Court to Activists (Again): Follow The Rules Or Suffer The Consequences
On February 14, 2022, Vice Chancellor Lori W. Will issued a post-trial decision affirming the Lee Enterprises, Inc. board of directors’ rejection of a shareholder nomination of directors because, in contravention of Lee’s bylaws, the notice neither was submitted by a stockholder of record, nor utilized the company’s required nominee questionnaire forms. This decision in Strategic Investment Opportunities LLC v. Lee Enterprises, Inc. further underscores the Court of Chancery’s recent decision in Rosenbaum v. CytoDyn, Inc., in which (as this blog previously reported here) the Court upheld a board’s decision to reject a nomination notice for failure to comply with information requirements in the governing bylaws.
As in CytoDyn, the bylaws at issue in Lee Enterprises were adopted on a clear day, here approximately two years before the nomination was received. Lee Enterprises’ bylaws provided that, among other things, nomination notices could be submitted by stockholders of record. But here, while the plaintiff was a beneficial owner of stock in Lee Enterprises, it was not a stockholder of record at the time it submitted its nomination notice. Lee Enterprises’ bylaws further provided that nomination notices must include Lee Enterprises’ nominee questionnaire forms, which would be made available to record holders. Given that the plaintiff was not a record holder, it was unable to obtain the company’s required questionnaire forms. Nonetheless, on the date on which nomination notices were due under the bylaws, the plaintiff submitted a nomination notice reflecting that it was the beneficial owner and that Cede & Co. was the record holder, and it also submitted alternative forms that it characterized as “comprehensive customary written questionnaire[s] . . . that [are] substantially similar in scope to the forms of written questionnaires provided by a company’s secretary in like situations.” Six days after the deadline for submitting nomination notices, the plaintiff became a stockholder of record.
After the board of Lee Enterprises rejected the nomination notice for failure to comply with the company’s bylaws, the stockholder plaintiff filed its lawsuit, seeking a declaration that its nomination materials were valid, together with a supporting injunction.
Following expedited proceedings, Vice Chancellor Will held that the rejection of the notice was contractually proper. The Court then shifted to an equitable analysis to consider whether the rejection should nonetheless be set aside due to any manipulative or other improper conduct by the company or the board. Applying an enhanced scrutiny standard of review, the Court found no evidence of manipulative conduct. Rather, the plaintiff delayed in its efforts to organize information necessary to submit a timely nomination notice inclusive of all information required under the bylaws. As a result, the plaintiff’s materials did not comply with the bylaws and the board was within its rights to reject the plaintiff’s notice.
Accordingly, Lee Enterprises is yet another reminder of the importance of advance notice bylaws in director elections, including that reasonable information requirements will be enforced, absent extreme circumstances. And as we saw in CytoDyn, and see again here in Lee Enterprises, adoption of such measures on a clear day is paramount.