OK, checked on some other devices:
1) Both my sons use Q6600 towers with ATI 6450 cards and 2 screens at 1080p, so I didn't expect a problem and didn't find one either. Even resizing screen 2 down to 720p, the preferences window was always A) vertically sizable, and B) less than the height of the screen.
2) My wife has a low-end 10.1" eMachines 355 with a 680p height and it had no problem either... The preferences window consistently opened to about 90% of the screen height and was indeed vertically resizable. However on that device, useful preferences navigation was more dependent on vertical scrolling but at least the simple, all settings and save were still accessible and not cut off (as on my i5 Lenovo v570).
3) Our HTPC is a 2gig Intel i3-540 (Intel HD video and win7 32bit) using built-in HDMI at 1080p, which suites us just fine for movies. The room size and 47" screen require using Windows font/icon magnification settings at 150% and the VLC preferences widows has no sizing problems here either.
Back to my fiddling with settings on my PC (the Lenovo V570 laptop):
Since my screen size is just 15.6" and maxes-out at 768p high, I normally have Windows font/icon magnification set at 125%. I set it to 100% and did the normal log-off/on as Windows suggested. Now VLC's preferences opens at 80% of screen height and allows me to resize the preferences window up but not down. On the other devices mentioned, I could reduce the window height to much lower - about 40% of the screen height. This still works and allows me to access the save button, but VLC convenience then forces me the use unacceptably small text and icon sizing on all the other apps I use (a little unfair).
At this point, I'm going to look into Intel display driver updates, GDI issues with other apps, and launching VLC with some Windows compatibility settings. I have tried the removal of %appdata%\vlc as stated in
https://forum.videolan.org/viewtopic.php?f=14&t=85063 but maybe a full removal, registry clean, and re-install will cure this. I'm not sure how many have fiddled with this issue, but since I do IT work, I've seen it before - thankfully, most default settings work just fine. BTW, my Lenovo's graphics chip-set is the Intel HD3000 - Does anyone else have this problem?
So... Using Windows font/icon magnification makes the preference window spill-over the top and bottom of the screen - but should it?