By: Joanna Diakos and Marissa Leon
In Bay Capital Finance, L.L.C. v. Barnes and Noble Education, Inc. (C.A. No. 2019-0539-KSJM), the Delaware Court of Chancery (the “Court”) enforced a company’s advance notice provision in its bylaws, dismissed a stockholder’s breach of fiduciary claim against a company’s chairman and ordered the stockholder to pay the defendants’ attorneys’ fees as a result of its bad faith litigation conduct.
Bay Capital Finance, L.L.C., a private investment fund (“Plaintiff”) sought to conduct a proxy contest for board representation at Barnes & Noble Education, Inc.’s (the “Company”) annual meeting. The Company’s bylaws contained an advance notice provision requiring that a stockholder seeking to nominate director candidates deliver director nominations not less than 90 days and no more than 120 days prior to the anniversary date of the prior year’s annual meeting of stockholders and that a stockholder must be a record holder as of the notice deadline in order to nominate directors. The Plaintiff submitted a timely notice on the last day to submit director nominations for the Company’s 2019 annual meeting, however the Plaintiff missed the deadline to become a holder of record despite repeated reminders. Following the advance notice deadline, the Board of Directors of the Company (the “Board”) held a special meeting and unanimously decided that the Plaintiff’s nomination was invalid under the Company’s bylaw record-holder requirement. Plaintiff searched for a way around his own negligence for having failed to abide by the bylaw record-holder requirement, and found an excuse in a 2018 proxy statement, which appeared to conflict with the bylaws. In particular, the 2018 proxy incorrectly pegged the deadline to the next annual meeting versus the previous one. Plaintiff used this conflicting language to resubmit its notice and to falsely state that it relied on the proxy language. The Company denied the demand.
Thereafter, the Plaintiff commenced litigation seeking a preliminary injunction to require the Company to accept Plaintiff’s nomination of directors and delay the upcoming annual meeting. Plaintiff claimed in its Verified Complaint that it relied on the inaccurate Company disclosure in the 2018 proxy to determine the deadline by which director nominations were due and believed it had no imminent deadline by which to become a record stockholder. The Court granted Plaintiff’s request for expedited discovery, but ultimately denied the request for a preliminary injunction because discovery revealed that Plaintiff had not in fact relied on the proxy language and that its non-compliance with the Company’s bylaws was nobody’s fault but its own. The Court expressed concerns regarding Plaintiff’s litigation conduct and added that whether fee-shifting was warranted would be addressed at a later date.
After losing its preliminary injunction, the Plaintiff pursued a claim against the Company, the members of the Board and the chairman of the Board (the “Defendants”) alleging that the chairman of the Board breached his fiduciary duties by rejecting Plaintiff’s nominations and not exercising his good faith to accept the Plaintiff’s nominations. In reaching its decision, the Court found that the Plaintiff was advised and aware of the requirements in the bylaws and through no fault of the Company the Plaintiff’s notice was untimely. The Court granted summary judgment for the Defendants on the basis that the Plaintiff was not a record holder on the deadline for submitting director nominations as required by the bylaws and the Company could therefore disregard the Plaintiff’s nominations.
The Court also concluded that the Defendants were entitled to reimbursement of a portion of their attorneys’ fees and costs. The Court found that the Plaintiff’s misleading statements in the complaint and throughout the discovery process amounted to bad faith conduct and abusive litigation tactics. The Court ordered Plaintiff to pay two-thirds of Defendants’ legal fees, excluding time spent on the summary judgment briefing, under the bad faith exception to the American Rule that each party bears its own litigation expenses.