Delaware Chancery Court Denies TRO Request Against Advance Notice Bylaw

By Michael Greene

Dec. 17 — The Delaware Chancery Court Dec. 16 denied a plaintiff stockholder's request for a temporary restraining order to enjoin an advance notice bylaw because the plaintiff did not provide compelling evidence that the bylaw's enforcement would be inequitable.

Vice Chancellor Donald F. Parsons Jr. opined that Delaware jurisprudence makes clear that compelling circumstances must exist before the court will invoke its equitable powers to enjoin an advance notice bylaw. Here, the plaintiff failed to meet that standard and the court denied the TRO request.

Advance Notice Bylaw & TRO

The plaintiff, activist hedge fund AB Value Partners LP, owns a 11.1 percent stake in the defendant, Kreisler Manufacturing Corp.

The plaintiff sought to nominate its own competing slate of directors at Kreisler's Dec. 18 annual meeting.

However, the plaintiff did not submits its nominees in accordance with the defendant's advance notice bylaw—which required nominees to be submitted between Sept. 18 and Oct. 18.

Subsequently, the plaintiff filed a request for a TRO to enjoin the defendant from enforcing the advance notice bylaw, alleging that its application is inequitable.

No Colorable Claim

At the outset, Vice Chancellor Parsons noted that advance notice bylaws are “commonplace” and frequently upheld by Delaware courts, though they can be struck down if they are applied inequitably.

Relying heavily on an earlier chancery court opinion—Hubbard v. Hollywood Park Realty Enterprises, Inc.—the plaintiff contended that material events occurred after the bylaw's deadline that rendered its enforcement inequitable.

Parsons noted that cases enjoining advance notice bylaws are “context-specific” applications of the Delaware Supreme Court's opinion in Schnell v. Chris-Craft Industries, Inc.—“a doctrine not lightly invoked.”

According to the court, to prove under Hubbard that enforcement of the bylaw is inequitable, the plaintiff must provide compelling facts showing that after the bylaw's deadline, because of action or inaction by the defendant's board, “circumstances at the Company had materially or radically changed such that equitable relief would be needed to afford the stockholders a fair opportunity to nominate an opposing slate.”

Here, however, the court found that certain changes in stockholder composition, recent increases in management compensation and errors in the company's 2014 meeting notice fell short of Hubbard's standard.

“Under Hubbard, the question is whether the board has shifted direction so markedly in the narrow period of time after the advance notice deadline and before the annual meeting that the stockholders should have the ability to put forward a competing slate of directors and, presumably, propose a different business direction for the corporation,” Parsons wrote.

Here, he found “no evidence that the Board took any action that resulted in a radical change in the Company's direction”

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The opinion is available at http://courts.delaware.gov/opinions/download.aspx?ID=216490