Delaware Courts Continue to Reject Hypothetical, Unripe Bylaw Challenges
On April 14, 2025, the Court of Chancery issued a decision in Siegel v. Morris that reaffirms the limits of challenges to companies’ bylaws based on their language alone. This latest decision (pending appeal) will likely limit bylaw litigation to stockholder claims concerning any bylaw’s actual impact, rather than hypotheticals.
In June 2024, Siegel filed claims challenging the company’s amended advanced notice bylaw, which governs the timing and procedure for a stockholder to nominate a candidate for election as a director. Plaintiff initially argued that the bylaw was facially invalid, meaning that the plain language of the bylaw alone was subject to judicial review and should be held invalid. This facial invalidity challenge differs from a so-called “as-applied” challenge, where a stockholder argues that a board has actually wielded a bylaw in an inequitable manner (e.g., by declaring the stockholder’s nomination notice invalid for failure to comply with an advance notice bylaw).
In July 2024 — just weeks after Siegel was filed — the Delaware Supreme Court issued its decision in Kellner (which we have discussed in prior publications). Kellner underscored the very narrow and high standard for a facial validity claim: a plaintiff must show that the challenged bylaw “cannot operate lawfully under any set of circumstances.” Siegel thereafter amended his complaint to disclaim a facial validity challenge, and attempted to fashion an as-applied challenge instead.
This amendment left plaintiff attempting to fit a square peg into a round hole. Siegel attempted to challenge the company’s advance notice bylaw despite (i) admittedly having no intention to nominate directors for election, nor (ii) identifying any other stockholder who had such intention. As the Court put it, “Plaintiff asks this Court to review the Advance Notice Bylaw now, even though no stockholder presently seeks to nominate a director for election….” It was, therefore, essentially a facial challenge in all but name.
The Court’s analysis on Defendants’ motion to dismiss thus understandably focused on the ripeness of the stockholder’s claim. The opinion underscored that Siegel’s advanced notice bylaw challenge was still a hypothetical, as the plaintiff expressed no interest in running a proxy contest, and nor had anyone else.
Importantly, the Court also rejected the notion that a ripe claim existed because the Board had “acted defensively” in adopting the advance notice bylaw. Here again, this was because there was no existing stockholder nomination or proxy contest at issue. Plaintiff attempted to point to a few lines from a law firm slide deck regarding the bylaw amendments that referenced stockholder activism, but this was “just not enough… to demonstrate that a genuine, extant controversy exists.” Indeed, as the Court noted, “[i]f a couple of generic law firm slides demand equitable review here, why not, as a practical matter, in essentially every other bylaw case as well?”
Finally, the Court also rejected plaintiff’s effort to create a ripe dispute by highlighting how specific language in the advance notice bylaw had been successfully challenged in other contexts – for example, in the 2021 Williams decision regarding rights plans. But, the Court understandably distinguished an advanced notice bylaw from a rights plan or a dead hand proxy, because the ramifications of these corporate devices differ markedly. Advanced notice bylaws do not trigger potentially devastating equity dilution or debt acceleration. Instead, a stockholder who fails to properly disclose particular communications may face rejection of their director nominees. Importantly, such a stockholder has a number of remedies available: to engage with the board about the matter, sue to obtain equitable relief, or seek to repeal the bylaw via majority stockholder vote.
Siegel reaffirms that the Delaware courts are interested in hearing actual, existing disputes and not hypothetical ones. Companies should continue to assess their bylaws with counsel in the face of these ongoing Delaware case law developments.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.
