Delaware court of chancery on Schnell and advance notice bylaw

The Delaware Court of Chancery has refused to invoke the Schnell doctrine to invalidate the announcement of the annual meeting of stockholders that was given in a way “intended to limit the rights of some stockholders” and that precluded “a contested election for the board.” In Accipiter Life Sciences Fund v. Helfer, LifePoint Hospitals, Inc.’s advance notice bylaw requires a stockholder proposal to be submitted “not later than “the 10^th day following the day on which public announcement of the date of such annual meeting is first made.”

LifePoint intended to hold its annual meeting on May 8, 2006. On January 12, 2006, LifePoint received a stockholder proposal and desired to avoid further proposals. On February 1^st, an associate at LifePoint’s outside counsel, Waller Lansden in Nashville, suggested announcing the May 8^th annual meeting date immediately to establish the deadline for shareholder proposals as early as possible. The Waller Lansden partner forwarded the suggestion to the company, which approved the tactic on February 2nd. The company decided to make the announcement in its fourth quarter earnings press release, which was released on February 6^th (read the press release). The announcement of the annual meeting was paragraph seven of the press release and neither the title of the press release nor any subheading made any allusion to the annual meeting.

Unbeknownst to LifePoint, Accipiter, a large stockholder, intended to wage a proxy fight to elect a slate of dissident directors. Two Accipiter financial analysts read the February 6^th press release but did not notice the annual meeting announcement. Accipiter formally nominated a slate of directors on March 31^st, which LifePoint rejected as untimely.

Vice Chancellor Lamb held that Schnell should be invoked only “where compelling circumstances suggest that the company unfairly manipulated the voting process in such a serious way as to constitute an evident or grave incursion into the fabric of the corporate law.” Although the Vice Chancellor found LifePoint’s actions to be “troubling”, he declined to exercise his equitable powers to provide relief. Perhaps most importantly, the Vice Chancellor found that LifePoint had no reason to know of the proposed dissident slate and thus did not intend to limit such contest for director positions. Nor did the notice render Accipiter’s challenge “extremely difficult or impossible”, presumably not warranting that uniquely Delawarean epithet, Draconian, which no doubt would have impelled relief. Moreover, there was no affirmative decision to omit mention of the meeting in the headline or a subhead, simply a failure to consider whether the announcement should have been highlighted. Finally, and perhaps at bottom, it is undisputed that Accipiter could have met the deadline had its employees simply read the press release carefully.

This case is no doubt rightly decided and raises at least two teaching possibilities. One is reinforcing the importance of careful attention to statutory requirements (by LifePoint and its counsel) and of careful attention to corporate documents (by Accipiter). In that sense this case is a very nice compliment to McKesson Corp. v. Derdiger, (page 546) in which inattention to detail made the company’s annual meeting date arguably invalid. The second teaching point is the ethical one. One could start with the motivations behind, and ethics of, advance notice bylaws. More prominent, of course, is the action of the lawyers: the associate who first spotted the possibility, the partner who forwarded the idea to the company, and the company general counsel who approved the idea.