Issuer Errs In Permitting Broker Non-Votes But Attorneys' Fees Claim Fails

Broker non-votes can be a source of confusion for those not familiar with how shares of public companies are typically held and stock exchange rules.  A broker non-vote occurs when a broker does not receive voting instructions from its client and does not have authority under stock exchange rules to vote the shares in its discretion.  

Digital Ally, Inc. allegedly permitted brokers to vote in favor of amendments to its articles of incorporation at its 2015 and 2016 annual meetings.  Consequently, the Company treated these amendments as having received the requisite stockholder approval.  Two shareholders, however, alleged that that this error was discernible from a "careful reading" of the Company's Form 8-Ks.  Apparently, they noticed that they reported no broker non-votes on these proposals and it would have been highly unlikely that brokers received voting instructions from all of their clients.  See the Company's Form 8-Ks filed June 12, 2015 and May 13, 2016.  The stockholders sent the company a demand letter and the company responded by admitting its mistakes and rescinding the amendments.  Nonetheless, the stockholders filed a lawsuit seeking $250,000 in attorneys' fees because their demand "conferred a fundamental and substantial benefit" on the company.

The Nevada district court dismissed the stockholders complaint.  Last week, the Nevada Supreme Court reversed on the basis of "no suit, no fee".  Jesseph v. Digital Ally, Inc., 136 Nev. Adv. Op. 59 (2020).  Writing for the court, Justice Abbi Silver found that "reason and policy dictates that an award of attorney fees under the substantial benefit doctrine must be based on predicate litigation". 

Nevada Is Not Delaware

Justice James W. Hardesty dissented, arguing that Nevada should follow the Delaware Court of Chancery's reasoning in Bird v. Lida, Inc., 681 A.2d 399 (Del. Ch. 1996).