DealLawyers.com Blog

Earlier this week in Siegel v. Morse (Del. Ch.; 4/25), the Chancery Court dismissed a stockholder challenge to a company’s recently amended advance notice bylaws as unripe — confirming that Delaware courts must be presented with a genuine dispute before undertaking an equitable review of a company’s bylaws. This Richards Layton alert describes the facts as follows:

In August 2023, the board of directors of The AES Corporation amended AES’s advance notice bylaws following the SEC’s adoption of the universal proxy rule.  [An AES stockholder] sued AES and its board to challenge the amendments. Plaintiff originally claimed that the amended bylaws were facially invalid and that the board breached its fiduciary duties by amending the bylaws . . .

Plaintiff then amended his complaint in light of Kellner, removing his facial invalidity challenge and resting on his fiduciary claim. Plaintiff’s claim focused on two purported issues with the amended advance notice bylaws: the “acting in concert” definition and an ownership provision that required nominating stockholders to disclose any equity interest in AES (including synthetic and derivative ownership interests, short interests, and hedging arrangements), along with their history of ownership of stock or derivative interest in AES (the “Ownership Provision”).  The Ownership Provision also required a nominating stockholder and any person “acting in concert” with such stockholder to disclose any performance-related fees they would receive if AES’s stock appreciated or depreciated.

The court took issue with the fact that the plaintiff wasn’t asking for himself or even asking for a friend. There was no pending or imminent proxy contest, plaintiff did not intend to nominate a director and could not identify any stockholder who “intends to run a proxy contest, is considering running one, or, for that matter, says he, she or it is ‘chilled’ . . . it appears Plaintiff seeks a declaration that the bylaw is ‘unenforceable’ as to all stockholders.”

Plaintiff tried to point to excerpts from slides prepared by the company’s counsel to suggest a selfish, disloyal or defensive motive, but VC Cook disagreed, saying the the board — like many boards — revisited the bylaws after the adoption of the universal proxy rules and the slides contained only “generic references to stockholder activism.” Such references do not “demonstrate that a genuine, extant controversy exists.” Accordingly, VC Cook found the challenge to be hypothetical and “precisely the sort of case” where the court should postpone review until a concrete dispute exists.

– Meredith Ervine