In a recent decision, Bay Capital Finance v. Barnes and Noble Education, C.A. No. 2019-0539-KSJM (Del. Ch. Aug. 14, 2019) (transcript), the Delaware Court of Chancery interpreted and analyzed the effect of stockholder noncompliance with the express requirements of an advance notice bylaw. In its decision, the Court of Chancery closely scrutinized the particular facts and circumstances that led to a stockholder's noncompliance with an advance notice bylaw, including whether the company's actions contributed to the stockholder's noncompliance, to determine whether the stockholder's nomination would be permitted.

Bay Capital involved Barnes and Noble Education's advance notice bylaw, which required that a stockholder submitting a director nomination be a "holder of record" as of the date of its nomination. In accordance with the advance notice bylaw, and based on the date of Barnes and Noble Education's 2018 annual meeting, a stockholder was required to submit its nominations for the 2019 annual meeting to Barnes and Noble Education by June 27, 2019. On June 27, Bay Capital, one of Barnes and Noble Education's stockholders, noticed its nomination of a slate of directors for election at the 2019 annual meeting; however, as of June 27, Bay Capital was only a beneficial owner of Barnes and Noble Education stock and not a record holder. Bay Capital became a record holder June 28, one day after the nomination deadline. Because Bay Capital did not meet the advance notice bylaw's record holder requirement June 27, 2019, Barnes and Noble Education rejected Bay Capital's nominations.

Bay Capital filed suit in the Court of Chancery and sought injunctive relief to permit Bay Capital to run its slate of directors at the 2019 annual meeting. The court found that Bay Capital was fully aware of the record holder requirement of Barnes and Noble Education's advance notice bylaw and was advised timely and repeatedly by its own adviser that Bay Capital must be a record holder to notice its nomination and that it could take a few days to complete the process of becoming a record holder. Despite this, the court noted that Bay Capital decided not to purchase its shares and initiate the process of transferring the shares into record name until a few days before the nomination deadline. The court then stated that "not even Delaware's strong public policy favoring the stockholder franchise will save Bay Capital from its dilatory conduct." The court noted that "Bay Capital blew the deadline" and then "made up excuses for doing so." Importantly, the court stated that "no record evidence suggests that [Barnes and Noble Education] is in any way at fault for [Bay Capital's] mistake" and "if this court required [Barnes and Noble Education] to accept the nomination in these circumstances, advance notice requirements would have little meaning under Delaware law."

Bay Capital also argued that Barnes and Noble Education should not have been permitted to enforce the record holder requirement because the company's disclosure regarding the advance notice bylaw in its 2018 proxy statement conflicted with the actual requirements of the advance notice bylaw. Specifically, the proxy statement did not properly disclose how to determine the nomination deadline for the upcoming meeting under the advance notice bylaw, and stated generically that any "stockholder" may submit a nomination, but did not clearly specify that under the advance notice bylaw a nomination could only be submitted by a "stockholder who is a holder of record." Nevertheless, because the record reflected that Bay Capital did not actually rely on the 2018 proxy language when making its nominations, but only attempted to use the inconsistencies in the disclosure as an after-the-fact justification for its noncompliance with the advance notice bylaw, the court found this argument to lack merit. Ultimately, the court denied Bay Capital's motion for a preliminary injunction. However, after denying Bay Capital's motion, the court stated that Barnes and Noble Education should not view the court's ruling as an endorsement of the conflicting disclosure regarding the advance notice bylaw in the proxy statement.

Key Takeaways

This decision underscores a fundamental principle of advance notice bylaws under Delaware law: compliance with the requirements of an advance notice bylaw will generally be required by the Delaware courts unless the advance notice bylaw unduly restricts the stockholder franchise or is applied inequitably. More specifically, Bay Capital demonstrates that Delaware courts will require stockholders to comply with a record holder requirement in an advance notice bylaw, absent any inequitable conduct by the company. Further, an important factor in determining whether an advance notice bylaw—and the company's enforcement thereof—is valid will be whether the company's conduct materially contributed to the stockholder's noncompliance.  When a company does not take any action that causes or materially contributes to the stockholder's noncompliance, Delaware courts will likely be more willing to enforce the requirements of the advance notice bylaw. On the other hand, if the company uses its advance notice bylaw in a manner designed to create unreasonable roadblocks for stockholders to nominate directors for election, Delaware courts may be hesitant to uphold a board's rejection of the nomination.

Finally, Bay Capital serves as a reminder to companies to perform a periodic review of the requirements of their advance notice bylaws and to ensure that the requirements are accurately described to the stockholders, whether it be in a proxy statement or otherwise. For example, if applicable, companies may want to consider using the term "stockholder who is a holder of record" (or other language that more closely tracks the relevant language of the advance notice bylaw provision) rather than using more generic terms, such as "stockholder," in any such disclosure when summarizing the procedures and requirements for stockholder nominations. While the evidence in Bay Capital showed that the nominating stockholder did not in fact rely on the company's proxy statement disclosure when submitting its nominations, a court may be willing to excuse noncompliance with an advance notice bylaw if that noncompliance can be shown to be a result of reasonable reliance on inaccurate disclosures about the requirements of the advance notice bylaw.

Taylor D. Anderson ([email protected]) is an associate of Richards, Layton & Finger. He focuses his practice on transactional matters involving Delaware corporations, including mergers and acquisitions, corporate governance and corporate finance.