January 15, 2020

Advance Notice Bylaws: Del. Supreme Court Upholds Strict Bylaw Deadline

On Monday, the Delaware Supreme Court issued its decision in BlackRock Credit Allocation Income Trust v. Saba Capital, (Del; 1/20) in which it reversed an earlier Chancery Court ruling & upheld a company’s right to insist on compliance with deadlines contained in an advance notice bylaw.

The case involved an advance notice bylaw entitling two closed-end investment fund trusts to request additional information after they received notice of a slate of trustee nominees put forward by an activist hedge fund, and requiring the hedge fund to respond within 5 days. The trusts used that bylaw provision as justification for sending the hedge fund a supplemental request requiring them to respond to over 90 questions. When they didn’t provide the information within 5 days, the trusts said that since they didn’t respond in a timely fashion, their nominations were defective.

The Chancery said that the advance notice bylaw didn’t give the trusts a license to engage in an unreasonably broad inquiry, and held that the plaintiff had established that some of the questions exceeded the authority granted by the bylaw. As this Wachtell Lipton memo points out, the Delaware Supreme Court saw things differently:

The Supreme Court held that, even if some of the questions asked went beyond the bounds of the bylaw, it is not acceptable for a shareholder “to simply let pass a clear and unambiguous deadline contained in an advance-notice bylaw, particularly one that had been adopted on a ‘clear day’.” Writing for the Court, Justice Valihura stated:

Bylaws, including advance notice bylaws, are “commonplace” and are interpreted using contractual principles. If such provisions are unclear, we resolve any doubt in favor of stockholders’ electoral rights. But the provisions at issue here were clear, as the Court of Chancery held. A rule that would permit election-contest participants to ignore a clear deadline and then, without having raised any objection, proffer after-the-fact reasons for their non-compliance with it, would create uncertainty in the electoral setting.

The Court noted that instead of seeking relief from the deadline for responding, the dissidents sat on their hands and simply let the deadline pass. The Court’s decision sends a strong message that deadlines in advance notice bylaws are going to be respected by the Delaware courts, and that dissidents who object to the scope of supplemental inquiries must assert those objections before the deadline passes.

John Jenkins