The last three months have seen a jump in shareholder lawsuits challenging “advance notice” provisions in company bylaws. 

Advance notice provisions are ubiquitous among Delaware public companies. They exist to promote the legitimate corporate purpose of conducting orderly stockholder meetings and election contests. Among other things, these provisions commonly require that nominations for director be formally submitted a certain number of days in advance of the annual meeting and be accompanied by certain categories of information about the proposing stockholder and the nominee. Delaware courts have historically permitted the exclusion of director nominations that fail to adhere to such provisions. However, context is key, and advance notice bylaws that are adopted during or in anticipation of a proxy contest will be subject to enhanced scrutiny and face a greater risk of being struck down.

The cause of this growing trend of lawsuits is the Delaware Chancery Court’s recent decision in Kellner v. AIM ImmunoTech Inc., 307 A.3d 998 (Del. Ch. Dec. 28, 2023). There, a stockholder sought a declaration that AIM ImmunoTech’s advance notice bylaws, adopted in response to an activist group’s campaign to run a competing slate of director nominees, were unlawful for unreasonably thwarting his ability to nominate directors. Among those bylaws was a provision that required the disclosure of all “arrangements, agreements or understandings,” whether written or oral, relating to a board nomination, including with respect to any “stockholder associated person.” The latter term, in turn, was defined to include “any person acting in concert” with the stockholder and any person affiliated with the stockholder or its affiliates.

Vice Chancellor Will, reviewing the bylaws under the “enhanced scrutiny” standard of review because they were adopted in anticipation of a proxy context, invalidated the provision at issue as an unreasonable attempt to block the stockholder’s ability to advance his director nominations. Specifically, the court found that the provision was “overbroad, unworkable, and ripe for subjective interpretation by the Board” insofar as it required disclosure about “far-flung, multilevel relationships.” As such, particularly in the context of the so-called “cloudy day” in which the bylaws were adopted, the provision was “unduly restrictive” of the stockholders’ franchise and, therefore, ran afoul of Delaware law. 

In the few months since Kellner, plaintiff firms have created a cottage industry out of challenging two types of provisions similar to the advance notice bylaws at issue in that case. They include:

1. “wolf pack” provisions, which contemplate that stockholders are “acting in concert” if they act “in substantial parallel” with each other, even absent any express “agreement, arrangement or understanding”; and
2. “daisy chain” provisions, which contemplate that two stockholders are “acting in concert” if they coordinate with the same third party regardless of whether they are coordinating with, or are even aware of, each other.

So far, companies have not sought to litigate the merits of these challenges but instead have opted to simply revise their bylaws to remove the challenged provisions and thereby moot the plaintiffs’ claims. This inevitably leads to claims by the plaintiffs’ attorneys for “mootness fees” on the theory that by spurring the proposed changes, they provided a benefit to the company and its stockholders.

In light of these increasing stockholder challenges and the potentially resulting fee awards, corporations should proactively review their advance notice bylaws and assess whether they are vulnerable to challenge as “unduly restrictive.” While bylaws adopted in anticipation of proxy contests are particularly vulnerable, as in Kellner, those that include “wolf pack” and “daisy chain” provisions have now also become a target for lawsuits.