July 2, 2019

Advance Notice Bylaws: Chancery Rebuffs Board’s Info Request to Nominee

Many advance notice bylaws contain language requiring proponents to submit such additional information about their director nominee as the board may reasonably request in order to establish whether the nominee meets the qualification standards set forth in the bylaw.  But a recent Chancery Court decision says that provisions of this kind aren’t a license for an unreasonably broad inquiry by the board.

In Saba Capital v. Blackrock Credit Allocation Income Trust, (Del. Ch.; 6/19), Vice Chancellor Zurn held that the terms of a board’s demand for additional information about a nominee weren’t reasonable & violated the terms of the applicable bylaw. Here’s an excerpt from a recent Morris James blog summarizing the case:

In this case, the defendants had advance notice by-laws that permitted the company to request additional information for certain purposes after receiving notice of a dissident slate of directors, and required a response within 5 days. Pursuant to that by-law, defendants had sent a questionnaire with over 90 questions to the dissident slate. When the dissidents did not supply the requested information within 5 days, defendants advised that their failure to comply resulted in their nominations being defective.

The stockholder supporting the dissident slate sued and asked the Court of Chancery to find the nominations complied with the advance notice by-law and to require that the dissidents be freely presented and votes for them counted. Construing the by-law at issue, the Court held that the plaintiff had established that a portion of questions asked exceeded the permissible scope of information requests under the by-laws

VC Zurn began her analysis by noting that under Delaware law, corporate bylaws “constitute part of a binding broader contract among the directors,  officers and stockholders.”   She found that the applicable provisions of the bylaw were “unambiguous,” and determined that, among other things, the terms of the bylaw did not permit the board to ask questions unrelated to the qualifications of the nominee laid out in Section 1 of the bylaw.

The Vice Chancellor found that the board’s information request went beyond what was contemplated by the bylaws, and held that “the Questionnaire as a whole was not “reasonably requested” or “necessary” to determine whether Saba’s nominees met Section 1’s requirements.”

John Jenkins