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E-MailWilliam Savitt, Ryan A. McLeod, and Anitha Reddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum, and is part of the Delaware law series; links to other posts in the series are available here.
The Delaware Court of Chancery this week upheld a board’s use of an advance notice bylaw to reject a dissident slate from running a proxy fight. Rosenbaum v. CytoDyn Inc., C.A. No. 2021-0728-JRS (Del. Ch. Oct. 13, 2021).
The case concerns a battle for control of the board of CytoDyn, a pharmaceutical company. Years ago, CytoDyn adopted a customary advance notice bylaw that required any stockholder seeking to nominate directors to provide information about its nominees at least 90 days before the stockholder meeting. As is typical, the bylaw required disclosure of, among other things, the nominees’ backers and whether the nominees had financial interests in any potential transactions involving the company. One day before this year’s nomination deadline, a group of CytoDyn stockholders submitted nomination materials for a rival slate. A month later, CytoDyn rejected the nominations as deficient for failure to disclose others who were supporting the nominees behind the scenes and to disclose that at least one of the nominees might seek to facilitate a self-interested merger if elected. The dissident stockholders commenced expedited litigation in Delaware, arguing that the board was improperly interfering with the election process.
The Court of Chancery found for the incumbent board. Starting from the premise that advance notice bylaws “serve an indisputably legitimate purpose,” the court found that CytoDyn’s bylaws—“adopted on the proverbial ‘clear day’”—were reasonable on their face and required disclosure of “vitally important information.” The dissident stockholders argued that they subsequently cured any omissions, but the court held that they had played “fast and loose in their responses” and waited until the “eve of the deadline” to submit their nominations, “leaving no time to fix the deficient disclosures.” The “structural conflicts that confront any incumbent board charged with enforcing an advance notice bylaw in the face of a notice that stockholders intend to propose a dissident slate” were insufficient to “override” the board’s decision to reject the nomination in the absence of any evidence of “manipulation” by the board.
The decision helpfully reaffirms that Delaware courts will uphold reasonable advance notice bylaws and the enforcement of those bylaws by incumbent boards.
