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Blackrock Credit Allocation Income Trust v. Saba Capital Master Fund, Ltd.

Supreme Court of Delaware

January 13, 2020

SABA CAPITAL MASTER FUND, LTD. Plaintiff-Below, Appellee.

          Submitted: December 4, 2019

          Court Below: Court of Chancery of the State of Delaware C. A. No. 2019-0416-MTZ

         Upon appeal from the Court of Chancery.

          William M. Lafferty, Esquire, D. McKinley Measley, Esquire, Thomas P. Will, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware. Of Counsel: Tariq Mundiya, Esquire, (argued) Sameer Advani, Esquire, Alexander L. Cheney, Esquire, Brittany M. Wagonheim, Esquire, Willkie Farr & Gallagher LLP, New York, New York for Appellants BlackRock Credit Allocation Income Trust and BlackRock New York Municipal Bond Trust.

          Carmella P. Keener, Esquire, Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware. Of Counsel: Carol S. Shahmoon, Esquire, Gregory E. Keller, Esquire, (argued) Shahmoon Keller PLLC, New York, New York for Appellee.

          Before SEITZ, Chief Justice; VALIHURA and TRAYNOR, Justices.

          VALIHURA, Justice.

         The issue we confront in this case is whether under their respective bylaws, two closed-end investment funds, BlackRock Credit Allocation Income Trust ("BTZ") and BlackRock New York Municipal Bond Trust ("BQH", and with BTZ, the "Trusts"), properly excluded their shareholder, Saba Capital Master Fund, Ltd. ("Saba"), from presenting its slate of dissident trustee nominees for election at the respective annual meetings. The Court of Chancery held that such exclusion was improper. It reasoned that the supplemental questionnaires that Saba's nominees were asked to complete (the "Questionnaire" and collectively, the "Questionnaires"), exceeded the bylaws' scope and, thus, the Trusts were "not permitted to rely on the five-day deadline for Saba's compliance with that request."[1] It also held that laches did not bar Saba's claims for equitable relief.

         On appeal, the Appellants contend that the Court of Chancery erred by issuing an injunction requiring the Trusts to count the votes for Saba's nominees at the respective annual meetings, since they claim that Saba's nominees were ineligible for election because of their failure to timely provide supplemental information in accordance with the clear and unambiguous bylaws. Appellants also contend that the court erred in holding that Saba's claims for equitable relief were not barred by laches.

         On appeal, the parties continue to dispute whether the Questionnaire is the type of "necessary" and "reasonably requested" subsequent information that falls within the meaning of Article I, Section 7(e)(ii) of the Trusts' bylaws. But, importantly, the parties both agree that at least part of the Questionnaire is within the bounds of Section 7(e)(ii), and part is not. It is also undisputed that Saba, upon receipt of the request for supplementation, did not contact the Trusts or seek relief from the deadline. Instead, it let the deadline pass and then complained, raising a number of excuses for not complying with the deadline. We agree with the Vice Chancellor that Section 7(e)(ii) is clear and unambiguous. But we disagree that Saba should be excused from complying with the Bylaws' clear deadline. Further, we affirm the Vice Chancellor's holding as to laches. Accordingly, we AFFIRM in part, and REVERSE in part, and REMAND for further proceedings.

         I. BACKGROUND

         Defendant-Appellants BTZ and BQH are Delaware statutory trusts registered as closed-end investment funds under the federal Investment Company Act of 1940. Defendant-Appellant BlackRock Advisors, LLC advises the Trusts. The individual Defendant-Appellants comprise the Trusts' boards of trustees (the "Boards"). We refer to BTZ, BQH, BlackRock Advisors, LLC, and the individual Defendant-Appellants, collectively, as the "Appellants."

         Plaintiff-Appellee Saba, a Cayman Islands company, holds shares of both Trusts. Saba is managed by Saba Capital Management, L.P., whose managing member is Boaz Weinstein.

          A. The Bylaws

         Article I, Section 7 ("Section 7") and Article II, Section 1 ("Section 1") of the bylaws of BTZ and BQH (collectively, the "Bylaws") are relevant to this appeal. Both sets of Bylaws are identical with respect to those sections.

         Section 7, entitled "Nomination of Directors," sets forth the method by which shareholders can nominate trustees to the Board.[2] The section begins by stating that "[o]nly persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Fund."[3] Section 7(f) further states that "[n]o person shall be eligible for election as a director of the Fund unless nominated in accordance with the procedures set forth in this Section 7 of this Article I."[4]

         When nominating directors for election, under Sections 7(a)-(c), stockholders are required to give timely written notice of a nomination (a "Nomination Notice").[5] Section 7(d) enumerates what a Nomination Notice must contain, which includes "information to establish to the satisfaction of the Board of Directors that the Proposed Nominee satisfies the director qualifications as set out in Section 1 of Article II."[6] It must also contain information required by federal securities laws, including information relating to whether the nominee is an "interested person" under the Investment Company Act of 1940 (the "1940 Act"), and information "that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors in an election contest pursuant to Section 14 of the [Securities Exchange Act of 1934]."[7]

Section 7(e)(ii), the provision in the Bylaws at issue here, reads as follows:
A shareholder of record, or group of shareholders of record, providing notice of any nomination proposed to be made at an annual meeting or special meeting in lieu of an annual meeting shall further update and supplement such notice, if necessary, so that:
(i) the information provided or required to be provided in such notice pursuant to this Section 7 of this Article I shall be true and correct as of the record date for determining the shareholders entitled to receive notice of the annual meeting or special meeting in lieu of an annual meeting, and such update and supplement shall be delivered to or be mailed and received by the Secretary at the principal executive offices of the Fund not later than five (5) business days after the record date for determining the shareholders entitled to receive notice of such annual meeting or special meeting in lieu of an annual meeting; and
(ii) any subsequent information reasonably requested by the Board of Directors to determine that the Proposed Nominee has met the director qualifications as set out in Section 1 of Article II is provided, and such update and supplement shall be delivered to or be mailed and received by the Secretary at the principal executive offices of the Fund no later than five (5) business days after the request by the Board of Directors for subsequent information regarding director qualifications has been delivered to or mailed and received by such shareholder of record, or group of shareholders of record, providing notice of any nomination.[8]

         Section 1 of Article II, entitled "Number and Qualifications," provides an expansive list of qualifications that prospective trustees must meet to serve on either of the Boards. This section lists trustee requirements and restrictions relating to limits on directorship positions, potential conflicts, criminal offenses, prohibited conduct, and various ineligibility provisions contained in certain federal securities laws.[9] The parties agreed in the proceedings below "that some of those qualifications relate to parallel requirements under the Investment Company Act of 1940."[10]

         B. The Nominations Dispute

         On or about March 30, 2019, Saba delivered a timely Nomination Notice to the Trusts pursuant to Section 7 to nominate four individuals for election to both of the Trusts' Boards. The Nomination Notice, according to the Court of Chancery, generally contained the information required under Section 7, "albeit at a high level and without much context or explanation."[11]

         Approximately three weeks later, on April 22, 2019, the Trusts' counsel, Willkie Farr & Gallagher LLP ("Willkie"), emailed Saba in separate emails requesting additional information. Willkie's transmittal email request stated:

Pursuant to Article I, Section 7 of the bylaws of the Fund, I am writing on behalf of the Board of Trustees of the Fund (the "Board") to request additional information with respect to the nominees submitted by Saba Capital Master Fund, LTD (the "Shareholder") for election at the Fund's 2019 shareholder meeting. Please have each of the proposed nominees complete and sign the attached questionnaire and return it to my attention with a copy to Janey Ahn, Secretary of the Fund.
The Board and the Fund each reserves all rights and remedies with respect to the subject matter of this correspondence, including without limitation the right to request additional information from the Shareholder or from the Shareholder's proposed nominees.[12]

         Although it referred to Section 7 generally, the email did not specifically reference Section 7(e)(ii) or the five-business-day response deadline. As explained below, the attached Questionnaire contained a mix of questions, with a significant number of them directly relating to the Section 1 qualifications. Under Section 7(e)(ii), the responses were due on April 29, 2019.

         Saba did not respond to the information request before the due date. On the morning of May 1, 2019, seven business days after making the information request, Willkie emailed Saba on behalf of BTZ declaring that because the Questionnaires have not been completed and returned, "the [Nomination Notice] is invalid under [BTZ's] bylaws and Delaware law."[13]

         That evening, for the first time since sending the April 22, 2019 email inquiry, the Trusts received a response. Saba's counsel, Schulte Roth & Zabel LLP ("Schulte Roth"), emailed Willkie contesting the invalidity determination. It contended that the Trusts' "assertion is incorrect, for several reasons, "[14] and claimed that the Trusts' rejection of the nominations was based "on an overly narrow interpretation of the Bylaws [and] is a transparent attempt to entrench the current Board by artificially imposing restrictions on the shareholder franchise."[15]

         It then defended Saba's lack of response on several grounds. First, Schulte Roth argued that Saba was not obligated to respond to the Questionnaire under the Bylaws because the Trusts sought duplicative information, as the Nomination Notice already contained information sufficient to determine whether the nominees were qualified to serve as a director of an investment company.[16] It further explained that the Trusts could determine, from the information provided in the Nomination Notice, whether the nominee is an "interested person" pursuant to the relevant provisions of the 1940 Act.[17] Schulte Roth also asserted that the information requested was unreasonable because it was duplicative, and to the extent there were any non-duplicative requests, those were "particularly unreasonable" because it refers to information "unrelated to the issue of whether the nominees meet the director qualifications as set forth in the Bylaws."[18]

         Schulte Roth asserted, assuming arguendo that a response was required, that the five business day deadline had not yet been triggered (Saba's "Trigger Theory"). They articulated that position as follows:

Second, even assuming, arguendo, that a response is required, the time for providing the response has not yet run. Article 1, Section 7(e)(i) of the Bylaws provides that a shareholder making a nomination has an obligation to "update and supplement" its notice so that the information provided therein is true and correct as of the record date for the annual meeting for which the notice is being provided, and any such update or supplement must be delivered no later than five business days after such record date. The reference to "subsequent information" in Section 7(e)(ii) plainly indicates that the information called for in that section is to be provided after the "update and supplement" required by Section 7(e)(i) and the record date. As such, because the record date has not yet passed, the Board's request was premature.[19]

         In other words, Schulte Roth understood the two subsections of Section 7(e) to be a conjunctive sequence whereby a request under Section 7(e)(ii) could be made only after the events in Section 7(e)(i) (that is, an update and supplement and the passing of the record date) had occurred. Indeed, Saba's counsel told the Court of Chancery that Saba and the nominees had begun filling out the Questionnaires on April 22, but did not believe the Questionnaires were subject to the five-business-day deadline under Section 7(e)(ii).[20] It nevertheless attached completed Questionnaires to its email response "[i]n an effort to resolve this matter amicably."[21]

         On May 7, Willkie responded to Schulte Roth and reiterated that the Nomination Notice was invalid because Saba failed to timely submit the Questionnaires, and that the Boards, in the exercise of their business judgment, determined not to waive the deadlines.[22]Willkie noted in its response that Saba's contentions in their May 1 response "appear to be litigation positions that Saba hastily concocted as soon as it realized that it had missed a concrete April 29, 2019 deadline established pursuant to the Bylaws."[23] Willkie further responded that the Bylaws at issue had been in effect since September 2010, [24] and that Saba's Trigger Theory was "nonsensical."[25] Willkie then explained that the Nomination Notice contained declaratory statements with no supporting detail, and so it needed more information regarding whether the nominees were "interested persons" under the 1940 Act.[26] It further pointed to inaccuracies or omissions in the submitted Questionnaires, [27]and asserted that "we do not believe you can seriously contend that enforcement of a pre-existing five business day deadline in a bylaw seeking more information about nominees to the board of a public regulated entity is evidence of 'entrenchment.'"[28]

         Saba responded later that day arguing that the nominations were not invalid under the Bylaws and that the Boards were breaching their fiduciary duties.[29] Two days later, on May 9, 2019, Saba sent another letter reasserting that its nominations were valid, and provided explanations for the deficiencies in the Questionnaires the Trusts had noted in its May 7, 2019 correspondence.[30]

         A proxy contest followed. On May 10, 2019, BQH filed its preliminary Schedule 14A with the SEC. The preliminary proxy stated that "[t]he Board has determined the nominations of the Hedge Fund Individuals to be invalid as a result of Saba's hedge fund failing to comply with the Trust's By-Laws."[31] It also urged stockholders "not to sign or return any proxy card sent to you by Saba, even to withhold votes on the Hedge Fund Individuals or to vote against the hedge fund's proposal, because doing so will cancel out any previously submitted votes on the Trust's [] proxy card."[32] Saba filed its competing BQH preliminary proxy on May 14, 2019, which asserted that its "nomination was properly and timely submitted under the Amended and Restated Bylaws of the Fund (the 'Bylaws') and that the Fund's assertions to the contrary are incorrect."[33]

         BTZ filed its preliminary proxy on May 20, 2019, expressing the same position as to Saba's nominations. Saba filed its BTZ preliminary proxy the next day. BQH filed its definitive proxy on May 24, 2019, announcing that the annual meeting would be held on July 18, 2019, and instructing stockholders to "discard any proxy card from Saba as any votes with respect to [its nominees] will not be counted at the meeting."[34] Saba filed its BQH definitive proxy on May 28. On June 5, 2019, BTZ filed its definitive proxy and set its annual meeting date for July 8, three weeks earlier than the prior year's July 30 meeting date.[35]

         C. The Questionnaire

         The scope of the Questionnaire is at the center of this dispute. The cover page of the Questionnaire states:

         This Annual Questionnaire will provide BlackRock with the information needed to:

• prepare regulatory filings, including registration statements filed with the U.S. Securities and Exchange Commission, amendments to such registration statements, annual reports and proxy statements;
• determine whether a Director or nominee may be an "interested person" of a Fund set forth in Schedule I (a "Fund"), as that term is defined under the Investment Company Act of 1940, as amended, and therefore not an independent Director;
• evaluate potential conflicts of interest;
• update records; and
• comply with other applicable laws and regulations.[36]

         There are two parts to the Questionnaire-the general questionnaire, and an "Annex A." The Questionnaire instructs that, in addition to completing the general questionnaire, "[i]f you are nominated to serve as a Director at this year's Annual Meeting of Shareholders, please complete Annex A - Supplemental Questionnaire for Nominees."[37] The Questionnaire as a whole, when counting the sub-questions, consists of nearly one-hundred questions.[38] The Trusts admit that the Questionnaire was not "crafted for this instance"[39]and that some questions do not strictly relate to the Bylaws.[40] However, the Trusts claimed that none of those questions were improper because "they relate to the Code of Federal Regulations with respect to proxy statements, with respect to Section 17(d) of the '40 Act," and to "federal law compliance for potential directors."[41]

         The Court of Chancery requested that the parties provide demonstratives "categorizing whether each of the subpart questions in the Questionnaire related to Section 1's director qualifications or some other purpose."[42] Saba claimed that only one-third sought information relevant to the Section 1 qualifications, whereas the Trusts contended that two-thirds of the questions were relevant to Section 1.[43] Thus, the parties agreed that at least one-third of the questions were not directly related to the enumerated qualifications, and that at least one-third of the questions were.

         D. The Court of Chancery Proceedings

         Saba filed its initial complaint with the Court of Chancery on June 4, 2019, more than three weeks after the Trusts' first preliminary proxy statement was filed, and nearly five weeks after it first learned of the Trusts' position that its nominees were ineligible. Saba asserted four counts, but sought injunctive relief only as to Counts III (breach of Bylaws) and IV (breach of fiduciary duty).[44] On June 12, Saba amended its complaint to include allegations related to the BTZ definitive proxy statement, which was filed with the SEC the day after Saba's initial complaint.[45] With respect to its claim for injunctive relief, Saba asked the court to order Appellants:

to (1) refrain from precluding, invalidating, or interfering with [Saba's] presentation of its four trustee nominees for election to the Board of BTZ and BQH at the 2019 annual meetings of shareholders, and (2) to allow any proxies or votes cast in favor of [Saba's] nominees at the meeting to be counted so that this Court may subsequently determine the outcome of the election and the proper constitution of the Board.[46]

         Saba raised several different theories in its brief in support of its motion for preliminary injunction. It argued that it had submitted a timely Nomination Notice, and that the Questionnaire was not a part of the requirements of a Nomination Notice.[47] Saba also noted that it never received notice of any deficiency in the Nomination Notice. It then argued that there is no provision in the Bylaws that gives the Boards broad authority to make general information requests without warning, nor is there a provision that allows for requests for duplicative information. Saba further argued that its Trigger Theory was the correct reading of Section 7(e), and, therefore, the Trusts' information request was not a supplemental information request under Section 7(e)(ii). Finally, Saba argued that even if the Trusts could request supplemental information under Section 7(e)(ii), the five-business-day deadline did not apply to the Questionnaire because the Trusts did not identify a need for an update and supplement, and the Questionnaire went beyond the allowable scope because it "was not properly limited to the 'director qualifications' requirements of Article II, Section 1."[48]

         The Court of Chancery heard argument on June 25, 2019 in response to Saba's request that the court "rule by June 28 in order to minimize the chance that brokers would discretionarily vote the shares of clients who did not provide voting instructions under New York Stock Exchange rules."[49]

         On June 27, 2019, the court, on a "highly expedited and pre-discovery record, "[50] issued a Memorandum Opinion (the "Opinion") granting mandatory injunctive relief based on Saba's breach of Bylaws claim.[51] In reaching this conclusion, the Court of Chancery agreed with the Trusts that Section 7(e)(ii) was unambiguous. The court first described Saba's main theories as follows:

Although Saba's position appeared to evolve somewhat from briefing to argument, it broadly asserts that a request under Section 7(e)(ii) may only be made subsequent to one or more of the following: an identified change to the contents of a Nomination Notice that requires an update or supplement, an update pursuant to Section 7(e)(i), or an information request under Section 7(d)(i)(C)(6).[52]

         The court dismissed Saba's reading of the Bylaws, rejecting Saba's Trigger Theory and holding that of the Bylaws provisions addressed by the parties, Section 7(e)(ii) is the exclusive method in the Bylaws for the Boards to request supplemental information relating to Nomination Notice.[53] The court thus determined that "the Boards could request supplemental information related to the Nomination [Notice] on April 22 under Section 7(e)(ii)."[54]

         However, the court said that the Trusts "went too far" with the Questionnaire. It explained that Section 7(e)(ii) establishes three limitations on what information the Trusts could request: "the desired information must be (a) for the purpose of determining whether Saba's nominees met Section 1's enumerated requirements, (b) 'reasonably requested' with that scope in mind, and (c) 'necessary' for the Boards' determinations."[55] The court found "that the Questionnaire as a whole was not 'reasonably requested' or 'necessary' to determine whether Saba's nominees met Section 1's requirements, "[56] and held that:

[b]y including in the Questionnaire a substantial number of questions unrelated to Section 1's director qualifications, and nonetheless enforcing the strict five-day deadline to invalidate Saba's nominations, Defendants overstepped their authority under Section 7(e)(ii) while demanding strict compliance from Saba.[57]

         The court also held that, because it was ruling for Saba on Count III, it need not reach any of the claims in Count IV alleging that the Trusts had acted inequitably. Nevertheless, the court stated that it would deny Saba relief "at this stage, "[58] as Saba had not met its burden under the mandatory injunction standard. It concluded that Section 7 of the Bylaws had been adopted on a "clear day" before this proxy contest, and that there was no evidence that they were being applied in bad faith. The court found that Saba's lack of proof was, in part, "a mess of Saba's own making" as it could have brought the claim weeks before it did, and "[t]he emergency nature of [Saba's motion] is, to some degree, a self-inflicted wound."[59] By waiting until June to file its case, Saba eliminated its opportunity to seek meaningful discovery prior to the hearing. However, the court stated ...

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