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This Ropes & Gray memo reviews the Delaware Chancery Court’s recent decision in Rosenbaum v. CytoDyn, (Del. Ch.; 10/21), in which dissident shareholders challenged the company’s enforcement of provisions of an advance notice bylaw.  The Court ultimately ruled in the company’s favor, and in doing so also shed some light on the appropriate standard of review for cases involving the application of validly adopted advance notice bylaws.

The plaintiffs submitted their nominations and supporting materials on the day before the advance notice bylaw’s deadline. Nearly a month after receiving the nomination materials, the company rejected them due to disclosure deficiencies relating to the bylaw’s requirement to identify the persons putting forward the nominations & the nominees’ financial interests in potential transactions with the company.  The plaintiffs sued, claiming that the company was interfering with the election process. This excerpt from the memo describes their argument & the Chancery Court’s response:

The dissident stockholders argued that the board’s rejection of the nomination notice was an action designed to interfere with the effectiveness of the Company stockholder vote, and as a result, under Atlas v. Blasius, the board needed to demonstrate a “compelling justification” for rejecting the notice. The Court of Chancery denied plaintiffs’ motion, reasoning that Blasius applies only when faithless fiduciaries act for the sole or primary purpose of thwarting a stockholder vote, which the board had not done. The Court found that the advance notice bylaw had been adopted on a “clear day” years prior to the current conflict with the dissident stockholders, and was commonplace in its formulation.

The Court considered whether inequitable conduct, including an inequitable application of the advance notice bylaws, had deprived stockholders of “a fair opportunity” to nominate its director slate. The Court noted that, because the dissident stockholders had filed on the eve of the deadline and as a result, had not left any time for the notice to be corrected, the fact that the Board did not promptly send the deficiency notice did not amount to “manipulative conduct” and change the analysis. The Court also noted that the dissident stockholders understood the terms of, and the effects of non-compliance with, the CytoDyn bylaws. As a result, the Court denied the dissident stockholders’ claim to compel CytoDyn to include the dissident’s slate.

It’s worth noting that the defendants contended that the Court should apply a “purely contractual” analysis. Vice Chancellor Slights rejected that argument. Instead, he concluded that the standard set forth in Schnell v. Chris-Craft Industries, (Del.; 11/71), should apply.

Schnell stands for the proposition that inequitable action by a fiduciary does not become permissible simply because it is legally possible, and the Vice Chancellor said that it required the Court to examine whether a validly adopted bylaw had been applied in an inequitable manner & deprived shareholders of a fair opportunity to nominate director candidates. As noted above, VC Slights held that the company had not applied the bylaw in an inequitable manner.

– John Jenkins