On January 13, 2020, the Delaware Supreme Court issued an opinion addressing deadlines and supplemental information requirements under advance notice bylaws. In the opinion, BlackRock Credit Allocation Income Trust v. Saba Capital Master Fund, Ltd.,1 written by Justice Karen Valihura, the Court allowed two closed-end investment funds2 to disregard a stockholder's nomination of directors due to a failure by the stockholder to provide a completed questionnaire by the deadline imposed by the bylaws. This decision reversed the Delaware Court of Chancery, which had issued an injunction requiring the funds to count votes for the stockholder's nominees. The decision provides important guidance for proxy contests going forward and is a strong signal that stockholders ignore clear deadlines in advance notice bylaws at their significant peril.
Factual Background
On March 30, 2019, the stockholder, Saba Capital Master Fund, Ltd. (Saba), provided timely notice of its intention to propose director nominees at two closed-end investment funds managed by an affiliate of BlackRock, Inc. The advance notice bylaws required Saba to include in its nomination notice enough "information to establish to the satisfaction of the Board of Directors that the Proposed Nominee[s] satisf[y] the director qualifications" found in the funds' bylaws. The funds' bylaws further allowed the respective Board of Directors to seek "necessary" and "reasonably requested" updates and supplements to determine that the nominees met the director qualifications. Relying on this provision, the funds requested the completion of a version of the funds' standard director and officer questionnaire that contained almost 100 questions and stretched over 47 pages. The bylaws also provided that any supplemental information requested by the funds had to be provided within five business days after the request.
Saba did not object to the form or timing of the questionnaire and failed to return the questionnaire within five business days. After the funds rejected Saba's nominations for failure to comply with the bylaws, Saba sought preliminary injunctive relief. Saba argued 1) that the deadline for providing the questionnaires had not passed because i) the record date for the annual meeting had not occurred and ii) there was no obligation to update or supplement the information provided about the nominees in Saba's nomination notice until after the record date; and 2) even if the questionnaire was properly issued, much of the content was irrelevant and the questions exceeded the scope of what the funds' advance notice bylaws permitted the funds to request from nominating stockholders.
On Saba's first argument, the Court of Chancery found that the procedure for issuing the questionnaire was unambiguous and that the funds had validly requested supplemental information. On Saba's second argument, the Court of Chancery sided with Saba. The Court found that the funds did not assert that all of the questions in the questionnaire were relevant to determining the qualifications of the nominees. In addition, at minimum, "thirty questions … were not tied to" director qualifications. Therefore, because a significant portion of the questionnaire was not "reasonably requested" nor "necessary" to determine whether Saba's nominees met the funds' director qualification requirements, the Court held that the funds had overstepped their authority in demanding strict compliance from Saba.
The Decision
On appeal, the Delaware Supreme Court reversed the Court of Chancery, holding that the funds could enforce their advance notice bylaws and exclude Saba's nominees. The Court rested its holding on two conclusions: 1) that the bylaws were clear and unambiguous, and 2) that Saba did not return the supplemental questionnaire within the deadline established by the bylaws.
First, the Supreme Court affirmed the Court of Chancery's finding that the procedure for updates and supplements to proposed nominations was clear and unambiguous. The Court noted that although ambiguous bylaws are interpreted in favor of the stockholder franchise, unambiguous requirements are enforced.
Second, the Supreme Court found that Saba had not complied with the requirement to return the requested supplemental information (in the form of the completed questionnaire) within five business days. The Court acknowledged that many aspects of the questionnaire were not tethered to the nominees' qualifications, but it emphasized that many other questions were directly tied to those same qualifications. Relying on principles of contract interpretation, the Court emphasized that Saba, a sophisticated stockholder, remained "silent" within the five-day period and did not raise the concerns identified by the Court of Chancery until much later and as litigation approached, thus creating the appearance of "after-the-fact excuses."
Takeaways
As stockholder activism remains prevalent, this case provides important support for the notion that Delaware courts will, as the circumstances warrant, promote the orderly conduct of stockholder meetings and elections by enforcing well-drafted advance notice bylaws. The Delaware Supreme Court expressed its "reluctan[ce] to hold that it is acceptable to simply let pass a clear and unambiguous deadline contained in an advance-notice bylaw, particularly one that has been adopted on a 'clear day.'"
Going forward, it can be expected that stockholders will look to raise any objections to the requirements of an advance notice bylaw—particularly around the supplementing of information already provided—as early as possible. Companies, in turn, are likely to be scrupulous in enforcing deadlines in their advance notice bylaws.
This case is an important reminder that companies should regularly review their advance notice bylaws to ensure that they unambiguously vest the board of directors with the power to request reasonable information to review and evaluate the stockholder's nominees, and that all procedures and deadlines operate clearly.
Zack Lenox and Nate Emeritz contributed to the preparation of this Wilson Sonsini alert.
[1] C.A. No. 297, 2019 (Del. Jan. 13, 2020).
[2] Although the opinion related to two closed-end investment funds, the advance notice bylaws at the funds were substantially identical to advance notice bylaws used by numerous companies.
