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UPDATE 2-Hedge fund Marcato sues Deckers over board election

(Adds details from lawsuit, performance of Marcato)

BOSTON, Oct 23 (Reuters) - Marcato Capital Management sued Deckers Outdoor Corp on Monday to force the maker of Ugg boots to hold its annual meeting and classify the hedge fund's board nominees so the company could avoid millions of dollars in financial penalties.

The lawsuit filed in Delaware Chancery Court heightens tensions between Deckers and the hedge fund, which has proposed replacing the company's entire 10-member board.

In the lawsuit, Marcato asked the court to force the company to lock in its annual meeting date for Dec. 14 and to take an administrative step to disable a provision in its credit and employment agreements.

Because Deckers has refused to approve the Marcato nominees, their election could trigger a change in control that could force financial penalties. In the lawsuit, the hedge fund said this could result in more than $120 million in accelerated debt, equity awards, and compensation.

The company and its board could eliminate the problem by simply acknowledging Marcato's nominees as "continuing directors," the lawsuit said. Such a step would not suggest that the company is endorsing the dissidents.

Marcato, which has an 8.4 percent stake in Deckers, said the board held its last annual meeting in September 2016.

Deckers expressed concern earlier this month about engaging in a proxy contest during the winter shopping season, suggesting to the hedge fund that the meeting could be delayed.

The company did not immediately respond to a request for comment.

Marcato, in a statement, described Deckers' posture as a "scorched-earth defense." It is requesting a trial in Delaware in early December.

"Deckers' board must be held accountable for violating the core principles of corporate democracy by preventing shareholders from exercising their right to vote without suffering entirely avoidable, value-destroying consequences," the statement said.

Marcato founder Mick McGuire has been pushing Deckers to sell pieces of its footwear business, buy back shares and overhaul executive compensation. Earlier this month, he said the share price could double by 2020 if the company takes those actions.

The stock dipped 5 cents to $66.04 on Monday. It has traded between $44 to $72.72 in the last 52 weeks.

As of mid-October, Marcato's main fund had returned 14 percent this year, while its smaller Encore fund was up 24 percent. The average activist fund returned 5.7 percent through the end of September, according to research firm HFRI. (Reporting by Svea Herbst-Bayliss; Editing by Jeffrey Benkoe and Lisa Von Ahn)