In a previous blog post, we discussed the Delaware Chancery Court’s decision in Saba Capital Master Fund, Ltd. v. Blackrock Credit Allocation Income Trust and its relevance to the interpretation of advance notice bylaw provisions. On appeal, the Delaware Supreme Court reversed the decision of the Chancery Court and strictly applied the deadlines set forth in the defendants’ unambiguous advance notice bylaw provisions.
Background of the Chancery Court Decision
In Saba, the defendants were two affiliated closed-end funds who sought to disqualify the director nominees of an activist shareholder because the activist shareholder did not strictly comply with the requirements of the advance notice provisions of the defendants’ bylaws. As allowed pursuant to the bylaws of the funds, the defendants had requested a response to a supplemental information request from the activist shareholder before a five-business day deadline.
The activist shareholder did not provide its response to the supplemental request until after the five-business day deadline had already passed, and the defendants sought to disqualify the activist shareholder’s nominees on those grounds. Among other arguments, the activist shareholder argued that the scope of the supplemental information request went beyond the specific bounds outlined in the defendants’ bylaws.
The Delaware Court of Chancery agreed with the activist shareholder and found that the supplemental information request exceeded the scope of the director qualification standards articulated in the defendants’ bylaws, and granted the injunctive relief requested by the activist shareholder.
Reversal by the Delaware Supreme Court
On appeal, the Delaware Supreme Court reversed the Chancery Court’s grant of injunctive relief. While the Delaware Supreme Court agreed with the Chancery Court’s interpretation of the relevant bylaws provisions and found that some of the questions were outside the scope permitted by the bylaws, the Supreme Court indicated 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, particularly one that had been adopted on a ‘clear day.’”
The Delaware Supreme Court found that the activist shareholder was obligated to respond to the supplemental information request prior to the expiration of the five-business day deadline.
The Delaware Supreme Court’s decision in this case is instructive from a planning perspective in several respects.
First, the Supreme Court focused on the fact that the bylaw provisions at issue in the case were clear and unambiguous and reiterated that if a bylaw provision was unclear, any doubt would be resolved in favor of the stockholders’ electoral rights. As such, advance notice bylaw provisions must be thoughtfully crafted to ensure such provisions are afforded their intended application.
Second, the Supreme Court’s reasoning suggests that it was relevant that the supplemental information request was not so overly broad so as to preclude a timely response. Reasonableness remains important in this situation and companies should narrowly tailor any information requests to the circumstances and avoid sending questionnaires that seek superfluous information intended to frustrate a timely response by a shareholder.
Finally, the Supreme Court further highlighted the fact that the bylaw provisions were adopted on a “clear day.”
It is critical that companies act proactively to remedy any deficiencies in their advance notice bylaw provisions in advance of an activist engagement. With these considerations in mind, the Delaware Supreme Court’s decision in Saba should give companies comfort that reasonable and thoughtfully crafted advanced bylaw provisions will likely be strictly enforced if contested. More generally, the Delaware Supreme Court’s decision highlights the importance of public companies having well-drafted and modern advance notice bylaw provisions in relation to possible activist campaigns.
If you have any questions, please feel free to email the authors directly or, if applicable, contact your primary Bass, Berry & Sims relationship attorney.
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Public and private companies of all sizes across a variety of industries turn to Bass, Berry & Sims for counsel on a wide range of corporate matters, including mergers, acquisitions and dispositions; capital markets transactions; executive compensation issues; corporate governance; and shareholder activism. We serve as primary corporate and securities counsel to more than 35 public companies and have counseled on 150 deals ranging in size from $20 million to more than $15 billion over the past two years.