February 28, 2022

Advance Notice Bylaws: Del. Chancery Upholds Record Holder Requirement

In Strategic Investment Opportunities v. Lee Enterprises, (Del. Ch.; 2/22), the Delaware Chancery Court rejected a hostile bidder’s allegations its nominees for election to the board were valid under the company’s advance notice bylaw or that the board acted inequitably in rejecting those nominations.  In doing so, it enforced provisions of the bylaw dealing with the persons entitled to submit nominations and the specific materials required to accompany a nomination.

The case arose out of Alden Global Capital’s hostile bid for Lee Enterprises. An Alden affiliate submitted a slate of nominees for election as directors of Lee. The company rejected those nominations on the grounds that Alden failed to comply with applicable provisions of Lee’s advance notice bylaw, which required notice of the nominations to be submitted by a stockholder of record and accompanied by a D&O questionnaire prepared by the company.

The plaintiff had attempted to become a record holder a few days before the nomination deadline set forth in the bylaw, but since the transfer was not completed in time it asked the record holder, Cede & Co. to provide a cover letter for its nomination in an alternative attempt to meet the requirement.  The plaintiff also requested the company to provide it with a form of nominee questionnaire, but the company refused to do that, since the plaintiff was not a record holder.

Vice Chancellor Will rejected the plaintiff’s contentions that the Cede & Co. letter amounted to compliance with the bylaw and that the company acted inequitably in refusing to accept an alternative form of questionnaire.  This excerpt from Hunton Andrews Kurth’s memo on the case provides an overview of the Vice Chancellor’s reasoning:

The Court of Chancery held that the record ownership requirement was unambiguous and it was undisputed that the nominating stockholder was not a record owner. It explained that the Cede & Co. letter did not cure this deficiency. Although the plaintiff argued that Cede & Co.’s role was purely ministerial, the court focused on the fact that Cede & Co. was not making the nomination. The court characterized Cede & Co.’s letter as “non-committal and “distanc[ing] itself from having any role in the nomination.” The court also found that the stockholder failed to comply with the bylaw requirement that it use the corporation’s form of questionnaire.

Having concluded that the stockholder did not comply with the bylaws, the court turned to whether the board acted inequitably by refusing to waive the non-compliance or provide Alden an opportunity to cure the deficiencies. The court observed that requiring a nomination to come from a record holder was not unreasonable because it “ensures order and gives the corporation certainty that the party attempting to take action based on a right incidental to share ownership is, in fact, a stockholder.” In response to the stockholder’s argument that the corporation had refused to provide its form of questionnaire when requested, the court said that “if only record holders could make nominations, it seems justifiable that [the corporation] would not undertake the process of providing a questionnaire unless a record holder inquired.”

The memo also provides several key takeaways from the decision, including the fact that while courts can still review a board’s response to a stockholder’s failure to comply with an advance notice bylaw under equitable principles, they are typically unwilling to set those requirements aside when the stockholder was responsible for the problem.

John Jenkins