A recent Delaware Court of Chancery decision interpreted an advance notice bylaw in a manner that disapproves of the attempt by the company to require onerous and extensive questions to be completed and returned within a five-day period before the proposed nominations to the board would be considered. The decision in Saba Capital Master v. Blacksock Credit Allocation Income Trust, C.A. No. 2019-0416-MTZ (Del. Ch. June 27, 2019), also includes useful nuggets of legal principles on related topics.

Key Takeaways:

The court distinguished between a request for a preliminary injunction and a request for mandatory injunctive relief. The court noted that mandatory injunctive relief is governed by the standard applicable to a request for summary judgment. See cases cited at footnote 26.  The injunctive relief sought in this case did not maintain the status quo, but rather seeks affirmative action to be taken by the opposing party.

The court observed that advance notice bylaws are frequently upheld as valid in Delaware but that they will be struck down if they “unduly restrict the stockholder franchise or are applied inequitably.” See footnotes 45 and 46.

The court discussed the well-established case law that triggers heightened judicial scrutiny if there is an unjustified interference with the stockholder franchise, and if fiduciary duties are violated by failing to ensure fair and reasonable nominating and voting procedures for the election of directors. See footnotes 49 – 51, including citations to Blasius Industries, Inc. v. Atlas Corp. and Schnell, Inc. v. Chris-Craft Industries, Inc.

See also discussion of the standard of review when a board impedes or interferes with the effectiveness of a shareholder vote, especially in the context of an election for directors. See cases cited at footnote 52.

In connection with the request for injunctive relief, the court explained that courts have consistently found irreparable harm where corporate management denies shareholders the right to vote their shares or if the management unnecessarily frustrates the stockholders’ attempt to obtain representation on the board of directors. See footnote 54.

The right of shareholders to vote includes the right to nominate a contesting slate of directors, and irreparable harm can be assumed where the lack of injunctive relief might defeat the efforts of stockholders and the will of the majority of stockholders in a vote to elect board members. See footnotes 55 and 56.