Delaware Court Of Chancery Rejects Challenge To Board’s Enforcement Of Advance Notice Bylaw
On October 13, 2021, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery denied a request for injunctive relief in a stockholder action against the board of CytoDyn (the “Company”). Rosenbaum v. Cyotodyn Inc., C.A. No. 2021-0728-JRS, 2021 WL 4775140 (Del. Ch. Oct. 13, 2021). Plaintiffs attempted to nominate a dissident slate of director candidates. They alleged that the board wrongfully rejected plaintiffs’ timely notice of their nominations. After a trial on a “paper record,” the Court found that plaintiffs’ notice did not comply with the Company’s advance notice bylaw—because it omitted information that was required under the bylaw to have been disclosed—and the board was thus “justified in rejecting” the notice.
The Company’s advance notice bylaw had been in place for years prior and, according to the Court, there was no dispute that it had been adopted on the “proverbial clear day.” The bylaw provided that, for a nomination to be deemed valid, the stockholder must give timely notice—at least 90 days before the annual meeting—and that notice must set forth various categories of information. The requisite disclosures included information required to be disclosed under securities laws and SEC regulations in solicitations of proxies for elections of directors, as well as various specified information about the proposed nominees and their supporters.
Noting that the law in this area “may not be as settled as one would think,” the Court rejected plaintiffs’ argument that the board would have to prove it had a “compelling justification” for the rejection under the enhanced scrutiny standard set forth in Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 660 (Del. Ch. 1988). In this regard, the Court held that Blasius could not be invoked by plaintiffs in the absence of evidence of “manipulative conduct” by the board. Instead, the Court applied contract principles subject to “overarching equitable principles” in connection with the most “sacrosanct” of stockholder rights—voting power—such that plaintiffs could still “turn to equity for relief by proving there are ‘compelling circumstances’ that justify a finding of inequitable conduct.”
The Court concluded that plaintiffs’ nomination notice was deficient because it did not disclose (i) required information about who was supporting plaintiffs’ proxy contest, and (ii) that the leading dissident board candidate was the CEO and substantial stockholder of a competitor that had previously sought a merger with the Company who might seek to facilitate a future combination. Moreover, plaintiffs did not submit their notice until the “eve of the deadline,” leaving no time to fix the deficiencies when identified by the incumbent board. Accordingly, the Court found that the notice did not comply with the applicable bylaw and that there was no evidence of manipulation or inequitable conduct by defendants, and thus entered final judgment in their favor.