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:
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 invalidate