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Recent Ruling on Advance Notice Bylaws

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Posted by Trevor S. Norwitz and Sabastian V. Niles, Wachtell, Lipton, Rosen & Katz, on Friday, July 26, 2019
Editor's Note: Trevor S. Norwitz and Sabastian V. Niles are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

A recent decision of the Delaware Court of Chancery provides a valuable reminder both of the validity and efficacy of advance notice bylaws, and of the importance of ensuring that they are carefully crafted and judiciously applied in a contested election.

In its ruling, which the companies have appealed, the Court held that two closed-end funds “went too far” in disqualifying board candidates proposed by an activist hedge fund based on its failure to respond to a lengthy supplemental questionnaire within the five-business day deadline stipulated in the funds’ bylaws. (The hedge fund submitted the completed questionnaires “shortly after” this deadline and receiving a notice of disqualification.) Based on a close reading of the bylaws and fact-specific circumstances, and reminding that the bylaws “constitute part of a binding broader contract among the directors, officers and stockholders” and that “[i]f charter or bylaw provisions are unclear, we resolve any doubt in favor of the stockholder’s electoral rights,” the Court overruled the disqualification and allowed the activist hedge fund to run its candidates.

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