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Following implementation of the SEC’s universal proxy rules, disputes about activists’ compliance with advance notice bylaws have become one of the key battlegrounds in proxy contests. Last week, in Kellner v. AIM Immunotech, (Del. Ch.; 12/23), the Chancery Court addressed a challenge to amendments to a company’s advance notice bylaw adopted during a proxy contest. Vice Chancellor Will upheld certain of those amendments & struck down others, but ultimately concluded that the board acted reasonably in rejecting the investors’ notice of nominations for noncompliance with the advance notice bylaw.

There’s an old adage that says the “politics makes strange bedfellows” and this case makes a strong argument that this adage applies equally to shareholder activism. The activists in this situation were an eclectic group comprised of a convicted felon, a former securities trader, a billionaire investor & minority owner of the Milwaukee Bucks, an investor relations consultant, and – I kid you not – the IR guy’s surfing buddy.

The surfing buddy – who I can’t help picturing as Jeff Spicoli from Fast Times at Ridgemont High – fronted the activists’ efforts to submit a notice of nominations in 2022.  The activist group’s 2022 effort was poorly organized and chaotic, and the company successfully rejected its nominations. However, concerns about the group’s efforts “to conceal who was supporting and who was funding the nomination efforts and to conceal the group’s plans for the Company” & the likelihood of a 2023 proxy contest prompted the board to consult with its legal advisors and adopt amendments to the company’s advance notice bylaws “to better protect AIM and its stockholders against potentially abusive and deceptive practices.”

As expected, the activists took another run at the company in 2023 and submitted a notice of nominations under the terms of AIM’s amended advance notice bylaw. The company rejected that notice, and the plaintiff brought a lawsuit seeking to hold the bylaw amendments invalid and compelling AIM to accept the activists’ nominees. Citing the Delaware Supreme Court’s recent decision in Coster v. UIP Companies, (Del.; 7/23) and noting that the amendments were not adopted on a “clear day,” Vice Chancellor Will evaluated the plaintiff’s claims under the Unocal enhanced scrutiny standard.

She concluded that the board reasonably identified a threat to the proper corporate objectives that prompted it to adopt the bylaw amendments but held that most of those amended provisions were not proportionate responses to that threat.  A total of six bylaw provisions were challenged by the plaintiff. The Vice Chancellor found that the following four provisions were invalid:

–  AAU Provision.  The bylaw amendments included language requiring disclosure of all arrangements, agreements, or understandings (“AAUs”), “whether written or oral, and including promises,” relating to a board nomination.  The provision contained a 24-month lookback period for disclosure of AAUs, and it also contained language requiring disclosure of any AAUs involving persons acting in concert with a particular holder and any “Stockholder Associated Person” (“SAP”). While the Vice Chancellor was not troubled by the lookback provision, she found the definition of SAP included in the bylaw to be unreasonably broad. She concluded that it rendered the AAU provision “overbroad, unworkable, and ripe for subjective interpretation” by AIM’s board.

– Consulting/Nomination Provision. The amendments also required disclosure of AAUs between the nominating holder or an SAP, on one hand, and any of its nominees, on the other, concerning “consulting, investment advice, or a previous nomination for a publicly traded company within the last ten years.”  Vice Chancellor Will concluded that the inclusion of SAPs created the same problems for this provision that it did for the AAU provision, and she also said that it imposed “ambiguous requirements across a lengthy term.”  Ultimately, she concluded that the provision “would give the Board license to reject a notice based on a subjective interpretation of the provision’s imprecise terms” and was invalid.

– Known Supporter Provision.  The amendments included language requiring the nominating stockholder and nominees to list all known supporters as part of the notice. The defendants justified this provision by noting that the Chancery Court had previously upheld language in an advance notice bylaw requiring disclosure of known financial supporters.  The Vice Chancellor was unpersuaded by that argument. She concluded that by adopting a provision that applied ambiguously to “all known supporters,” the board could take a broad reading of the provision and reject the nomination for reasons that a stockholder couldn’t realistically anticipate.

– Ownership Provision.  The amendments required a nominating stockholder to disclose, among the holder’s interest in AIM stock, including shares beneficially owned and synthetic, derivative, and short positions in the stock.  That disclosure requirement extended to SAPs, immediate family members, and persons acting in concert with a nominee.  While observing that disclosure of this nature was “perfectly legitimate” in principle, Vice Chancellor Will found the bylaw language itself to be “indecipherable” and concluded that it “sprawled wildly” beyond that legitimate purpose. She concluded that “the provision seems designed to preclude a proxy contest for no good reason.”

The Vice Chancellor upheld the other two provisions of the bylaw amendments challenged by the plaintiff. Those involved a requirement to disclose the dates of first contact among those involved in the nomination effort, which she concluded was a reasonable approach to the objective of eliciting sufficient information “for the Board to make a recommendation about the nominations and stockholders to cast informed votes.”  She also upheld the bylaw’s requirement that the nominees complete D&O questionnaires.

Despite tossing several of the bylaw amendments, the Vice Chancellor ultimately upheld the board’s decision to reject the activists’ nominations on the basis of their noncompliance with several valid requirements set forth in the advance notice bylaws. She also concluded that the remedy of rejecting the nominations was reasonable and proportionate under the circumstances.

– John Jenkins