Delaware Supreme Court Finds Dissident Board Nominees Ineligible Because Of Noncompliance With Bylaws Deadline To Respond To Supplemental Information Request
On January 13, 2020, in an opinion authored by Justice Karen L. Valihura, the Supreme Court of Delaware held that defendants—two investment trusts—were permitted to disqualify the board nominees of a plaintiff shareholder for missing a deadline in the trusts’ bylaws to respond to board requests for additional information. Blackrock Credit Allocation Income Trust v. Saba Capital Master Fund Ltd., C.A. No. 2019-0416-MTZ (Del. Jan. 13, 2020). The Supreme Court’s decision reversed in part a ruling by Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery that plaintiff’s nominees were improperly excluded. Even though the requests for information may have exceeded the contemplated scope and plaintiff may have misread the bylaws and believed the deadline was inapplicable, the Delaware Supreme Court held that a rule that would excuse deadline non-compliance could “potentially frustrate the purpose of advance notice bylaws” intended to facilitate orderly meetings and election contests.
Plaintiff, a shareholder of the investment trusts, provided timely notice to the trusts to nominate to each of the boards a slate of four individuals. A few weeks later, defendants sent to plaintiff requests for additional information—in the form of questionnaires—pursuant to identical provisions of the bylaws of each trust. The requests for additional information did not state a response deadline but did generally reference the relevant section of the bylaws, which contained a five-business-day response deadline. Seven business days after the requests, defendants’ counsel emailed plaintiff declaring that the nomination notice was invalid for failure to comply with the deadline. Thereafter, plaintiff’s counsel responded and argued, among other things, that the deadline was inapplicable and the information requests were duplicative and unreasonable. A proxy contest ensued in which defendants informed shareholders that they would not be counting votes for plaintiff’s slate, because the nominations were invalid. Plaintiff filed suit and moved for a preliminary injunction seeking to preclude defendants from invalidating and interfering with its nominations and to compel the counting of votes for its slate.
The Court of Chancery held that the deadline would have been applicable, but the information requests exceeded the scope of the information to be sought—relating to specified nominee qualifications—pursuant to the bylaws. Therefore, it granted the requested injunctive relief.
The Delaware Supreme Court reversed. The Court noted that certain questions in the information request exceeded the contemplated scope, but other questions were “directly tied to the nominee qualifications under [the bylaws].” Indeed, the Court explained that it was “undisputed” that at least one-third of the questions were “directly relevant.” Thus, found the Court, plaintiff should have raised any concerns or objections it had within the required time frame. According to the Court, “[w]hat [plaintiff] could not do, without risking disqualification of its nominees, was to stay silent, do nothing, and let the deadline pass.” While the Court recognized that the information request did not specify the deadline and a “reasonable reading of the record” was that plaintiff misread the bylaws and did not think it was obligated to respond within five business days, the Court nevertheless held that plaintiff’s non-compliance rendered its nominees ineligible. Explaining the reasoning for its decision, the Court emphasized that it was “reluctant to hold that it is acceptable to simply let pass a clear and unambiguous deadline contained in an advance-notice bylaw”, because excusing such non-compliance would “create uncertainty in the electoral setting.”