Kellner v. AIM ImmunoTech Inc.

Court of Chancery of the State of Delaware · 2023 · Corporations

CorporationsAdvance notice bylawsStockholder franchiseDirector nominationsProxy contestsadvance notice bylawsUnocalSchnell

Facts

AIM had experienced a failed 2022 dissident nomination effort in which the board believed the nominating stockholder concealed the identities and roles of others backing the effort. In March 2023, while another proxy contest was reasonably anticipated, AIM's board adopted amended advance notice bylaws that expanded disclosure requirements. Kellner later submitted a notice nominating himself, Deutsch, and Chioini, but the board rejected it for noncompliance, chiefly because it omitted or misstated arrangements or understandings behind the nomination and also failed to comply with other disclosure requirements. Kellner challenged both the facial validity of the amended bylaws and the board's rejection of his notice.

Issue

Whether AIM's amended advance notice bylaws were valid when adopted in the face of an anticipated proxy contest, and whether the board lawfully and equitably rejected Kellner's nomination notice for failure to comply with valid advance notice requirements. More specifically, the court had to decide which bylaw provisions were proportionate and enforceable, and whether Kellner's notice satisfied those enforceable provisions.

Rule

Advance notice bylaws are generally valid if they reasonably further the legitimate corporate objectives of orderly meetings and informed voting through disclosure, but when adopted or enforced in a context affecting the stockholder franchise they are reviewed under enhanced scrutiny. Under that review, the board must show it reasonably identified a threat to an important corporate interest and that its response was reasonable in relation to the threat and not preclusive or coercive. In applying an advance notice bylaw, courts first construe the bylaw as a contract, resolve ambiguity in favor of stockholders' electoral rights, and then consider whether equity excuses strict compliance. A bylaw that unduly restricts the stockholder franchise or is inequitably adopted or enforced will be struck down or limited.

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Redwood Biologics, a Delaware corporation headquartered in San Diego, expected a proxy contest after an opaque nomination effort the prior year appeared to be backed by undisclosed actors. In response, its board adopted new advance notice bylaws requiring nominees to disclose direct and indirect derivative positions and the dates of first contact among the nominating stockholder and nominees regarding the company or the nomination effort.

If a stockholder challenges the board's adoption of these bylaws, which is the most likely standard and result?

Explanation. When a board adopts advance notice bylaws in a context affecting the stockholder franchise, the court applies enhanced scrutiny using Unocal with sensitivity to Schnell and Blasius principles. Adoption in the face of an anticipated contest does not make bylaws per se invalid. The board must show it reasonably identified a threat to an important corporate interest, such as obtaining transparency for informed voting, and that the response was reasonable in relation to that threat and not preclusive or coercive. Narrow disclosure provisions like derivative-position disclosure and first-contact dates are the type the opinion treated as potentially reasonable. (Derived from Kellner v. AIM ImmunoTech Inc. (n.d.).)