October 9, 2024
Enforceability of Advance Notice Bylaws: Key Takeaways from Kellner v. AIM ImmunoTech
The Delaware Supreme Court’s July 11, 2024 Opinion issued in Kellner v. AIM ImmunoTech, Inc. offers important guidance under Delaware law for corporate attorneys and advisors, particularly on the enforceability of advance notice bylaws in shareholder activism.
The dispute began when a group of stockholders, led by Ted D. Kellner, sought to replace directors on AIM ImmunoTech’s board due to concerns about mismanagement. After several attempts to nominate new directors, all of which were rejected by AIM’s board for failing to comply with the company’s bylaws, the board responded by amending the advance notice bylaws, adding more stringent disclosure rules aimed at deterring the insurgent group’s efforts.
Kellner then filed suit in the Delaware Court of Chancery, challenging both the rejection of his third nomination attempt and the validity of the amended bylaws. Six bylaws were at issue, four of which the Court of Chancery found overly broad, vague, and inequitable, while upholding the remaining two. In the end, the Court of Chancery supported the board’s decision to reject Kellner’s nominations for non-compliance with the remaining valid provisions.
On appeal, Kellner argued that the Court of Chancery wrongly reinstated a 2016 bylaw, which the board had not cited as a reason for rejecting his nominations and questioned the inconsistency of upholding some bylaws while invalidating others.
The Delaware Supreme Court agreed with the Court of Chancery, affirming its ruling that the four invalidated bylaws imposed excessive burdens and vague requirements, while the two bylaws upheld were fair and reasonable. It agreed with Kellner that the 2016 bylaw should not have been reinstated, as AIM’s board had not relied on it when rejecting his nominations. However, the Delaware Supreme Court upheld the two valid bylaws, concluding that the board acted equitably in enforcing them.
Ultimately, the Supreme Court ruled that the AIM board acted inequitably when adopting the amended bylaws, finding that their primary purpose was to block the proxy contest rather than enhance transparency or protect the stockholder franchise.
The six bylaws at issue in the case, along with explanations of the Court of Chancery’s and Supreme Court’s rulings, are below:
In sum, Kellner shows that Delaware courts will evaluate board actions through a fiduciary lens, and actions perceived as entrenching the board may be invalidated. Accordingly, directors and their advisors should ensure that amendments to advance notice bylaws are narrowly tailored to address legitimate governance concerns, avoiding overly broad provisions that could block nominations and eventually be invalidated if challenged.
The dispute began when a group of stockholders, led by Ted D. Kellner, sought to replace directors on AIM ImmunoTech’s board due to concerns about mismanagement. After several attempts to nominate new directors, all of which were rejected by AIM’s board for failing to comply with the company’s bylaws, the board responded by amending the advance notice bylaws, adding more stringent disclosure rules aimed at deterring the insurgent group’s efforts.
Kellner then filed suit in the Delaware Court of Chancery, challenging both the rejection of his third nomination attempt and the validity of the amended bylaws. Six bylaws were at issue, four of which the Court of Chancery found overly broad, vague, and inequitable, while upholding the remaining two. In the end, the Court of Chancery supported the board’s decision to reject Kellner’s nominations for non-compliance with the remaining valid provisions.
On appeal, Kellner argued that the Court of Chancery wrongly reinstated a 2016 bylaw, which the board had not cited as a reason for rejecting his nominations and questioned the inconsistency of upholding some bylaws while invalidating others.
The Delaware Supreme Court agreed with the Court of Chancery, affirming its ruling that the four invalidated bylaws imposed excessive burdens and vague requirements, while the two bylaws upheld were fair and reasonable. It agreed with Kellner that the 2016 bylaw should not have been reinstated, as AIM’s board had not relied on it when rejecting his nominations. However, the Delaware Supreme Court upheld the two valid bylaws, concluding that the board acted equitably in enforcing them.
Ultimately, the Supreme Court ruled that the AIM board acted inequitably when adopting the amended bylaws, finding that their primary purpose was to block the proxy contest rather than enhance transparency or protect the stockholder franchise.
The six bylaws at issue in the case, along with explanations of the Court of Chancery’s and Supreme Court’s rulings, are below:
- Agreement/Arrangement/Understanding (AAU) Provision. This required disclosures not only from the nominating stockholder but also from any person associated with the stockholder, such as affiliates, associates, and even family members. It also required disclosure of all AAUs between the nominating stockholder (or any party connected to them) and others, such as nominees, associates, and other stakeholders in the company. The Court of Chancery invalidated this provision, finding it overbroad and vague, akin to a “tripwire,” with overly complex requirements that could subject stockholder nominations to subjective board interpretation. The Supreme Court affirmed the invalidation, agreeing that the provision’s subjective nature was preclusive.
- Consulting/Nomination Provision. This required disclosure of AAUs between the nominating stockholder and a Stockholder Associated Person (SAP) regarding consulting, investment advice, or nominations to serve in public company roles over a ten-year span. The Court of Chancery invalidated this provision, ruling that it imposed ambiguous and onerous disclosure obligations spanning ten years regarding consulting and investment advice between nominees and stockholders. The Supreme Court affirmed the invalidation, viewing the provision as disproportionate to the board’s stated goal of transparency.
- Known Supporter Provision. This required disclosure of names and contact information for other known stockholders and SAPs who support the stockholder proposal or nominations. The Court of Chancery invalidated this provision, finding it vague and lacking clarity on what constituted "support." In the Court’s view, the bylaw was too broad in requiring disclosure of stockholders known to support a nomination. The Supreme Court affirmed the invalidation, agreeing that the provision’s vagueness could unduly restrict stockholder nominations.
- Ownership Provision. This mandated detailed disclosures concerning ownership interests of not only the nominating stockholder but various SAPs. The Court of Chancery invalidated this provision, finding it excessively long and indecipherable, and concluding that it was effectively designed to prevent nominations. The Supreme Court affirmed the invalidation, describing the provision as unintelligible and overly complex, failing under any standard.
- First Contact Provision. This required the nominating stockholder to disclose dates of first contact with nominees to ensure transparency by revealing when the relationship and nomination discussions commenced, specifically mandating that the stockholder identify when they first discussed AIM with the nominees. The Court of Chancery upheld this provision, finding that the requirement to disclose the first date of contact between the stockholder and nominee was clear and not preclusive. The Supreme Court affirmed, holding that it was a reasonable disclosure requirement that did not unfairly burden the nomination process.
- Questionnaire Provision. This required nominees to complete a director and officer (D&O) questionnaire, with specific disclosures about past adverse recommendations from proxy advisory firms. The Court of Chancery upheld this provision, ruling that requiring nominees to complete a detailed questionnaire was reasonable and within the board’s rights. The Supreme Court affirmed, agreeing that the provision was necessary to ensure voters were informed without being overreaching.
In sum, Kellner shows that Delaware courts will evaluate board actions through a fiduciary lens, and actions perceived as entrenching the board may be invalidated. Accordingly, directors and their advisors should ensure that amendments to advance notice bylaws are narrowly tailored to address legitimate governance concerns, avoiding overly broad provisions that could block nominations and eventually be invalidated if challenged.