DealLawyers.com Blog

Late last month, John blogged about the Delaware Chancery Court’s decision in Vejseli v. Duffy, (Del. Ch.; 5/25) in which Vice Chancellor David upheld a board’s rejection of dissidents’ nominees but allowed the dissidents to resubmit their nominations after concluding the board breached its fiduciary duties when it reduced the number of directors up for election. This Fried Frank alert discussing the decision provides some related practice points for boards considering nomination notices. Here are some of the suggestions:

– A board should understand and be able to articulate the specific corporate purpose for which it rejects a nomination notice. Even if rejection of a nomination notice may be legally permissible on the basis that it does not comply with the company’s advance notice bylaw requirements, the rejection also must be equitable—that is, done for the purpose of advancing a legitimate corporate purpose, and not for pretextual, selfish, or disloyal reasons.

– When considering a nomination notice, a board should consider whether the notice complies with the requirement that all agreements relating to the nomination must be disclosed. Given the court’s focus in Ionic on the validity and importance of this requirement for an informed stockholder vote, a board evaluating a nomination notice should carefully consider what its advance notice bylaw requires with respect to disclosure of agreements and whether the requirement has been met.

– Boards should consider specifying in an advance notice bylaw that recently terminated agreements and surviving provisions of terminated agreements must be disclosed. Even if (as in Ionic) the bylaw does not so provide expressly, the board should consider whether non-disclosure of such agreements or provisions renders the nomination notice at issue non-compliant.

– A board should make governance changes on a “clear day” when possible. Such actions, even if defensive in nature, will be reviewed under the business judgment rule. If such actions are defensive, affect the stockholder franchise, and are not adopted on a clear day, then enhanced scrutiny under the Coster standard will apply instead.

– There remains an open issue as to how broadly the Coster standard applies. It has not been clear whether the Coster standard applies only to board responses taken on a “rainy day” when they relate to the election of directors or issues touching on control—or, instead, as may be suggested by certain language in Coster, it applies to all stockholder votes. As Coster and Kellner, and now Ionic, all have involved elections of directors, the question remains unanswered.

We’re posting memos on this decision in our “Advance Notice Bylaws” Practice Area.

– Meredith Ervine