DealLawyers.com Blog

We previously blogged about the Chancery Court’s decision in Kellner v. AIM Immunotech, (Del. Ch.; 12/23), in which Vice Chancellor Will invalidated certain amendments to a company’s advance notice bylaw adopted during a proxy contest, but ultimately concluded that the board acted reasonably in rejecting the investors’ notice of nominations for noncompliance with the advance notice bylaw.  Last week, the Delaware Supreme Court issued an opinion affirming that decision in part and reversing it in part.

The plaintiffs challenged six bylaw provisions, which are detailed in our earlier blog on the case. The Chancery Court invalidated four of the challenged bylaw provisions but upheld two others. The Supreme Court held that, under the circumstances of this case, all of the bylaws had to go. This excerpt from a recent blog by Prof. Ann Lipton summarizes the Court’s reasoning:

First, the Delaware Supreme Court held (and we should all take note of this for future cases) that advance notice bylaws may be evaluated for invalidity, and separately for inequity.  A validity challenge is a facial challenge, and relatively narrow: quoting ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), the Court held “A facially valid bylaw is one that is authorized by the Delaware General Corporation Law (DGCL), consistent with the corporation’s certificate of incorporation, and not otherwise prohibited.”  The fact that it might operate inequitably or unlawfully in some circumstances is not sufficient to render the bylaw invalid.

On that analysis, the Court found that one amended AIM bylaw was invalid, because it was unintelligible: “The bylaw, with its thirteen discrete parts, is excessively long, contains vague terms, and imposes virtually endless requirements on a stockholder seeking to nominate directors….An unintelligible bylaw is invalid under ‘any circumstances.'”

The other bylaws, however, were found to be facially valid.  But, they still had to be “twice-tested” in equity.  And that test is the enhanced scrutiny test, as articulated in Coster v. UIP Companies, 300 A.3d 656 (Del. 2023).  First, the board must identify a threat and act in good faith; second, the board’s response must be proportional.

In this case, the Court found that the totality of the amended bylaws – which were exceptionally broad, required information potentially unknown to the nominee, were ambiguous, unreasonable, and ultimately at odds with the board’s stated purpose of information-collection – suggested that the board did not, in fact, act with a proper purpose when amending them.  Instead, the purpose was to block the dissident entirely.  When it comes to proxy contests, boards may try to inform stockholders, but they can’t substitute their own judgment for the stockholder vote; therefore, all of the bylaws (including the two that Will did not find to be unreasonable) had to be stricken.

I think the Court’s reminder that “when corporate action is challenged, it must be twice-tested – first for legal authorization, and second by equity” is important to keep in mind, and not just for advance notice bylaw challenges. My guess is that the “twice-tested in equity” concept will feature prominently in the parade of case law that’s likely to result from the adoption of new Section 122(18) of the DGCL.

– John Jenkins