In a recent decision¹, the Delaware Court of Chancery upheld the rejection of a proposed slate of director nominees by the incumbent board of AIM ImmunoTech, Inc. (“AIM” or the “Company”) for AIM’s 2023 Annual Meeting of Stockholders. Though the Court upheld the rejection by the Company generally, it did provide a detailed review of AIM’s recently adopted advance notice bylaws and found a number of the bylaws preclusive and unreasonable.

Background

AIM is a pharmaceutical company incorporated in Delaware. The Company’s stock trades on the NYSE American stock exchange. In 2022, a group of stockholders attempted to oust two of AIM’s incumbent directors on AIM’s four-seat board by nominating two individuals ahead of AIM’s 2022 stockholders’ meeting. The nominees were not elected at the meeting. Before the opening of the advance notice window for the 2023 stockholders’ meeting, AIM’s directors voted to amend the Company’s advance notice bylaws in response to the events of the 2022 director nomination process. The same group of stockholders then gave AIM notice of their intent to nominate directors at the 2023 stockholders’ meeting, but AIM’s board rejected the notice and refused to include the stockholder group’s nominees on the voting proxy.  The stockholder group then brought suit contesting the amended bylaws and the board’s rejection of their notice.

Opinion

After an exhaustive recitation of the plaintiffs’ activities in the lead up to their nomination efforts and plans for contesting the board’s decision to reject their nominees, the Court identified the standard of its review, applying the “enhanced scrutiny” standard under the Delaware Supreme Court’s landmark decision in Unocal ², as the bylaw amendments constituted defensive measures against a board takeover.  Under Unocal, the burden of proof is on the defendant board to show that:

1. the board faced a threat “to an important corporate interest or to the achievement of a significant corporate benefit.” and
2. the board’s response to the threat was “reasonable in relation to the threat posed and was not preclusive or coercive to the stockholder franchise.”

The plaintiffs asserted that six specific provisions of AIM’s amended bylaws failed the Unocal two-prong test and were therefore invalid. The Court determined that as a general proposition, the board’s decision to amend AIM’s bylaws met the requirements of Unocal’s first prong, in that the board made a reasonable assessment to “better protect AIM and its stockholders against potentially abusive and deceptive practices.” Further, the Court found that while four of the six bylaws did not satisfy the second prong of Unocal, two of the six were non-preclusive and reasonable, therefore upholding the board’s rejection of the plaintiffs’ nominees.

The Court’s discussion of each of the bylaws in dispute provides legal practitioners and public company boards an excellent roadmap for analyzing proposed advance notice bylaw provisions. 

The Four Invalid Bylaw Provisions:

1. The Arrangements, Agreements or Understandings Bylaw

AIM’s amended bylaws required the disclosure of all agreements, arrangements, or understandings that a nominating stockholder or any “Stockholder Associate Person” had with any holder, nominee (or immediate family member, affiliate, or associate thereof), person acting in concert with any Stockholder Associated Person, holder, nominee (or immediate family member, affiliate, or associate thereof), or “other person or entity (the “AAU Bylaw”).  Furthermore, the AAU Bylaw included a lookback period of 24 months.  “Stockholder Associate Person” was defined in the AAU Bylawas:

• Any person acting in concert with the nominating holder with respect to the proposal or the corporation
• Any person controlling, controlled by, or under common control with, such holder or any of their respective Affiliates and Associates, or a person acting in concert therewith with respect to the proposal or the corporation, and
• Any member of the immediate family of such holder of an Affiliate or Associate of such holder

While the Court found the lookback period neither preclusive nor unreasonable (as a stockholder could easily understand what it required and disclose information accordingly), the Court determined that the AAU Bylaw as drafted was invalid, citing the second prong of Unocal. The Court described the AAU Bylaw as going “off the rails” as the terms “Associate,” “Affiliate,” and “immediate family” within the Stockholder Associated Person definition created an “ill-defined web of disclosure requirements.”  When taken together, the combination of multiple definitions of affiliations and relationships caused the purported disclosure requirement to spiral to an absurd degree.  The Court further described the AAU Bylaw as drafted as vague, noting that the requirements about “far-flung, multi-level relationships suggests an intention to block the dissident’s effort.”

2. The Consulting / Nominating Bylaw

AIM’s consulting / nominating bylaw required that a nominating stockholder disclose all agreements, arrangements, or understandings between the nominating stockholder or a Stockholder Associate Person on one hand, and any stockholder nominee on the other hand “regarding consulting, investment advice, or a previous nomination for a publicly traded company within the last ten years.”

The Court found this bylaw to be invalid under Unocal for reasons similar to those it invoked to invalidate the AAU Bylaw. The bylaw imposed upon nominating stockholders “ambiguous requirements across a lengthy term.”

3. The Known Supporter Bylaw

The Company’s “known supporter” bylaw required that nominating stockholders disclose “all known supporters” of the nomination.

The Court found this broadly drafted bylaw to also be invalid under Unocal as it was ambiguous and overbroad, seeking “disclosure of any sort of support whatsoever”. The Court contrasted this provision with a similar, but limited provision that was upheld in Rosenbaum v. CytoDyn Inc.³, in which the board of the defendant company required disclosure of known financial supporters of the nominator and nominees.

4. The Ownership Bylaw

AIM’s “Ownership Bylaw” required a nominating stockholder to disclose the stockholder’s ownership in the Company’s stock, including beneficial, synthetic, derivative, and short positions, and extending to all Stockholder Associate Persons, immediate family members, and persons acting in concert with a nominee nominated by the stockholder.

The Court found AIM’s Ownership Bylaw to be invalid under Unocal. While the Court conceded that requiring disclosure of synthetic equity positions are generally legitimate, the Court described AIM’s Ownership Bylaw as “indecipherable”, spanning 1,100 words and 13 subparts. The provision “sprawled wildly beyond its purpose” by requiring, among other things, disclosure of legal, economic, or financial interests of a broad range of constituents in any principal competitor of AIM.

The Two Valid Bylaw Provisions:

1. The “First Contact” Bylaw

AIM’s amended bylaws required the nominating stockholder to disclose the dates of first contact among those involved in the nomination effort.

The Court upheld this provision under Unocal, explaining that the bylaw was tailored to provide a logical, reasoned approach to advance a proper objective unique to AIM, that is, to elicit sufficient information for the Company’s board to make a recommendation about the nominations and stockholders to cast informed votes. The Court noted that while the bylaw was “unusual”, it called for a defined set of information that could be known or knowable with reasonable diligence by the nominating stockholder.

2. The “Questionnaire Bylaw”

The Company’s “Questionnaire Bylaw” required nominees to submit a completed D&O questionnaire in the form provided by the Company within five business days of a request therefor.

The Court upheld this provision under Unocal, noting that the bylaw furthers information gathering and disclosure functions of advance notice bylaws. Though the plaintiffs argued that the five business day window was unreasonable, the Court declined to declare the bylaw invalid as a result, calling such a conclusion regarding the time period “hair splitting”.

While the Court found four of six of AIM’s amended advanced notice bylaw provisions to be invalid, the Court declined to invalidate the amended bylaws as a whole. The Court further reviewed provisions included in AIM’s pre-amendment advance notice bylaws, which required disclosure of “all arrangements or understandings between [the nominating] stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made.” The Court declared this provision valid because it was narrower than the amended bylaw that the Court invalidated, and it would be inequitable in the Court’s view to eliminate this disclosure requirement given the corporate risks at play if nominating stockholders were able to conceal agreements or arrangements.

Conclusion

Even though the Court did not find in favor of the plaintiffs in this case, it did provide public company boards and their advisors a more concrete roadmap for evaluating proposed advanced notice bylaws, highlighting where a company may impose reasonable and justifiable obligations upon nominating stockholders using specific, clearly articulated disclosure requirements while also elucidating where the imposition of unreasonable, vague and/or far-reaching obligations will not pass muster with the Delaware courts. Public companies should review their advance notice bylaws with a view to enhancing the ability of their directors to effectively respond to stockholder proposals and nominations in a manner that will provide stockholders with appropriate information regarding the proponents.

1. Kellner v. AIM ImmunoTech Inc., C.A. 2023-0879-LWW (Del. Ch. Dec. 28, 2023)↩
2. Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985)↩
3. Rosenbaum v. CytoDyn Inc., 2021 WL 4775140 (Del. Ch. Oct. 13, 2021)↩