Sunshine Breaking Through the Clouds: Delaware Supreme Court Sheds Light on Standard of Review for Challenges to Advance Notice Bylaws

On Thursday, the Delaware Supreme Court issued a long-awaited decision regarding the validity and enforceability of certain provisions in a company’s advance notice bylaws.  The Kellner v. AIM Immunotech Inc. decision clarifies how the Delaware courts will evaluate claims challenging an advance notice bylaw.  Critically, it confirms that different standards attach when a plaintiff challenges (i) the language of a company’s bylaw (a so-called facial or validity challenge) in the abstract, absent a proxy contest versus (ii) a board’s decision to adopt, amend, or enforce an advance notice bylaw during a proxy contest (a so-called as applied challenge).  This decision provides helpful guidance to practitioners and will hopefully limit the wave of facial challenge litigation that followed the Kellner trial court ruling.


Voting Commitments Matter and Will Be Enforced: Delaware Supreme Court Affirms Chancery Decision Holding Activist Stockholders to Their Bargain

When companies settle proxy contests with activist stockholders, the activists generally give up stockholder-level influence in exchange for board-level influence.  In a typical agreement in this setting, activists gain board seats in exchange for a commitment to vote their shares with the board’s recommendation on proposals put to stockholders.  Activists also agree to standstill periods in which they refrain from taking actions opposed to the board, and from increasing their holdings above a specified cap.


Protecting Its “Unwaivable Right to a Jury Trial,” California Waves Goodbye to a Delaware Forum Selection Clause

I. Overview of Enforceability of Forum Selection Clauses

The Delaware Court of Chancery has promoted the use of forum selection clauses in corporate charters since its 2010 opinion In re Revlon Inc. Shareholders Litigation. Three years later, in Boilermakers v. Chevron, the Delaware Court of Chancery ruled that forum selection clauses in corporate bylaws are facially valid for types of shareholder litigation, including derivative claims, fiduciary claims, statutory claims under the Delaware General Corporation Law, and claims regarding internal affairs. In light of these decisions, Delaware forum selection clauses contained in corporate charters or bylaws of the type found facially valid in Boilermakers have been enforced by state courts in many states. But a recent decision from a California appellate court suggests that some California courts may be resistant to such provisions based on California public policy in favor of the right to a jury trial.


New Year’s Surprise: Portions of Cloudy Day Advance Notice Bylaw Amendments Called into Question

The Delaware Court of Chancery rang in the new year with a decision calling into question certain provisions in a company’s advance notice bylaws, which had been adopted in the face of an upcoming proxy fight.  On the whole, the Kellner v. AIM Immunotech Inc. decision is yet another reminder of the critical importance of advance notice bylaws and that they are often enforced by Delaware courts.  But companies should work with counsel to consider the impact of this decision on their own bylaws, bearing in mind that considerations may change based on the outcome of a now-pending appeal in Kellner.


Entire Fairness Does Not Require Perfection

The Delaware Supreme Court recently held in In re Tesla Motors Stockholders’ Litigation, ___ A.3d ___, 2023 WL 3854008 (Del. Jun. 6, 2023) (“Tesla”), that an entire fairness analysis does not require perfection, so long as the acquisition itself was the result of fair dealing and fair price. Practitioners and boards engaging with a potentially conflicted transaction would be well served to study this opinion with care, particularly where the potential acquiror cannot (or chooses not to) employ a special committee of independent directors to handle negotiations.


The Board as Activist

The universal proxy rules, which went into effect on September 1, 2022, have shifted the landscape of shareholder activism by allowing shareholders to “mix and match” their votes across proxy cards in contested elections. Since September, the move to candidate-based (rather than slate-based) voting has encouraged activists to nominate smaller, more targeted slates, and the added leverage in settlement negotiations has ultimately resulted in activists winning a larger number of board seats.

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Chancery Cancels Corwin for Post-Close Claims for Injunctive Relief

Earlier this month, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery issued a decision regarding an unsettled question of Delaware corporate law: whether an uncoerced and fully informed vote of disinterested stockholders may ratify and defeat a post-close claim seeking to enjoin certain governance measures and alleged entrenchment devices negotiated by a company’s board as part of a transaction.  The court concluded that such a vote, known commonly as “Corwin cleansing,” does not apply to post-close claims for injunctive relief under Unocal Corp. v. Mesa Petroleum Co.  The court’s decision, at least for now, will have immediate significance for company boards and their advisors when negotiating transactions or stockholder agreements that include measures that may be characterized as defensive or entrenching existing management or directors.


Good Fences Make Good Neighbors and Preserve Attorney-Client Privilege in the Boardroom: A Word of Caution for Boards Navigating Potential Disputes Among Directors or With Funds They Manage

The boardroom frequently presents attorney-client privilege and work product protection issues. The Delaware Court of Chancery’s recent decision in Hyde Park Venture Partners Fund III, LP v. FairXchange, LLC, C.A. No. 2022-0344-JTL (Del. Ch. March 9, 2023), provides a reminder of the importance of vigilance in considering when and how to limit a director’s access to privileged materials in circumstances where directors’ interests may diverge – particularly where directors manage, or are affiliated with, investment funds owning stock of the Company.


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.


Activist Investing Today: Zaba Sees M&A Activism Amid Uncertainty

In the recent podcast episode with The Deal, Derek Zaba, co-chair of Sidley’s Shareholder Activism and Corporate Defense practice, explains why an insurgent investor might be more willing to push for M&A than seek out an operational thesis in today’s volatile markets.

Derek Zaba

Palo Alto, New York