DealLawyers.com Blog

In early January, John blogged about the Chancery Court’s decision in Kellner v. AIM Immunotech (Del. Ch.; 12/23) addressing a challenge to advance notice bylaw amendments. Vice Chancellor Will upheld certain amendments but struck down others. This Morgan Lewis memo discusses the fallout from that decision. Specifically, that “two provisions in particular have been seized upon by the plaintiffs’ class action bar as ‘low hanging fruit’ by which they may extract attorney fees based on the purported benefit conferred when the plaintiffs’ lawyers point out (in a litigation demand, books and records demand, or complaint filed in court) that a company’s bylaws contain the offending provisions.”

The memo says that the “low-hanging fruit” falls into two categories:

(1) language that contemplates that stockholders are “Acting in Concert” with one another absent an express “agreement, arrangement or understanding” or if they act “in substantial parallel” with each other (sometimes referred to as a “wolf pack provision”) and

(2) language that deems two stockholders working with the same third party to be “Acting in Concert” regardless of whether the two stockholders know about each other’s existence (sometimes referred to as a “daisy chain provision”).

This language can sometimes also be found in the definition of a “Stockholder Associated Person.”

It also gives sample language to look out for.

Because stockholder plaintiffs’ lawyers are entitled to attorney fees when a litigation demand, books and records demand or complaint confers a benefit upon the corporation by causing the corporation to correct the offending language, public companies should “promptly create a written, nonprivileged record that they have become aware of the Kellner decision and are taking steps to review and, if warranted, amend their advance notice bylaws.” Here’s more:

If the corporation had recognized the issue and took steps to correct it before the plaintiffs’ firm surfaces with a demand or lawsuit, the plaintiffs’ firm will not be able to prove causation and thus will not be entitled to a fee. As such, corporations are advised to, at minimum, review their advance notice bylaws to determine whether they contain the “Acting in Concert”/“Wolf Pack” and “Daisy Chain” provisions that plaintiffs’ firms are now targeting and document that the review is being conducted in light of the Kellner decision.

In addition, as noted above, there may be other aspects of a corporation’s advance notice bylaws that, while not immediately apparent as with the “Acting in Concert” and “Daisy Chain” provisions, nonetheless could be held to violate the spirit of Kellner and other Delaware case law. Corporations are advised to engage counsel for a full review of advance notice provisions to ensure that, should the advance notice provisions come into play in a contested election, they will withstand judicial scrutiny.

– Meredith Ervine