaware Court of Chancery ruled earlier Thursday that hedge fund Jana Partners LLC, which is leading a group of investors trying to take control of CNET’s board, could nominate directors without violating the company’s corporate bylaws.

CNET said in January that Jana’s efforts to nominate two directors to existing board seats and expand the board by five members were “improper” under its bylaws.

Jana took the matter to court through an affiliate, challenging CNET’s interpretation of its bylaws.

In response to the ruling, Jana Managing Partner Barry Rosenstein said he hoped the company “will now put aside their efforts to thwart this debate with technicalities and instead engage stockholders in a dialogue about the company’s future.”

CNET said it is defending the litigation because “it is not in the best interest of our stockholders to undertake a costly and disruptive proxy contest initiated by Jana Partners that does not comply with the company’s by-laws.”

It also said Jana will need to get the votes of two-thirds of CNET shareholders to secure the election of more than two directors.

Shareholders have to own at least $1,000 in company stock for at least one year to nominate director candidates for election, according to CNET bylaws. Jana first made its investment in October 2007, according to the court ruling.

The court said the provisions are inapplicable and invalid in Jana’s case since they apply to proxy fights that are management funded, rather than independently funded.

CNET shares rose as much as 6 percent before closing Thursday up 26 cents at $7.46 on Nasdaq.

Jana, which holds about 10 percent of CNET’s voting stock, has said that the San Francisco-based company has “significantly lagged peers in value creation and performance” and needs to be “revitalize(d).”

Jana is partnering with investment funds Sandell Asset Management Corp and Velocity Interactive Group, venture capital firm Spark Capital and technology entrepreneur Paul Gardi of Alex Interactive Media to shake up CNET’s board.

The group hopes its nominees -- drawn from the technology, media and finance industries -- will bring the expertise needed to turn around CNET and boost its stock price.

It said earlier it would nominate Gardi and Spark Capital founder Santo Politi to replace the two CNET directors scheduled to stand for re-election at the company’s next annual meeting in June.

In addition, Jana proposed expanding CNET’s board to 13 members from eight, and filling the resulting vacancies with its nominees.

Last week, the nominees met with CNET officials in an attempt to reach a settlement prior to the ruling, a person familiar with the group’s affairs said.

The group has also been talking with CNET shareholders, as it tries to drum up support for its slate of nominees, the person said. (Reporting by Anupreeta Das; Editing by Lisa Von Ahn/Jeffrey Benkoe)