Two hedge funds failed in their effort to get their slate of two candidates elected to the board of directors of a Delaware company in which they had a 13 percent interest after the Chancery Court rejected the funds’ contention that the company’s by laws on nominating directors were so confusing as to excuse compliance. Vice Chancellor Lamb ruled that the incumbent directors were the only properly nominated candidates and, thus, were rightfully reelected. (Openwaves Systems, Inc. v. Harbinger Capital Partners Master Fund I, Ltd., Del. Chan Ct, May 18, 2007).
Far from being confused, said the court, the hedge funds were simply dilatory in researching the advance notice bylaws while taking the public position of being a passive investor until the very last minute, by which time it was too late for them to muster their candidates and propose a slate.
While acknowledging that the bylaws were not the most well drafted of corporate instruments, the court could not conclude that they left an unreasonably short time period for compliance. Rather, the hedge funds had a reasonable opportunity to submit their nominations and chose not to either out of neglect or indecision, or perhaps to gain a tactical advantage by remaining a passive 13G filer even while they were preparing to wage a proxy contest.
Whatever the reason, continued the Vice Chancellor, the funds did not comply with any deadline under any reasonable reading of the bylaws. The court concluded that the funds’ plea of confusion was merely a litigation device that bore no relationship to the timing of its decision to nominate directors after both possible deadlines for doing so had passed.
Under the federal securities laws, when the funds formed an intent to nominate directors, they were required to amend their filing to disclose the additional information required by Schedule 13D. Throughout the entire relevant time period, the funds were a 13G filer. A Schedule 13G is similar to a Schedule 13D, but it may be filed only if the purchasers have no intent to change or influence the company.
In the court’s view, the funds’ status as a 13G filer further undermined their already weak argument that their failure to comply with the advance notification bylaws was caused by some confusion. On the contrary, the funds’ continued representation that their share purchases were for investment only was entirely consistent with the other evidence tending to show that they did not begin to focus on the process of making board nominations until such time that they could never have complied with either deadline.