In the course of affirming a Court of Chancery decision in a seemingly routine dispute relating to a stockholder’s ability to nominate a slate of directors, the Delaware Supreme Court underscored the importance of parties’ (and counsel’s) candor with the Court and the potential consequences should the Court conclude it has been misled.
Bay Capital Finance, L.L.C. v. Barnes and Noble Education, Inc. arose from Bay Capital’s attempt to propose a competing slate of directors for election at Barnes and Noble Education’s (BNED) 2019 annual meeting. BNED’s bylaws include an advance notice provision requiring that nominations of director candidates must be delivered to the company “not less than 90 days . . . prior to the first anniversary of the date of the immediately preceding annual meeting” and that the nominating stockholder must be “a holder of record . . . at the time of giving the notice.” Based on the date of BNED’s 2018 annual meeting, the deadline for the 2019 election was June 27, 2019.
Although Bay Capital had previously attempted to acquire BNED, it was not a stockholder when it decided to nominate directors, so it bought BNED shares through a broker on June 24. Unfortunately for Bay Capital, it failed to take into account that the securities trade would not settle in time for it to be recorded as a BNED stockholder of record by the June 27 deadline for nominations. When Bay Capital nonetheless submitted its notice of nomination, the BNED board rejected it. Undeterred, Bay Capital resubmitted its notice, pointing to a discrepancy between the bylaws and BNED’s prior proxy statements, which had stated that the nomination deadline would be 90 days from the next annual meeting (rather than 90 days before the first anniversary of the last meeting), and contending that it had relied on the proxy disclosure. After BNED once again rejected the notice as untimely, Bay Capital filed suit against the company and its board, claiming in a verified complaint that it had relied upon and been misled by the company’s erroneous proxy disclosure.
The lawsuit did not go well for Bay Capital. As soon-to-be Chancellor McCormick put it, “[d]iscovery pulled at the plaintiff’s verified allegations as if they were loose threads on a sweater, unraveling them line-by-line to reveal the naked truth.” Discovery revealed that Bay Capital was not even aware of the proxy disclosure at the time that it submitted its nominations and, to the contrary, that it knew of and had discussed internally the correct deadline for several months. The discrepancy regarding the nomination deadline, as it turns out, was discovered by Bay Capital’s counsel after the initial notice of nominations was rejected; counsel then advised Bay Capital to pursue litigation against BNED to “ratchet up the pressure” on the company to settle. In sum, the Court of Chancery concluded that “the plaintiff’s primary case was thus a bold-faced lie.” Making matters worse, the Court found that plaintiff had obstructed discovery by providing evasive answers and then unilaterally terminating the deposition of its principal hours early.
The Supreme Court affirmed the trial court’s grant of summary judgment to the company, as well as an award of more than $850,000 in attorneys’ fees and costs “in view of plaintiff’s bad faith conduct and abusive litigation tactics.” Finally, in what may be viewed as a rejection of extreme chutzpah, both courts slapped down Bay Capital’s argument that it was entitled to a “mootness fee” for having caused the company to correct the discrepancy between its bylaws and its proxy disclosures.
The Bay Capital decision underscores Delaware precedent holding that advance notice bylaws generally will be strictly construed; a failure to comply often will result in the lost opportunity to nominate directors. Equally, if not more important, and certainly more broadly reaching, practitioners and parties have been reminded (to the extent they need to be) that false pleadings and arguments presented knowingly without factual basis may lead to severe sanctions.