DealLawyers.com Blog

The Delaware Chancery Court established the standard for reopening an advance notice bylaw deadline over 30 years ago in Hubbard v. Hollywood Park Realty Enterprises (Del. Ch.; 1/91). Under that standard, a board has a duty to waive the deadline only if a “radical shift in position, or a material change in circumstances” has occurred after the deadline has passed. Earlier this summer, in Sternlicht v. Hernandez (Del. Ch.; 6/23), Vice Chancellor Fioravanti considered what circumstances would constitute a radical shift or material change. This Fried Frank memo briefly summarizes the facts that the plaintiffs argued constituted a radical shift:

[T]he plaintiff-stockholders sought a preliminary injunction against enforcement by Cano Health, Inc. (the “Company”) of its advance notice bylaw deadline for the nomination of directors at its then-upcoming annual stockholders meeting. The plaintiffs were three of the directors on the Company’s nine-member board, who together had resigned six weeks after the deadline for nominations had passed and then sought to make director nominations. The plaintiffs contended that it would be inequitable to permit enforcement of the deadline, due to the radical change in circumstances at the Company after the nominations deadline (namely, the fracturing of the board and the plaintiffs’ resignations).

In rejecting the plaintiffs’ request to reopen the window, VC Fioravanti noted that the post-deadline changes were not caused by the board majority and clarified the materiality standard in this context:

– In the case of the Company, the post-deadline changes at the Company were not caused by the board, but by a minority faction of the board. The plaintiffs claimed that the board’s response to the CEO’s conduct and the fissure between the plaintiffs and the other outside directors constituted fundamental changes to the Company so as to meet the standard set forth in Hubbard for equitable relief requiring waiver of the advance notice deadline. The court, however, observed that the plaintiffs were “a three-member minority of the board” who were advocating for certain changes. “They never had a majority of the board in their camp who suddenly switched allegiances and radically changed the direction of the Company.” The board majority, in fact, did not effect any change—they “did not even change the status quo, let alone radically shift board allegiances like in Hubbard,” the court wrote.

– The post-deadline change of circumstances was not material in this context. The plaintiff argued that the “materiality” standard for changed circumstances that would support enjoining enforcement of an advance notice deadline is the same standard for “materiality” as applies in the disclosure context. In other words, the plaintiffs appeared to argue that the change of circumstances would be material for this purpose if there was a substantial likelihood that a stockholder would consider any of the board’s conduct after the deadline had passed as “important to know in deciding whether to run a proxy context.”  The court rejected the plaintiffs’ “attempt to import the disclosure standard of materiality into Hubbard.” In the Hubbard context, the court stated, materiality relates to actions taken by the board that “substantially alter the direction of the company.” For example, the court indicated, a board’s refusal to engage with a potential, credible acquiror when its previously stated investment thesis was to sell the company could constitute a “radical change” in the board’s plans for the company that would meet the Hubbard standard.

While the opinion discusses two cases since Hubbard where the court granted motions to expedite claims to enjoin the enforcement of advance notice bylaws, those cases subsequently settled, and, as VC Fioravanti states, “[n]either the court nor the parties have been able to identify any decision of this court in the ensuing 32 years enjoining the application of an advance notice bylaw in reliance on Hubbard.”

– Meredith Ervine