CURRENT MONTH (February 2022)

Delaware Court Interprets Advance Notice Bylaws Under General Principles of Contract Interpretation

By Mark Hobson

In Strategic Investment Opportunities, LLC v. Lee Enterprises, Inc., et al., Vice Chancellor Will analyzed a claim involving an initial step in a hostile bid by the plaintiff, Strategic Investment Opportunities, LLC (“Opportunities”)—or more accurately, the attempt by Opportunities’ ultimate parent, Alden Global Capital LLC—to acquire the defendant, Lee Enterprises, Inc., by trying at the last moment to designate two nominees for election as directors at the defendant’s 2022 stockholders’ annual meeting.

The core issues in this case involved the interpretation and application of the facts at hand to the defendant’s bylaws—specifically, whether at the time of making the nomination Opportunities qualified as a “record holder” pursuant to Section 2(a) of the bylaws, and whether the nomination materials submitted by the plaintiff satisfied the form requirements in Sections 2(b)(1)(viii) and 2(b)(4) of the defendant’s bylaws. Vice Chancellor Will ultimately determined that the plaintiff failed to satisfy either requirement and ruled in favor of the defendant.

First, the court noted that bylaws are a contract between the stockholders, directors, and company, so in construing a corporation’s bylaws, the court is bound by principles of contract interpretation. There is no need to interpret a bylaw or search for the parties’ intent if the language of the bylaw is unambiguous; in such instances, the court will give the bylaw the force and effect required. The court will construe the bylaw as written with words and phrases given their commonly accepted meaning unless context requires otherwise. In this particular case, any ambiguity or lack of clarity in an advance notice bylaw provision would have to be resolved in favor of the shareholder’s fundamental electoral rights. In sum, the court’s review involved determining whether the bylaws were clear and ambiguous, whether the stockholder’s nomination complied with the bylaws, and whether the defendant interfered with the plaintiff’s attempt to comply.

Vice Chancellor Will determined that enhanced scrutiny applied—which requires a context-specific application of the directors’ duties of loyalty, good faith, and care—and concluded that (i) the plaintiff’s nomination was not made by a “record holder,” (ii) defendant’s required form of questionnaire was not included with the Nomination Notice, and (iii) the defendant did not interfere with the plaintiff’s ability to comply with the provisions of the bylaws. In other words, the defendant’s board of directors did not use the “corporate machinery” to obstruct the plaintiff’s efforts to exercise its fundamental right to undertake a proxy contest against management. Rather, the plaintiff chose to wait until the last minute to begin the process of submitting a nomination and ultimately failed to submit a compliant notice.

As a consequence, the court found that the plaintiff did not succeed on the merits of its breach of contract claim or breach of fiduciary duty claim, denied the plaintiff’s request for declaratory and injunctive relief, and entered final judgment in favor of the defendants. 

Terms of Stockholders Agreement Did Not Constitute a Waiver of Stockholder Fiduciary Duty Claims

Manti Holdings, LLC v. The Carlyle Group Inc., C.A. No. 2020-0657-SG (Del. Ch. February 14, 2022) (Glasscock, V.C.)

By Nicholas D. Mozal, Jacqueline A. Rogers, Rebecca Salko, Callan Jackson, and Kelly Henry, Potter Anderson & Corroon LLP

In this memorandum opinion, the Delaware Court of Chancery denied defendants’ motion to dismiss claims alleging breaches of fiduciary duties in connection with a sale of Authentix Acquisition Company, Inc. (“Authentix”). The defendants argued a provision in the Stockholders Agreement waived such claims for breaches of fiduciary duties. The Court concluded the language that purportedly waived such claims was not a clear and knowing relinquishment of the right to seek redress against corporate directors and controllers for breach of fiduciary duty, and therefore, was not a prospective waiver of such claims.

This dispute arose out of a post-closing damages action in which plaintiffs alleged breaches of fiduciary duty by the controlling stockholder and certain directors and officers of Authentix associated with the controlling stockholder relating to the sale in 2017 of Authentix. The plaintiffs, common stockholders of Authentix, alleged that the sale was prompted by a “self-imposed deadline” by the controlling stockholder rather than a desire to maximize value for the common stockholders. The defendants moved to dismiss the Amended Complaint for failure to state a claim and because plaintiffs purportedly waived their right to bring such claims in the Stockholders Agreement, which required the stockholders to “consent to and raise no objections against such transaction” if it was approved by “holders of at least fifty percent (50%) of the then-outstanding Shares.”

In denying defendants’ motion, the Court, relying on case law from the alternative entity context, explained that waivers generally must be clear and unequivocal and that the intent to eliminate fiduciary duties must be plain and unambiguous in the document; otherwise, “the interpretive scales . . . tip in favor of preserving fiduciary duties.” In analyzing whether the language set forth in the Stockholders Agreement was sufficient to constitute a waiver of fiduciary duties, the Court looked to the specific applications of the duties that were further enumerated in the waiver provision, which included an agreement of the stockholders to (i) vote their shares in favor of the transaction, (ii) refrain from exercising appraisal rights, and (iii) execute certain transaction documents. The Court determined that the failure to explicitly include the waiver of fiduciary duties in the carefully enumerated applications set forth in the waiver provision was dispositive and that the obligation to “raise no objections” was not sufficient to constitute a knowing waiver of fiduciary duties.

The Court rejected the defendants’ argument that the provision did not waive the fiduciary duties themselves but rather waived claims for breaches of fiduciary duties, admitting that was “a distinction too fine for [its] legal palate.” That was because a right without an enforcement mechanism is an empty right and would make the fiduciary duties owed to the stockholders illusory. The Court further explained that a more reasonable interpretation of the waiver provision was that the plaintiffs would be precluded from actions that would impede or delay the closing of the transaction.

The Court explicitly did not address whether a waiver of fiduciary duties in the corporate context is permissible under Delaware law. In a footnote, however, the Court noted that permitting such a waiver would be a departure from the norms of corporate governance and would blur the lines between alternative entities and corporations.


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