In Kellner v. AIM ImmunoTech, the Delaware Court of Chancery held that certain advance notice bylaw provisions were invalid. While the decision engages in a fact-specific analysis of many aspects of AIM ImmunoTech’s advance notice bylaws, two provisions in particular have been seized upon by the plaintiffs’ class action bar as “low hanging fruit” by which they may extract attorney fees based on the purported benefit conferred when the plaintiffs’ lawyers point out (in a litigation demand, books and records demand, or complaint filed in court) that a company’s bylaws contain the offending provisions.
In addition to lawsuits recently filed in Delaware seeking to invalidate advance notice bylaws with the offending provisions, we are aware of public companies receiving stockholder demands of the same nature and expect this to be a continuing trend into the future. To avoid claims of this nature and the risk of paying attorney fees, public companies should promptly create a written, nonprivileged record that they have become aware of the Kellner decision and are taking steps to review and, if warranted, amend their advance notice bylaws.
Kellner v. AIM Immunotech (Dec. 28, 2023) involved a board’s adoption of amendments to its advance notice bylaws on a “cloudy day” (with an activist campaign under way). Following trial, the Delaware Court of Chancery held, among other things, that certain of the amendments were invalid as they “unduly restricted” the stockholder franchise. The decision stands for the broad principle that an advance notice bylaw may be deemed invalid if the provision is overbroad, ambiguous, or incomprehensible.
The court acknowledged that advance notice bylaws may legitimately serve the purposes of imposing order on the stockholder nomination process and gathering relevant information for full disclosure, but deemed the lengthy, complicated, and oftentimes ambiguous provisions of the bylaws as giving the board license to reject a nomination notice based on the board’s “subjective interpretation” of the provision.
Because the amendments were adopted “on a cloudy day,” they were reviewed under an enhanced scrutiny standard and invalidated in part. While some aspects of the bylaws were invalidated on fact-specific grounds that may vary from case to case, others were deemed by the court to objectively operate as a “tripwire,” which could be characterized as prima facie invalid.
We anticipate that Kellner will incent and guide future challenges to advance notice bylaws in activist contests in accord with the spirit of Kellner, employing a fact-specific analysis. We also anticipate (based on recent experience) that the plaintiffs’ bar will make a cottage industry out of challenging provisions in advance notice bylaws that they will characterize as per se invalid—i.e., facial challenges to the bylaws irrespective of whether an activist has arrived on the scene—in the form of stockholder litigation and books and records demands.
The latter risk in particular is one that can be managed proactively by corporations by taking action now to review its bylaws in light of the Kellner decision to ensure that plaintiffs’ lawyers are unable to prove causation.
Low-hanging fruit for revision following the Kellner decision falls into two categories: (1) language that contemplates that stockholders are “Acting in Concert” with one another absent an express “agreement, arrangement or understanding” or if they act “in substantial parallel” with each other (sometimes referred to as a “wolf pack provision”) and (2) language that deems two stockholders working with the same third party to be “Acting in Concert” regardless of whether the two stockholders know about each other’s existence (sometimes referred to as a “daisy chain provision”).
This language can sometimes also be found in the definition of a “Stockholder Associated Person.” Language to look out for may include the following type of language found within the definition of “Acting in Concert” or “Stockholder Associated Person”:
Wolf Pack Language
Daisy Chain Language
The law provides that stockholder plaintiffs’ lawyers are entitled to attorney fees when the stockholder confers a benefit upon the corporation through litigation activity, including litigation demands, books and records demands, and complaints filed in court.
This doctrine requires that the stockholder’s attorney prove that it caused the corporation to correct the offending language by making a demand or filing suit. If the corporation had recognized the issue and took steps to correct it before the plaintiffs’ firm surfaces with a demand or lawsuit, the plaintiffs’ firm will not be able to prove causation and thus will not be entitled to a fee.
As such, corporations are advised to, at minimum, review their advance notice bylaws to determine whether they contain the “Acting in Concert”/“Wolf Pack” and “Daisy Chain” provisions that plaintiffs’ firms are now targeting and document that the review is being conducted in light of the Kellner decision.
In addition, as noted above, there may be other aspects of a corporation’s advance notice bylaws that, while not immediately apparent as with the “Acting in Concert” and “Daisy Chain” provisions, nonetheless could be held to violate the spirit of Kellner and other Delaware case law.
Corporations are advised to engage counsel for a full review of advance notice provisions to ensure that, should the advance notice provisions come into play in a contested election, they will withstand judicial scrutiny.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following: