Chancery Court Highlights Importance of Delivering Nomination Notices Ahead of Advance Notice Deadlines

Andrew Freedman, Lori Marks-Esterman and Ron Berenblat

The Harvard Law School Forum on Corporate Governance, one of the top online resources for discourse on corporate governance, recently published a client alert authored by Partners Andrew Freedman, Lori Marks-Esterman and Ron Berenblat titled “Chancery Court Highlights Importance of Delivering Nomination Notices Ahead of Advance Notice Deadlines.” The article discusses the Delaware Chancery Court’s recent decision in Rosenbaum v. CytoDyn Inc., No. 2021-CV-0728-JRS (Del. Ch. Oct. 13, 2021), which found that a group of activist investors seeking to nominate a dissident slate of directors did not comply with a company’s advance notice bylaws.  The article discusses the key takeaways from the decision and provides practical insight into how the ruling is likely to impact proxy contests going forward.

The case arose following a push by a group of investors to nominate directors and institute changes at CytoDyn, Inc., a pharmaceutical firm in the process of developing a new drug. Litigation commenced after CytoDyn’s board of directors rejected the investors’ 222-page nomination notice because of disclosure deficiencies. In the decision, the Court found the Nomination Notice “fell short of what was required” in two ways. First, the Court held the Nomination Notice did not sufficiently disclose “who was supporting [P]laintiffs’ proxy contest” financially. And second, the Nomination Notice failed to disclose that the Plaintiffs’ nominees might seek to facilitate a future merger with another company that had ties to the investor group if the campaign was successful—information the Court found to be “material” to a reasonable investor. A unique feature of the Court’s opinion was its response to the parties’ “very different perspectives of the standard of review” that should be applied. The Plaintiffs argued that the Court should have applied “enhanced scrutiny” to the Board’s rejection of the nomination under the Delaware Supreme Court’s decision in Blasius Industries, Inc. v. Atlas Corporation because the rejection was an act by a conflicted board taken “for the primary purpose of impeding the exercise of stockholder voting power.” Conversely, CytoDyn asserted that the more permissive business judgment rule should apply, and that the clear terms of the bylaws—a contract between the Company and its shareholders—should be enforced according to clear terms.  The Court found that a Blasius review was not warranted because Plaintiffs had played “fast and loose” with their disclosure obligations and left no time to fix any issues; thus, the Board’s delay in rejecting the Nomination Notice did not rise to the level of “manipulative” conduct warranting enhanced scrutiny review under Blasius.

From a practical perspective, the decision serves as a reminder that shareholders seeking to nominate directors should obtain guidance from advisors specializing in shareholder activism. The case also serves as a reminder of the newfound importance of submitting nominations as far in advance of the nomination deadline as possible in order to build in enough time for the company to respond to the notice and for the nominating shareholder to address any purported delinquencies prior to the deadline.

Read the client alert in its entirety here.