Bay Capital Finance L.L.C. v. Barnes and Noble Education, Inc. ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
BAY CAPITAL FINANCE, L.L.C.,)
)
Plaintiff, )
)
v. ) C.A. No. 2019-0539-KSJM
)
BARNES AND NOBLE )
EDUCATION, INC., MICHAEL P. )
HUSEBY, EMILY CHIU, DANIEL )
DEMATTEO, DAVID GOLDEN, )
JOHN RYAN, JERRY SUE )
THORNTON, AND DAVID WILSON, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: December 19, 2019
Date Decided: March 30, 2020
Sean J. Bellew, BELLEW LLC, Wilmington, Delaware; David A. Felice, BAILEY
& GLASSER LLP, Wilmington, Delaware; Martin F. Cunniff, RUYAK CHERIAN
LLP, Washington, D.C.; Counsel for Plaintiff Bay Capital Finance, L.L.C.
Raymond J. DiCamillo, Robert L. Burns, Kevin M. Gallagher, Eliezer Y. Feinstein,
Brian S. Yu, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware;
Adam Offenhartz, Aric H. Wu, David F. Crowley-Buck, Peter M. Wade, GIBSON,
DUNN & CRUTCHER LLP, New York, New York; Counsel for Defendants Barnes
and Noble Education, Inc., Michael P. Huseby, Emily Chiu, Daniel DeMatteo, David
Golden, John Ryan, Jerry Sue Thornton, and David Wilson.
McCORMICK, V.C.
The plaintiff desired to nominate a slate of directors for election at the
defendant company’s 2019 annual meeting. The company’s advance notice bylaw
required the plaintiff to own stock in record name by the deadline for nominating
directors. The plaintiff failed to become a record holder before the deadline, and the
company thus rejected the plaintiff’s nomination notice. Undeterred, the plaintiff
commenced this litigation to require the company to accept its nomination notice.
In its verified complaint, the plaintiff claimed that it relied to its detriment on
language in the company’s 2018 proxy that inaccurately described the method for
computing the nomination deadline. The plaintiff further alleged that the board
chairman rejected the plaintiff’s nomination in bad faith due to a personal animus
against the plaintiff’s principal. Based on the plaintiff’s claim that it relied on the
inaccurate proxy language, the plaintiff was granted expedited proceedings toward
a hearing on a motion to preliminarily enjoin the annual meeting.
Discovery pulled at the plaintiff’s verified allegations as if they were loose
threads on a sweater, unraveling them line-by-line to reveal the naked truth. In a
rather shocking turn of events, discovery revealed that the plaintiff never relied on
the inaccurate proxy language. In fact, the plaintiff first learned of the inaccurate
language after it was too late to comply with the bylaw deadline. The plaintiff’s
primary case was thus a bold-faced lie. Naturally, the plaintiff’s motion for a
preliminary injunction was denied. Thereafter, the company issued corrective
disclosures and the annual meeting took place, mooting most of the plaintiff’s
claims.
The defendants have moved for summary judgment on what little remains of
the plaintiff’s case—the claim that the chairman breached his fiduciary duties when
refusing the plaintiff’s nomination notice. This decision grants that motion. The
plaintiff relies on language in the company’s bylaws granting the chairman the
discretion to refuse non-compliant nomination notices. The undisputed facts are that
it was the full board, and not the chairman acting pursuant to this grant of authority,
that rejected the plaintiff’s nomination notice.
The defendants have also moved for fees and costs incurred in connection
with this litigation. This decision grants most of that motion as well. Not only was
the plaintiff’s primary claim based on a lie, but the plaintiff also obstructed discovery
directed to its principal. Either one of these insults likely would have been sufficient
grounds for shifting fees to a degree; the presence of both makes the outcome
unavoidable.
I. FACTUAL BACKGROUND
The facts are drawn from the materials presented in the defendants’ motion
for summary judgment.
2
A. Plaintiff Misses the Deadline for Nominating Directors for
Election.
Plaintiff Bay Capital Finance, L.L.C. (“Bay Capital” or “Plaintiff”) is a private
investment fund formed under Delaware law. 1 Sunil Suri is Plaintiff’s Principal and
Managing Member. 2
Defendant Barnes & Noble Education, Inc. (the “Company”) provides
solutions for the education industry.3 The Company is a Delaware corporation
formed through an August 2015 spin-off from Barnes & Noble, Inc. 4 Its stock trades
on the New York Stock Exchange under the ticker symbol BNED. 5 The individual
defendants (with the Company, “Defendants”) were members of the Company’s
board of directors (the “Board”).6 Defendant Michael P. Huseby served as Chairman
of the Board and CEO of the Company. 7
Between February and June of 2019, Plaintiff submitted four proposals to
purchase the Company’s outstanding equity. 8 The Board rejected each of these
1
C.A. No. 2019-0539-KSJM, Docket (“Dkt.”) 1, Verified Compl. (“Compl.”) ¶ 6; Dkt. 43,
Defs.’ Answer & Affirmative Defenses to Pl.’s Verified Compl. (“Ans.”) ¶ 6.
2
Compl. ¶ 6; Ans. ¶ 6.
3
Compl. ¶ 8; Ans. ¶ 8.
4
Compl. ¶ 1; Ans. ¶ 1.
5
Compl. ¶ 7; Ans. ¶ 7.
6
Compl. ¶ 10; Ans. ¶ 10.
7
Compl. ¶ 9; Ans. ¶ 9.
8
Compl. ¶ 14, Ans. ¶ 14; (2/7/19 proposal); Compl. ¶ 15, Ans. ¶ 15 (3/8/19 proposal);
Compl. ¶ 16, Ans. ¶ 16 (6/7/19 proposal); Compl. ¶ 18, Ans. ¶ 18 (6/27/19 proposal).
3
proposals. 9 Plaintiff’s counsel, Daniel Gordon, suggested that Plaintiff could
nominate a competing slate of directors for election at the 2019 annual meeting.10
Plaintiff resolved to explore this possibility. 11
Since August 2015, the Company’s bylaws have contained an advance notice
provision requiring that a stockholder seeking to nominate director candidates for
election at an annual meeting deliver “notice of nomination” of director candidates
“not less than 90 days . . . prior to the first anniversary of the date of the immediately
preceding annual meeting.” 12 Based on the date of the 2018 annual meeting, the
nomination deadline for the 2019 annual meeting was June 27, 2019. The bylaw
also requires that the stockholder be “a holder of record . . . at the time of giving of
the notice,” which this decision refers to as the record-holder requirement. 13 The
9
Compl. ¶ 14, Ans. ¶ 14 (2/7/19 proposal); Compl. ¶ 15, Ans. ¶ 15 (3/8/19 proposal);
Compl. ¶ 16, Ans. ¶ 16 (6/7/19 proposal); Compl. ¶ 18, Ans. ¶ 18 (6/27/19 proposal).
10
Dkt. 72, Aff. of Brian S. Yu in Supp. of Defs.’ Opening Br. in Supp. of Their Mot. for
Summ. J. & an Award of Fees & Costs (“Yu Aff.”) Ex. 11, at BC EXP 0065711 (Gordon
emailing Suri on 6/4/19: “We would give the CEO Y days to respond and advise him that
absent a sale we intend to pursue either a public tender offer for the company or the
nomination of a new slate of directors in advance of their September annual meeting.”);
Yu Aff. Ex. 12, at BC EXP 0095826–27 (Gordon emailing Suri on 6/12/19, to summarize
his research of the Company’s governance documents and suggest that Plaintiff could
“nominate a replacement slate of Directors to be voted upon at the next annual meeting”).
11
Yu Aff. Ex. 12, at BC EXP 0095825 (Suri responding to Gordon on 6/12/19: “Why don’t
you think of some candidates and I some”).
12
Yu Aff. Ex. 4, art. III, § 3 (Company bylaws effective September 21, 2017); see also Yu
Aff. Ex. 5, art. III, § 3 (Company bylaws effective August 1, 2015).
13
Yu Aff. Ex. 4, art. III, § 3; see also Yu Aff. Ex. 5, art. III, § 3.
4
bylaw further provides that “[t]he chairman of the meeting may refuse to
acknowledge the nomination of any person not made in compliance with the
foregoing procedure.” 14
Plaintiff was generally advised of the nomination deadline as early as April
2019, when Suri retained Citigroup Inc.’s Banking, Capital Markets & Advisory
Group (“Citi”) to advise Plaintiff on strategies for acquiring the Company. 15 Suri
directed Citi to “to review all the records,” which included the Company’s bylaws.16
On April 18, Citi made a presentation to Suri. In an analysis based explicitly on the
Company’s bylaws, Citi identified the Company’s “Advance Notice Requirement”
as one of the potential “Limits on Ability to Change the Board.”17 Citi further
advised: “Nominations and proposals must be received between 90 and 120 days
prior to the first anniversary of the preceding year’s annual meeting.” 18 Suri received
this presentation and recalled reviewing it.19
14
Yu Aff. Ex. 5, art. III, § 3.
15
See Yu Aff. Ex. 10, at BC EXP 0009336 (Citi vice president circulating discussion
materials in advance of 4/18/19 conference call).
16
Yu Aff. Ex. 7 (“Suri Dep. Tr.”) at 150:7–20.
17
Yu Aff. Ex. 10, at BC EXP 0009354 (4/18/19 Citi presentation to Suri summarizing the
Company’s “Defense Profile”).
18
Id. (4/18/19 Citi presentation to Suri).
19
Suri Dep. Tr. at 90:1–19.
5
Plaintiff was specifically advised of the record-holder requirement in June
2018. On June 12, after “reviewing [the Company’s] Corporate By-laws and other
governance documents,” Gordon explained that, in order to nominate a slate of
directors, Plaintiff would need to first become a stockholder of record:
It is important that we become a shareholder and instruct
the brokerage firm to designate us as “record holder” of
the shares. Even if it is just 1,000 shares, it is essential
that our name appear as a shareholder on the Company’s
shareholder registry (instead of having our shares lumped
in with other customers of Merrill Lynch). Whichever
brokerage firm you use can take steps necessary to
designate us as the “record holder” for the shares if they
are specifically directed to do so.20
Suri responded that he was “actioning the purchase of the shares” to be held “in the
name of Bay Capital.” 21 Gordon wrote again on June 13: “Please let me know when
the purchase is completed. . . . We will need to move very quickly . . . .” 22 Bay
Capital did not purchase any shares in the Company on June 12 or 13.23
Plaintiff was advised of an exact date by which he needed to satisfy the record-
holder requirement on June 16. Gordon sent Suri an email flagged as “High
Importance,” which attached a copy of the Company’s bylaws and included the
20
Yu Aff. Ex. 12, at BC EXP 0995826 (6/13/19 email chain between Gordon and Suri
(emphasis added)).
21
Id. at BC EXP 0995825 (6/13/19 email chain between Gordon and Suri).
22
Id.
23
Suri Dep. Tr. at 139:4–6.
6
relevant text of the advance notice bylaw in the body of the email. 24 Gordon
underlined the relevant bylaw language concerning the nomination deadline:
The email then advised: “[T]he preceding annual meeting took place on
September 25, 2018. Therefore, our Notice would need to be served on [the
Company’s] Secretary no later than June 25, 2019.”25 Suri testified that he recalled
receiving and reviewing this email. 26 Suri responded that he agreed and listed a
number of individuals he considered as possible nominees.27 He also said that he
would purchase stock in the Company that week. 28 Bay Capital did not purchase
any stock in the Company that week. 29
24
See generally Yu Aff. Ex. 13 (6/16/19 email from Gordon to Suri summarizing and
attaching the Company’s operative bylaws).
25
Id. at BC EXP 0064466 (emphasis added). Of course, the actual deadline was June 27,
2019, not June 25 as Gordon advised. Although the June 25, 2019 date was a mistake, it
is not one that helps Plaintiff’s case.
26
Suri Dep. Tr. at 189:12–190:9, 191:20–192:1.
27
Yu Aff. Ex. 14, at BC EXP 0064403 (6/16/19 email from Suri listing directors).
28
Id. (6/16/19 email from Suri stating that he “will this week purchase the shares”).
29
See Suri Dep. Tr. at 192:24–193:2; id. at 195:12–25.
7
Plaintiff received three subsequent communications, each conveyed with
increasing urgency, pressing Plaintiff to purchase stock in record name. On June 19,
Gordon reminded Suri that, in order to nominate “a new slate of directors . . . we
need to be a record holder of shares in [the Company].” 30 Suri responded that day:
“The shares are being bought.”31 On June 20, Gordon reminded Suri another time
that “we need Bay Capital to be the ‘shareholder of record.’” 32 And on June 21,
Gordon yet again reminded Suri that Bay Capital’s nomination letter “needs to be
delivered by June 25, 2019 so as to be considered timely under the Company’s By-
laws.”33 Suri did not purchase any stock in the Company on June 19, 20, or 21,
despite these reminders.
It was not until June 24 that Suri placed an order for 25,000 shares of the
Company through a broker. 34 That date risked being too late because the settlement
of any trade typically occurs days after the order is placed,35 and only after a trade
30
Yu Aff. Ex. 15, at BC EXP 0064310 (6/19/19 email from Gordon to Suri).
31
Id. (6/19/19 email from Suri to Gordon).
32
Yu Aff. Ex. 16, at BC EXP 0064204 (6/20/19 email from Gordon to Suri).
33
Yu Aff. Ex. 17, at BC EXP 0032644 (6/21/19 email from Gordon to Suri).
34
Yu Aff. Ex. 18, at BC EXP 0091845 (6/24/19 email from Suri to Gordon forwarding
trade confirmation).
35
Yu Aff. Ex. 21, at CPU0026 (Computershare informing Suri that settlement “normally
takes a minimum of 2 business days to process”).
8
is settled can the broker submit a request to register that stock in the name of the
purchaser such that the purchaser becomes a holder of record.
Suri forwarded the June 24 order confirmation to Gordon, who again advised
Suri: “Please stress to [the broker] the need for [Bay Capital] to be listed as the
shareholder of record. Without this status [the Company] can reject the nomination
notice.”36 Suri acknowledged this communication.37 Gordon then emailed the
broker and Suri together explaining: “There is one technical element to this process
which is critically important. The shares acquired by Bay Capital need to be
registered in Bay Capital’s name. In other words, Bay Capital has to be listed on
the company’s stockholder registry as the Shareholder of Record.” 38
Gordon forwarded the trade confirmation to outside counsel engaged by
Plaintiff to launch the proxy fight on June 25.39 Counsel responded that trade
confirmation did not evidence that Bay Capital’s shares were “held in record name
by Bay Capital Finance, LLC.” 40 Counsel further advised that the process of moving
36
Yu Aff. Ex. 18, at BC EXP 0091845 (6/24/19 email from Gordon to Suri).
37
Id. (6/24/19 response from Suri: “Yes coming”).
38
Yu Aff. Ex. 19, at BC EXP 0063305 (6/24/19 email from Gordon to Suri (emphasis
added)).
39
See Yu Aff. Ex. 20, at BC EXP 0063184 (6/25/19 email from Gordon to Plaintiff’s
counsel).
40
Id. at BC EXP 0063183 (6/25/19 email from Plaintiff’s outside counsel to Gordon)
(emphasis in original).
9
the shares into record name “typically takes 1-3 business days.” 41 Gordon forwarded
that email to JP Morgan and emphasized that “we MUST have the shares listed in
record name by June 27, 2019.” 42
On the morning of June 27, Gordon emailed the Company’s proxy solicitor,
Computershare, to request an “account statement confirming that Bay Capital’s
shares have been transferred to its Computershare account.” 43 Computershare
responded around 11:00 a.m. advising that “[a]s of this morning no shares have been
credited to the account.”44 After some back and forth with Computershare, Gordon
concluded around noon that Bay Capital “[would] not have shares in record name
prior to the close of business [on June 27, 2019].” 45
On the evening of June 27, after Plaintiff learned that it would not timely
satisfy the record-holder requirement, Plaintiff submitted a nomination notice.46 In
the notice, Suri represented repeatedly that Bay Capital was a “stockholder of
41
Id. at BC EXP 0063183–84 (6/25/19 email from Plaintiff’s counsel).
42
Id. at BC EXP 0063183 (6/25/19 email from Gordon forwarding Plaintiff’s outside
counsel’s instructions to JPMorgan).
43
Yu Aff. Ex. 1, at BC EXP 0062980 (6/27/19 email from Gordon to JPMorgan and
Computershare requesting account statement).
44
Id. at BC EXP 0062979 (6/27/19 email from Computershare to Gordon).
45
Id. at BC EXP 0062977 (6/27/19 email from Gordon to Suri).
46
Compl. ¶ 32; Ans. ¶ 32; Yu Aff. Ex. 22 (6/27/19 Bay Capital Notice of Nomination).
10
record.”47 On June 28, Computershare reported to the Company that the shares
posted to Bay Capital’s account on June 28 and that Bay Capital was thus not “a
holder of record as of 6/27/19.”48
Although the Company bylaws granted Huseby the authority to “refuse to
acknowledge” any non-compliant nomination notice, Huseby did not refuse the
nomination notice pursuant to that grant of authority. 49 Rather, the full Board
considered Plaintiff’s nomination notice at a special meeting on June 28. At the
meeting, the Board “unanimously instructed legal counsel to prepare and deliver to
Bay Capital a confirmation that the letter of nomination was invalid under the
Company’s bylaws.” 50 That same day, Company counsel informed Suri and Bay
47
Yu Aff. Ex. 22, at BNED-0001583; id. at BNED-0001585 (stating that Bay Capital held
25,000 shares “in record name”); id. at BNED-0001586 (stating: “The Nominating
Stockholder hereby represents that it is a holder of record of stock of the Company entitled
to vote in the election of directors . . . .”).
48
Yu Aff. Ex. 48, at CPU0021 (6/28/19 email from Computershare).
49
Dkt. 62. Pl.’s Reply Br. in Further Supp. of Its Mot. for a Prelim. Inj. (“Pl.’s PI Reply
Br.”) Ex. PX-15, at 13:7–14 (Huseby testifying at his deposition that he did not read
Plaintiff’s nomination letter); id. at 92:21–24 (same); see also Yu Aff. Ex. 37, at 47:17–
48:25 (Huseby testifying that he did not believe he had discretion to accept a late
nomination); id. at 93:10–13 (Huseby testifying that the rejection was “a decision made by
the board”). When ruling on summary judgment, the Court may consider the factual record
developed by the parties at the preliminary injunction phase. See, e.g., TrustCo Bank v.
Mathews, 2015 WL 295373 (Del. Ch. Jan. 22, 2015).
50
Pl.’s PI Reply Br. Ex. PX-14, at BNED-0002330 (minutes of special meeting of the
Board).
11
Capital that the June 27 nomination notice was invalid because Plaintiff failed to
timely satisfy the record-holder requirement.51
B. Plaintiff Seeks to “Ratchet Up the Pressure” Against the
Company by Pursuing Litigation Based on a False Narrative.
Having missed the deadline due to its own negligence, Plaintiff went looking
for a reason to blame the Company. It was in this context that Suri first learned of
the 2018 proxy language. In a June 27 email, Gordon advised Suri that the 2018
proxy “appears to be in conflict with the bylaws.” 52
Gordon made a good call: the 2018 proxy in fact contained language
conflicting with the advance notice bylaw. Whereas the bylaw pegs the deadline to
the previous annual meeting, the 2018 proxy pegged the deadline to the next annual
meeting, providing:
51
Yu Aff. Ex. 24 (6/28/19 letter from Company counsel to Plaintiff and outside counsel).
In its reply brief at the preliminary injunction stage, Plaintiff argued for the first time that
Defendants “actively work[ed] to disqualify Bay Capital’s nomination” by causing the
employees at Computershare to “run[] around” in disarray. Pl.’s PI Reply Br. at 3–4.
Plaintiff pressed these allegations at the preliminary injunction hearing but again failed to
offer a factual basis to support them. Rather, the record reflects “that the meeting date was
set in accordance with the Company’s historical practices and on a clear day before any
dispute arose with Bay Capital.” Dkt. 74, Oral Arg. & Rulings of the Ct. on Pl.’s Mot. for
a Prelim. Inj. (“PI Oral Arg. Tr.”) at 112:24–113:8; see Dkt. 55, Transmittal Aff. of Eliezer
Y. Feinstein in Supp. of Defs.’ Answering Br. in Opp’n to Pl.’s Mot. for Prelim. Inj.
(“Feinstein Aff.”) Exs. DX-25, DX-27, DX-28, DX-29, DX-11, DX-12, DX-13, DX-14,
DX-15, DX-40, DX-41, DX-42, DX-43, DX-44, DX-48. In fact, after the close of business,
the Company’s counsel even requested that Computershare double check that “there [was]
no transfer effected through [June 27] that is not reflected in the list.” Yu Aff. Ex. 48, at
CPU0022 (6/27/19 email from Company counsel requesting confirmation).
52
Yu Aff. Ex. 1, at BC EXP 0062977 (6/27/19 email from Gordon to Suri).
12
In accordance with the charter of the Corporate
Governance and Nominating Committee, in order for the
Corporate Governance and Nominating Committee to
consider a candidate submitted by a stockholder for
election at a stockholder meeting, the Company must
receive the [requested] information not less than 90 days,
nor more than 120 days, prior to such meeting. 53
Gordon then made a bad call: he advised that Plaintiff could exploit this after-
the-fact discovery by resubmitting its nomination notice and “argu[ing] that we were
in compliance with the proxy language.” 54
Outside counsel repeated Gordon’s advice in an email on June 29, advising
Suri that the Company “[had] a discrepancy in [its] 2018 proxy statement which sets
forth a different nomination deadline than the Bylaws . . . . It is still an issue for the
Company that we can exploit that they disseminated a false and misleading proxy
statement last year to shareholders.”55 In a separate June 29 email, Gordon advised
that Bay Capital could pursue litigation to “ratchet up the pressure” on the Company
to settle with Bay Capital, even though “Delaware case law is strong in terms of
permitting the advance nomination period within the Bylaws.”56
53
Yu Aff. Ex. 6, at 16 (2018 proxy statement). Plaintiff, however, claimed that he could
not have known this at the relevant time, because the Company did not disclose the 2019
annual meeting date until August 15.
54
Yu Aff. Ex. 1, at BC EXP 0062977 (6/27/19 email from Gordon to Suri).
55
Yu Aff. Ex. 26, at BC EXP 0002227 (6/29/19 email chain between Suri and counsel).
56
Yu Aff. Ex. 45, at BC EXP 0062763 (6/29/19 email exchange between Gordon and Suri).
13
Suri approved of Gordon’s proposed approach. In response to the first email,
Suri wrote: “Perfect. As we are invited to debate – then we should oblige! Pursue
unabated.”57 In response to the second email, Suri wrote: “Once we started we
cannot pull back or be reticent. We pursue expeditiously.” 58
Plaintiff’s advisors executed the strategy. On July 1, Plaintiff sent the
Company an “updated Notice of Stockholder Nomination,” an exhibit to which
confirmed Plaintiff was not a record holder until June 28. 59 In a separate July 1 letter
from counsel, Plaintiff identified the discrepancy between the advance notice bylaw
and the 2018 proxy statement and demanded that the Company accept Plaintiff’s
nomination notice.60
Although Gordon had initially advised that Plaintiff should “argue that we
were in compliance with the proxy language,”61 there was no way for Plaintiff to
know at the time whether the nomination in fact complied with the proxy language.
This is because the Company had not yet announced the 2019 annual meeting date
57
Yu Aff. Ex. 26, at BC EXP 0002227 (6/29/19 email from Suri to Plaintiff’s counsel).
58
Yu Aff. Ex. 45, at BC EXP 0062763 (6/29/19 email from Suri to Gordon).
59
Yu Aff. Ex. 25, at BNED-0001449 (7/1/19 email from Plaintiff’s counsel to the
Company); id. at BNED-0001474 (“Direct Registration Advice” indicating the June 28,
2019 record date).
60
Yu Aff. Ex. 2, at 2 (7/1/19 letter from Plaintiff’s counsel to the Company).
61
Yu Aff. Ex. 1, at BC EXP 0062977 (6/27/19 email from Gordon to Suri).
14
from which to count back to the deadline as specified in the 2018 proxy statement.62
Perhaps in view of this dilemma, Plaintiff made a subtle but important shift in
strategy, arguing that it relied on, rather than complied with, the 2018 proxy
disclosure. The letter stated:
Bay Capital relied on the Company’s proxy disclosure in
formulating its plans and timing in nominating a slate of
directors for the Annual Meeting, and only upon its
discovery of the earlier purported deadline under the
Bylaws, delivered the Nomination while its shares were in
the process of being transferred into record name. 63
Of course, Plaintiff’s claim of reliance was false. Plaintiff never relied on the
proxy language in “formulating its plans and timing.” Plaintiff relied on the advance
notice bylaw and did not even know of the proxy language until after it missed the
relevant deadline.
Plaintiff repeated the lie in pleadings filed with this Court. After the Company
responded by denying the July 1 demand, 64 Plaintiff commenced litigation seeking
a preliminary injunction to require the Company to include Plaintiff’s nominated
slate of directors for election at the annual meeting. 65 In the Verified Complaint
62
Coincidentally, it was later revealed that the 2018 proxy’s computation method derived
the same June 27 deadline established by the bylaw.
63
Yu Aff. Ex. 2, at 2 (7/1/19 letter from Plaintiff’s counsel to the Company (emphasis
added)).
64
Feinstein Aff. Ex. DX-61 (7/2/19 letter from Company counsel explaining that Bay
Capital’s nomination was “untimely and invalid”).
65
Compl. ¶ 5.
15
filed on July 15, Plaintiff claimed that it relied on an inaccurate Company disclosure
in the 2018 proxy to determine the deadline by which director nominations were
due. 66 Plaintiff further claimed that Huseby breached his fiduciary duties by refusing
Plaintiff’s nomination. In the motion to expedite, Plaintiff represented that “Bay
Capital initially relied on the Company’s 2018 Proxy Statement under which it faced
no imminent deadline.” 67
The Court granted Plaintiff’s motion to expedite on July 22, 2019. In doing
so, the Court placed great weight on the clear inconsistencies between the advance
notice bylaw and the 2018 proxy language, as well as Plaintiff’s assertion that it had
relied on the 2018 proxy language and thus “had no way of knowing what that
deadline was” because the date of the 2019 annual meeting had yet to be
announced. 68
66
Id. ¶ 30 (“Bay Capital relied on the 2018 Proxy, under which it faced no imminent
deadline. Upon review of the Bylaws, however, the error in the 2018 Proxy became
apparent.”).
67
Dkt. 2, Pl.’s Mot. for Expedited Proceedings ¶ 5; see also Dkt. 53, Telephonic Oral Arg.
& Rulings of the Ct. on Pl.’s Mot. for Expedited Proceedings at 5:8–12 (Plaintiff’s counsel
arguing: “Bay Capital is entitled to a declaratory judgment that the [C]ompany’s erroneous
statements caused confusion about the proper timing and the process for the nomination of
directors”).
68
Dkt. 53 at 29:11–31:13; see also PI Oral Arg. Tr. at 38:1–11, 96:11–17 (“Because, as of
June 27th, the [C]ompany had not yet announced to its stockholders the date of the 2019
meeting, Bay Capital did not believe that deadline applied, I was told. . . . [I]t was on this
theory that I deemed Bay Capital’s claims colorable . . . .”).
16
C. Plaintiff’s Litigation Conduct
Plaintiff requested expedition, and (in the “be careful what you ask for”
category) Plaintiff was granted expedition. After receiving an August 14 hearing
date, Suri realized that it might interfere with his travel plans, and his enthusiasm for
expedition appeared to wane. Plaintiff’s counsel wrote to the Court explaining that
“Suri . . . [would] be out of the country between the commencement of discovery
and August 14,”69 and therefore Suri was unavailable to be deposed absent
scheduling relief. The Court denied the Plaintiff’s requested scheduling relief and
ordered that Suri make himself available for a deposition during the discovery
period.70
Suri then made himself available for a deposition, but he required Defendants’
counsel to depose him in London. He arrived at his deposition 30 minutes late, 71 left
in the middle of the deposition for over two hours to attend meetings he had
69
Dkt. 23 at 4 (7/24/19 letter from Plaintiff’s litigation counsel to the Court requesting
adjournment of the preliminary injunction hearing date).
70
Dkt. 92, Telephonic Scheduling Conference Tr. at 5:19–6:4; see also id. at 7:5–10.
71
Compare Suri Dep. Tr. at 110:22 (Plaintiff’s litigation counsel stating that he had his
client arrive to the deposition at 10:00 a.m.), with Dkt. 36, Notice of Dep. of Sunil Suri
(start time of 9:30 a.m.).
17
scheduled that same day, 72 and unilaterally terminated the deposition in the middle
of defense counsel’s questioning. 73
Worse yet, Suri was evasive in his responses. For example, when asked the
value of assets managed by Bay Capital, Suri responded “between one dollar and as
much as a billion dollars,”74 and he refused to provide any narrower range.75 When
pressed for a more precise estimate, Suri responded: “I gave you the range,
counselor. I said the value of the assets ranges anywhere from a dollar to a billion
dollars. That to me is a reasonable response to your question.” 76 When asked the
number of people employed by Bay Capital and the number of buildings owned by
Bay Capital, Suri responded with additional imprecise ranges.77
D. Defendants Move for Summary Judgment.
At the August 14 preliminary injunction hearing, the Court denied the motion
on the ground that Plaintiff was not likely to prevail on the merits of its claim of
72
Suri Dep. Tr. at 147:19–23 (going off the record at 2:36 p.m. before going back on the
record at 5:16 p.m.).
73
See id. at 244:16–17 (Suri: “Actually, I don’t need to answer any more questions. I am
done . . . .”); id. at 246:4–12 (Plaintiff’s litigation counsel: “We are done. Sir, we are
done. . . . You cannot instruct him to do anything. We are leaving.”).
74
Id. at 34:17–19.
75
See generally id. at 34:20–39:20.
76
Id. at 36:18–23.
77
Id. at 41:20–22 (employees); id. at 14:11–19:23 (buildings).
18
reliance given that Plaintiff’s non-compliance with the Company’s advance notice
bylaw was nobody’s fault but its own.78
At the end of the preliminary injunction hearing, the Court expressed concerns
regarding Plaintiff’s litigation conduct and added that “whether this litigation
conduct warrants fee shifting” was “an open issue” to be decided at a later date.79
After efforts to settle the litigation failed, Defendants moved for free shifting and for
summary judgment. 80 The parties completed briefing on November 11, 2019, 81 and
the Court heard oral arguments on December 19, 2019. 82
II. DEFENDANTS ARE ENTITLED TO SUMMARY JUDGMENT ON
COUNT TWO.
Summary judgment serves to “avoid a useless trial”83 and “should, when
possible, be encouraged for it should result in a prompt, expeditious and economical
78
PI Oral Arg. Tr. at 115:6–12 (finding that “not even Delaware’s strong public policy
favoring the stockholder franchise will save Bay Capital from its dilatory conduct. Bay
Capital blew the deadline. It then made up excuses for doing so. No record evidence
suggests that the company is in any way at fault for that mistake”).
79
Id. at 119:16–21.
80
Dkt. 69, Defs.’ Mot. for Summ. J.; Dkt. 70, Defs.’ Mot. for an Award of Fees & Costs.
81
Defs.’ Opening Br.; Dkt. 78, Pl.’s Answering Br. to Defs.’ Mot. for Summ. J. & an
Award of Fees & Costs (“Pl.’s Answering Br.”); Dkt. 80, Defs.’ Reply Br. in Further Supp.
of Their Mot. for Summ. J. & an Award of Fees & Costs.
82
Dkt. 91, Oral Arg. on Defs.’ Mot. for Summ. J. & Fee Shifting & Mot. to Stay Disc. &
Rulings of the Ct. on Mot. to Stay Disc.
83
McKesson Corp. v. Derdiger, 793 A.2d 385, 388–89 (Del. Ch. 2002).
19
ending of lawsuits.” 84 Court of Chancery Rule 56 provides that summary judgment
is appropriate when “there is no genuine issue as to any material fact and . . . the
moving party is entitled to a judgment as a matter of law.” 85 A party is entitled to
judgment as a matter of law “where there are no material factual disputes.”86 “If,
however, there are material factual disputes, that is, if the parties are in disagreement
concerning the factual predicate for the legal principles they advance, summary
judgment is not warranted.”87 “In discharging this function, the court must view the
evidence in the light most favorable to the non-moving party.” 88
The Complaint asserts three Counts:
• In Count One, Plaintiff seeks a declaration that Plaintiff’s nomination
notice setting forth a slate of candidates was valid and should be
presented to the Company’s stockholders.
• In Count Two, Plaintiff seeks a declaratory judgment that the
Company’s CEO Huseby breached his fiduciary duties by improperly
rejecting Bay Capital’s slate of candidates and not exercising in good
faith his discretion to accept the nominations even if they did not strictly
comply with the bylaws.
• In Count Three, Plaintiff alleges that the Board and Huseby breached
their fiduciaries duties by disclosing misleading information in the
84
Davis v. Univ. of Del., 240 A.2d 583, 584 (Del. 1968).
85
Ct. Ch. R. 56(c).
86
Merrill v. Crothall-American, Inc., 606 A.2d 96, 99 (Del. 1992) (citing Moore v.
Sizemore, 405 A.2d 679, 680 (Del. 1979)).
87
Id.88
Id. (citing Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970)).
20
Company’s annual proxy statement concerning the deadline for
submissions to the annual meeting.89
In response to Defendants’ motions, Plaintiff conceded that Count One had
been mooted by the 2019 annual meeting on September 25, 2019, and that Count
Three had been mooted by supplemental disclosures issued by the Company on
August 15, 2019.90 Those Counts are dismissed,91 and this decision addresses
Defendants’ summary judgment motion as to Count Two only.
In Count Two, Plaintiff points to language in the advance notice bylaw
granting the Board chairman discretion to refuse a non-compliant notice of
nomination: “The chairman of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing
procedure . . . .” 92 Plaintiff alleges that Huseby breached his fiduciary duties by
“[f]ailing to exercise in good faith the discretion granted him under Article III,
Section 3 of the Company’s Bylaws to accept Bay Capital’s nominations even if not
submitted in strict compliance with the Bylaws.”93
89
Compl. ¶¶ 50–60.
90
Pl.’s Answering Br. at 1, 8.
91
Gen. Motors Corp. v. New Castle Cty., 701 A.2d 819, 823 (Del. 1997) (“According to
the mootness doctrine, although there may have been a justiciable controversy at the time
the litigation was commenced, the action will be dismissed if that controversy ceases to
exist.” (citing Glazer v. Pasternak, 693 A.2d 319, 320 (Del. 1997))).
92
Yu Aff. Ex. 5, art. III, § 3.
93
Compl. ¶ 57.
21
For Huseby to be liable for breach of his fiduciary duties under Article III,
Section 3, Huseby would have had to act pursuant to that grant of authority. He did
not. 94 Rather, the full Board considered and rejected the nomination notice at the
July 28 special meeting. 95 Plaintiff’s claim thus lacks any factual predicate. Plaintiff
appears to argue that Huseby should have invoked his discretion under Article III,
Section 3 to make his own determination, a determination that conflicted with the
determination of the full Board. Unsurprisingly, Plaintiff cites to no authority to
support this proposition. The Court is aware of none.
Plaintiff’s sole ploy in response to Defendants’ motion is to state in a
Rule 56(f) Affidavit that it requires additional “information regarding any Board
investigation into Bay Capital or Mr. Suri.” 96 But Plaintiff does not connect this
statement to the relevant determination—Huseby’s (lack of) action under Article III,
Section 3. Moreover, at the summary judgment stage, Rule 56(e) provides that the
94
Yu Aff. Ex. 37, at 47:17–48:25 (Huseby testifying that he did not believe he had
discretion to accept a late nomination); id. at 93:10–13 (Huseby testifying that the rejection
was “a decision made by the board”); see also Pl.’s PI Reply Br. Ex. PX-14, at BNED-
0002330 (draft minutes of a special meeting of the Board stating that “[t]he Board also
unanimously instructed legal counsel to prepare and deliver to Bay Capital a confirmation
that the letter of nomination was invalid under the Company’s bylaws”); Pl.’s PI Reply Br.
Ex. PX-15, at 13:7–14 (Huseby testifying at his deposition that he did not read Plaintiff’s
nomination letter); id. at 92:21–24 (same).
95
Pl.’s PI Reply Br. Ex. PX-14, at BNED-0002330. Because Plaintiff has not challenged
the Board’s action, this decision does not and need not address it.
96
Dkt. 78, Aff. of Sean Bellew in Supp. of Pl.’s Opening Br. Opposing Defs.’ Mot. for
Summ. J. & an Award of Fees & Costs Pursuant to Ch. Ct. R. 56(f) ¶ 5.
22
non-moving party “must set forth specific facts showing that there is a genuine issue
for trial.” 97 “To invoke Rule 56(f), the opposing party must submit an affidavit
requesting discovery and stating its scope.” 98 Although this Court has “broad
discretion” in permitting additional discovery under Rule 56(f), the onus is on the
non-moving party to state “with some degree of specificity, the additional facts
sought by the requested discovery.” 99 Plaintiff received documents and deposition
testimony from Huseby during expedited discovery, 100 and Plaintiff’s Rule 56(f)
Affidavit does allege with any degree of specificity additional facts to be sought
through additional discovery. 101 Thus, Defendants are entitled to summary judgment
on Count Two.
97
Ct. Ch. R. 56(e).
98
Corkscrew Min. Ventures, Ltd. v. Preferred Real Estate Invs., Inc., 2011 WL 704470,
at *3 (Del. Ch. Feb. 28, 2011) (citing von Opel v. Youbet.com, Inc., 2000 WL 130625, at *1
(Del. Ch. Jan. 26, 2000)).
99
Ryan v. Lyondell Chem. Co., 2008 WL 2923427, at *22 (Del. Ch. July 29, 2008), rev’d
on other grounds, 970 A.2d 235 (Del. 2009); see also Wimbledon Fund LP v. SV Special
Situations LP, 2011 WL 378827, at *4 (Del. Ch. Feb. 4, 2011) (explaining that “[t]he
purpose of a Rule 56(f) affidavit is to avoid situations where an opposing party receives an
adverse judgment on a summary judgment record due to a lack of adequate time for
discovery but also to require a party who needs discovery to respond to a summary
judgment motion to timely explain what discovery it needs to do so”).
100
See generally Yu Aff. Ex. 39 (Huseby deposition transcript).
101
It bears noting that although Plaintiff’s motion for a preliminary injunction was denied
on August 14, 2019, Plaintiff did not serve any discovery requests after Defendants moved
for summary judgment on September 4, 2019. Plaintiff also did not serve any discovery
requests before it filed its answering brief on October 11, 2019. A party that delays in
taking discovery, despite having had the opportunity to do so, cannot raise its own failure
as a defense against summary judgment. See Comet Sys., Inc. S’holders’ Agent v. MIVA,
Inc., 980 A.2d 1024, 1033–34 (Del. Ch. 2008); Lyondell Chem., 2008 WL 2923427, at *22
23
III. DEFENDANTS ARE ENTITLED TO A PORTION OF THEIR
ATTORNEYS FEES AND COSTS.
Bad faith litigation conduct allows a court to shift fees as exception to the
American Rule that requires each party to pay its own attorneys’ fees. 102 “Although
there is no single definition of bad faith conduct, courts have found bad faith where
parties have unnecessarily prolonged or delayed litigation, falsified records or
knowingly asserted frivolous claims.” 103 “The bad faith exception is applied in
‘extraordinary circumstances’ as a tool to deter abusive litigation and to protect the
integrity of the judicial process.” 104 “The party seeking fees must demonstrate by
clear evidence that the other party acted in subjective bad faith.”105
Abuse of the discovery process provides another basis to shift fees.
“[S]anctions may be imposed upon anyone participating in a Delaware proceeding
who engages in abusive litigation tactics.”106 “The Delaware Supreme Court has
(declining to excuse the plaintiff’s own delay in requesting additional discovery while the
summary judgment motion was pending).
102
Shawe v. Elting, 157 A.3d 142, 149 (Del. 2017).
103
Johnston v. Arbitrium (Cayman Is.) Handels AG, 720 A.2d 542, 546 (Del. 1998)
(internal citations omitted).
104
Montgomery Cellular Hldg. Co. v. Dobler, 880 A.2d 206, 227 (Del. 2005) (citing
Johnston, 720 A.2d at 546).
105
Shawe v. Elting, 157 A.3d at 150 (citing Lawson v. State, 91 A.3d 544, 552 (Del. 2014));
see also Beck v. Atlantic Coast PLC, 868 A.2d 840, 843 (Del. Ch. 2005) (shifting fees were
plaintiff and his counsel prosecuted the action in bad faith by “fil[ing] false and misleading
complaints with this court that misrepresented factual circumstances at the core of [the]
case”).
106
Kaung v. Cole Nat. Corp., 884 A.2d 500, 508 (Del. 2005) (collecting cases).
24
made clear that “‘[d]iscovery abuse has no place in our courts.’” 107 To remedy
discovery abuses, this Court “has the power to issue sanctions . . . under its inherent
equitable powers, as well as the Court’s inherent power to manage its own affairs.”108
“[W]hen a party fails to comply with discovery orders of the Court or otherwise
engages in discovery abuses, the award of attorneys’ fees and expenses to the
opposing party is mandatory, absent a showing by the wrongdoer that his actions
were substantially justified or that other circumstances make the award unjust.” 109
Plaintiff’s misleading statements at the outset and throughout this case
warrant fee shifting under the bad faith exception to the American Rule. In the
Complaint, Plaintiff averred that it “relied on the 2018 Proxy.” 110 Suri signed the
Verification to the Complaint, affirming “that the factual allegations contained
therein, are true and correct to the best of [his] knowledge.” 111 Plaintiff doubled
down on this representation in its motion for expedited proceedings, where it stated
that “Bay Capital initially relied on the Company’s 2018 Proxy Statement.” 112 As
107
Terramar Retail Ctrs., LLC v. Marion #2-Seaport Tr. U/A/D June 21, 2002, 2018
WL 6331622, at *8 (Del. Ch. Dec. 4, 2018) (quoting Holt v. Holt, 472 A.2d 820, 824 (Del.
1984)).
108
Id. at *10.
109
Bader v. Fisher, 504 A.2d 1091, 1096 (Del. 1986).
110
Compl. ¶ 30.
111
Dkt. 1, Verification to Compl.
112
Dkt. 2, Pl.’s Mot. for Expedited Proceedings ¶ 5.
25
discussed above, the Court granted the motion for expedited proceedings based
primarily on this assertion. 113
As discovery revealed, Plaintiff’s claim of reliance was false. In fact, Suri
never relied on the 2018 proxy statement, and he was unaware of any discrepancies
until June 27, 2019, when Gordon manufactured a basis for ratcheting up the
pressure on the Company. 114 Nevertheless, Plaintiff continued to press its claims of
reliance and moved for a preliminary injunction. In that motion, Plaintiff again
stated that “Bay Capital relied on the Proxy Statements in preparing its slate of
director candidates for consideration at the annual meeting, only accelerating the
process when it realized the Proxy Statements conflicted internally with the
bylaws.” 115 At the preliminary injunction hearing, the Court noted that there was
“no evidence that [Plaintiff] actually relied on the proxy in waiting until the last
minute to buy shares. In fact, the evidence reflects that [Plaintiff] was very much
aware of the advance notice bylaws.”116 In response, Plaintiff’s counsel stated that
“the fact of the matter is, it was relied on.”117 Plaintiff did not provide a factual basis
from which anyone could reach that conclusion.
113
PI Oral Arg. Tr. at 96:8–23.
114
Yu Aff. Ex. 1, at BC EXP 0062977 (6/27/19 email from Gordon to Suri).
115
Dkt. 51, Pl.’s Opening Br. in Supp. of Its Mot. for a Prelim. Inj. at 15–16.
116
PI Oral Arg. Tr. at 31:8–13.
117
Id. at 31:18–19.
26
Plaintiff’s discovery abuses further warrant fee shifting. In particular, Suri’s
conduct during his own deposition raises serious concerns. Plaintiff assigns blame
to Defendants for what happened that day, arguing that they “failed to call the court
for assistance during the deposition, never requested a meet and confer, and never
filed a motion to compel.” 118 But Delaware law imposes no such rigid duties on
parties seeking fees for discovery misconduct.119
In view of Plaintiff’s bad faith conduct and abusive litigation tactics,
Defendants are entitled to recover a portion of their fees. Defendants are entitled to
two-thirds of their fees excluding time spent on the summary judgment briefing.120
The one-third deduction accounts for fees incurred in connection with the
Company’s defense of Count Three. As the Court remarked at the preliminary
injunction hearing, the 2018 proxy language describing the nomination deadline
conflicted with the language of the advance notice bylaw. 121 The Company could
118
Pl.’s Answering Br. at 21.
119
See, e.g., CSH Theatres, LLC v. Nederlander of S.F. Assocs., 2018 WL 3646817, at
*31–36 (Del. Ch. July 31, 2018) (awarding fees and costs in connection with a deposition
where deponent “willfully gave nonsensical and nonresponsive answers”), aff’d sub. nom.
In re Shorenstein Hays-Nederlander Theaters LLC Appeals, 213 A.3d 39 (Del. 2019).
120
The summary judgment briefing primarily focused on Defendants’ fee request, and the
Court does not include time spent preparing motions for fee requests in fee awards. See
Beck, 868 A.2d at 856.
121
PI Oral Arg. Tr. at 119:22–120:2. Plaintiff argues that it is entitled to a mootness fee in
connection with this amendment. But Plaintiff failed to move for mootness fees. Thus,
this decision does not address the merits of Plaintiff’s argument.
27
have mooted the issue early on and avoided any fees; it instead chose to litigate.
Thus, the Court grants Plaintiff that one-third of Defendants’ fees would have been
expended on litigation relating to Count Three.122
IV. CONCLUSION
For the foregoing reasons, Defendants’ Motions for Summary Judgment and
for an Award of Fees and Costs are GRANTED IN PART.
122
See Beck, 868 A.2d at 856 (reducing fee award after granting the “charitable
assumption” that the defendants would have had to expend over half of their requested fees
on a motion to dismiss in the event that the plaintiffs had acted candidly to put forth an
otherwise colorable claim).
28