On the eve of the submission deadline prescribed by the bylaws, a group of dissident stockholders of pharmaceutical firm CytoDyn filed an advance notice of intent to nominate rival candidates to replace the incumbent board at the company’s next annual meeting. Nearly a month later, the board sent a deficiency letter identifying several omissions in the notice. Although the stockholder group filed a supplemental notice with the missing information, the board rejected the notice. The dissident stockholders sought an injunction compelling CytoDyn to allow the nominees to stand for election and argued that the heightened scrutiny of Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988) should apply because the board acted “for the primary purpose of preventing the effectiveness of a shareholder vote,” and that the court should impose a presumption that the conduct was invalid unless the board could provide a compelling justification. The board, on the other hand, argued that the advance notice bylaws were a matter of pure contract law that should be evaluated under the business judgment rule.
Vice Chancellor Slights rejected the application of both standards, finding instead that equitable principles articulated in Schnell v. Chris-Craft Indus., Inc. applied. The court found no basis to apply the exacting Blasius standard because there was no evidence that the board’s denial of the shareholder nominees was the product of “manipulative conduct.” But the deferential business judgment rule was also inappropriate given the structural conflicts that confront any incumbent board when enforcing an advance notice bylaw to reject a proposed rival slate for election to the board. Drawing from the equitable principles in Schnell, the court found that it is the plaintiffs’ burden to prove that there are “compelling circumstances” that justify a finding of inequitable conduct.
Applying this standard, the court found in favor of the board. Even though the board waited nearly a month before sending out its deficiency letter, the plaintiffs waited until the last minute to file their nomination notice knowing the bylaws contained no method to cure, and thus ran the risk of filing a noncompliant notice subject to rejection by the incumbent board. Indeed, the court found that the notice was deficient in two key respects – it did not disclose who supported the nominations and it did not disclose that one of the nominees may seek to facilitate an insider transaction – and thus, the board rejected the notice on reasonable grounds.
The ruling illustrates that Delaware courts will enforce reasonable advance notice bylaws to reject rival board nominees in the absence of inequitable conduct by the incumbent board. However, the Rosenbaum opinion also highlights two scenarios that may have resulted in a different outcome. In Rosenbaum, the court emphasized that CytoDyn’s advance notice bylaws were put in place on “a clear day” years before the controversy. The court also observed that the board’s nearly month-long delay in responding to the shareholders’ nomination notice may have been viewed differently if the plaintiffs’ notice was submitted well in advance of the deadline. Thus, the outcome may be different in instances where an advance notice bylaw was not adopted on a clear day, or where the board remained silent in responding to a nomination notice submitted well in advance of the deadline such that deficiencies could have been timely cured.
Authored by Ryan M. Philp, Allison M. Wuertz, and Matt Ducharme.