April 13, 2018

Activism: Court Upholds Board’s Rejection of Nominee

This Sidley memo discusses Blue Lion Opportunity Master Fund, L.P. vs. HomeStreet, Inc. (Wash. King Cty,; 3/18), a recent case out of Washington State where a court upheld a board’s decision to disallow an activist’s director nominee because of its non-compliance with the requirements of the company’s advance notice bylaw.

HomeStreet, Inc. is a Washington corporation that received notice from an activist hedge fund of its intention to nominate 2 director candidates at the company’s annual meeting. That notice was delivered late in the afternoon on the eve of the deadline established under the company’s advance notice bylaw. This excerpt says that’s when the fun began:

On March 1, HomeStreet rejected the notice because it failed to comply with the company’s advance notice bylaw in myriad instances. Among other things, the notice failed to provide information required under the bylaws by reference to the federal proxy rules (e.g., the activist’s estimated proxy fight cost and whether the activist planned to seek reimbursement from the company for its cost). The notice also failed to include a variety of information regarding share ownership of Blue Lion affiliates and certain required shareholder representations.

In response, on March 13, Blue Lion filed suit against the company, seeking a declaratory judgment that Blue Lion’s notice complied with the company’s advance notice bylaw, along with a motion for a preliminary injunction enjoining the company from rejecting the notice as invalid. In their briefs, both parties agreed that there was no Washington case law on point and thus advised the court to look toDelaware case law.

On March 30, the court ruled in favor of HomeStreet. The court affirmed that advance notice bylaws like the one at issue are common, that HomeStreet’s advance notice bylaw was valid and that Blue Lion failed to comply with the requirements of that bylaw. The court ruled that the company’s board of directors’ decision to reject the activist’s notice was an exercise of its business judgment that the court will not second-guess or disturb.

The court rejected the argument that the board’s action was a defensive measure aimed at the shareholders’ franchise, and thus subject to the Blasius “compelling justification” standard of review. Instead, it applied the business judgment rule to the board’s decision to reject the nominee.

John Jenkins