Delaware Court Of Chancery Holds That Company And Its Directors Did Not Breach Bylaws Or Fiduciary Duties In Rejecting Director Nomination Notice
On February 14, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery entered judgment in favor of Lee Enterprises, Inc. (the “Company”) and its directors following an expedited trial on claims for breach of the Company’s bylaws and the directors’ fiduciary duties. Strategic Investment Opportunities LLC v. Lee Enterprises, Inc., C.A. No. 2021-1089-LWW (Del. Ch. Feb. 14, 2022). Plaintiff, a beneficial stockholder, sought declaratory and injunctive relief to allow its nomination of directors—attempted in conjunction with a takeover bid by plaintiff—to move forward. The Court found that plaintiff did not comply with advance notice requirements for director nominations in the Company’s “clear and unambiguous” bylaws. Applying “enhanced scrutiny,” the Court also concluded that the board did not breach fiduciary duties by rejecting plaintiff’s nomination based on “a validly adopted bylaw with a legitimate corporate purpose.”
The Company’s bylaws required director nominations to be made by stockholders of record and compliance with advance notice procedures, which included the provision of a completed questionnaire. The deadline for the relevant election was November 26, 2021.
According to the Court, plaintiff decided to undertake a “hostile” takeover bid shortly before the deadline and sent a non-binding proposal to the board to acquire the Company on November 22, 2021. That same day, plaintiff began requesting that its broker convert certain shares held in the name of Cede & Co. (“Cede”) to book entry form so that plaintiff could be considered a record holder, but that request was not completed until December 2, 2021. Also, on November 22, 2021, plaintiff requested from the Company the form of questionnaire for director nominees. The Company rejected the request indicating that the forms were only to be provided within 10 days of a proper written request from a record holder. Therefore, plaintiff directed Cede to sign a letter to the Company “deliver[ing] the nomination” by plaintiff of directors and indicating that plaintiff was providing additional information on the nominees. Plaintiff submitted the letter and information to the Company on November 26, 2021. The Company’s board determined that the purported nomination notice did not comply with the bylaws and declared it invalid.
Following a trial on a paper record, the Court found that the nomination notice “failed to satisfy both the record holder and form requirements” of the bylaws. Therefore, the Court concluded that the rejection did not constitute a breach of contract. Indicating it could not “ignore the defensive mindset” in which the board was operating when it rejected the nomination notice, however, the Court determined that it was appropriate to apply “enhanced scrutiny.” Nevertheless, the Court concluded that the board “acted reasonably.” The Court highlighted that the bylaws had been adopted on a “clear day” and that the board “did not engage in manipulative conduct or move the goal posts to make compliance more difficult.” The Court also noted that “plaintiff could easily have met the bylaw’s record holder and—by extension—form requirements had it not delayed” and, therefore, “equity does not demand” overriding the board’s decision. As the Court explained, the board “had a genuine interest in enforcing its Bylaws so that they retain meaning and clear standards that stockholders must meet.”