Bylaw Amendments, Shareholder Activism, and Flying Close to the Sun

A case presently before the Delaware Court of Chancery challenging a corporation’s advance notice bylaw amendments, initiated by activist investor Politan Capital Management LP in October 2022,[2] brings to mind the storied Icarus. In the legend, a master craftsman creates wings of feathers and wax for himself and his son to escape danger. He cautions his son Icarus not to fly too close to the sun, lest the wings melt. Icarus, carried away with this device figuratively and literally, flies too high and tumbles into the sea.

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The Era of Section 11 Litigation in State Courts Appears To Be Ending

On April 28, 2022, a state appellate court for the first time addressed provisions in a public company’s certification of incorporation that designate federal court as the sole forum for the litigation of Section 11 claims.  Wong v. Restoration Robotics, Inc.,  – Cal. Rptr. 3d –, 2022 WL 1261423.  Section 11 of the Securities Act of 1933 gives stock purchasers a claim against stock issuers and a broad range of other defendants for materially false or misleading statements in registration statements.  (more…)

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Ten Questions To Ask Before Joining a Public Company Board of Directors

Being asked to join the board of directors of a public corporation is an honor. Board membership can be an enriching experience and an avenue for personal and professional growth. However, in an increasingly litigious, regulated and complex public company landscape, director candidates should conduct thoughtful and targeted due diligence on a company and its existing board practices before committing to a role that should be expected to extend over multiple years. The following are ten questions director candidates should ask themselves and the prospective company. The answers to many of these questions can be found in a company’s public disclosures. To demonstrate diligence and an earnestness in learning more about a company, a prospective board candidate may choose to start there before confirming the answers through conversations with current and former directors, senior management or a recruiter. (more…)

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Court to Activists (Again): Follow The Rules Or Suffer The Consequences

On February 14, 2022, Vice Chancellor Lori W. Will issued a post-trial decision affirming the Lee Enterprises, Inc. board of directors’ rejection of a shareholder nomination of directors because, in contravention of Lee’s bylaws, the notice neither was submitted by a stockholder of record, nor utilized the company’s required nominee questionnaire forms. This decision in Strategic Investment Opportunities LLC v. Lee Enterprises, Inc. further underscores the Court of Chancery’s recent decision in Rosenbaum v. CytoDyn, Inc., in which (as this blog previously reported here) the Court upheld a board’s decision to reject a nomination notice for failure to comply with information requirements in the governing bylaws. (more…)

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Seventh Circuit Says Delaware Companies May Not Bar The Door To Federal Court For Federal Proxy Fraud Derivative Claims

I.        Introduction

The Seventh Circuit recently issued an important decision holding that an exclusive forum provision in a company’s bylaws requiring that all derivative actions be brought in Delaware Chancery Court is unenforceable as applied to derivative cases brought under the federal proxy laws. On its face, Seafarers Pension Plan v. Bradway seems to foreclose the use of exclusive forum provisions for claims for which there is exclusive federal jurisdiction. As the Seventh Circuit notes, that would seem to be consistent with both federal proxy fraud law, which forbids contractual waivers of compliance with the law, as well as Delaware state law. But as discussed below, there is reason to believe that the decision may not be the last word on the topic, and, indeed, that it could end up before the U.S. Supreme Court. (more…)

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Delaware Supreme Court Confirms Appraisal Rights May Be Waived Contractually — Query What Else May Be

On September 13, 2021, over a rare dissent, the Delaware Supreme Court affirmed the Court of Chancery’s dismissal of a petition for appraisal filed by minority stockholders (the “Petitioners”) of Delaware corporation Authentix Acquisition Company, Inc. (“Authentix”). The high court agreed that the Petitioners could waive the statutory right to an appraisal through provisions in a stockholder agreement (the “Stockholders Agreement”). Significantly, this ruling may open the door for corporations to contractually waive other permissions portions of the Delaware General Corporation Law (“DGCL”). (more…)

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Sidley Secures Trial Win; Court of Chancery Enforces Advance Notice Bylaw Where Stockholders Failed To Supply Required Information

On October 13, 2021, Vice Chancellor Joseph R. Slights III issued a post-trial decision affirming the CytoDyn Inc. board of directors’ decision to reject a stockholder nomination of directors for failure to supply information required by the company’s advance notice bylaw. This is the first decision from a Delaware court addressing informational deficiencies in such a nomination notice, and provides important guidance for the many public companies with similar bylaws. (more…)

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Maybe ESG Derivative Cases Aren’t Going to be a Thing After All?

Starting last summer, a series of derivative cases were filed against boards of a number of public companies alleging that the boards failed to create meaningful diversity in their board rooms and amongst the ranks of senior management.  These cases, filed mostly by one law firm and primarily in the Northern District of California, had the markings of becoming a new genre of claim. Two of these cases have now proceeded through their first motion hearing and neither survived intact. Ocegueda v. Zuckerberg et al., No. 20-cv-04444 (the Facebook case) and Lee v. Fisher et al., No. 20-cv-06163 (the Gap case).  Although other cases remain pending and perhaps these two will be refiled, judicial reaction so far suggests that other methods to promote diversity may have greater impact.

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Sara B. Brody

San Francisco, Palo Alto

sbrody@sidley.com

A Reminder of the Obvious: Lawsuit Built on “Bold-Faced Lie” Does not End Well for Plaintiff

In the course of affirming a Court of Chancery decision in a seemingly routine dispute relating to a stockholder’s ability to nominate a slate of directors, the Delaware Supreme Court underscored the importance of parties’ (and counsel’s) candor with the Court and the potential consequences should the Court conclude it has been misled. (more…)

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California Court Upholds Delaware Corporation’s Exclusive Federal Forum Charter Provision

The Superior Court of California, County of San Mateo, recently enforced a Delaware corporation’s charter provision mandating that claims brought under the Securities Act of 1933 be filed in a federal court. This marked the first decision outside of Delaware to enforce an exclusive federal forum provision since the Delaware Supreme Court decided in March 2020 that such provisions are valid under Delaware law.

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