This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
The Delaware Chancery Court recently nixed a shareholder group’s bid to replace CytoDyn Inc.’s directors, finding that the COVID-19 drug developer’s incumbent board rightly rejected the dissidents’ fatally flawed notice of their candidates’ proxy intentions for failure to comply with CytoDyn’s advance notice bylaw. Rosenbaum, et al. v. CytoDyn Inc., et al., No. 2021-0728-JRS, opinion issued (Del. Ch. Oct. 13, 2021).
In his October 13 opinion after a paper record trial, Vice Chancellor Joseph Slights denied the plaintiff shareholder group’s motion for an injunction that would compel the company to place the dissident director candidates on the ballot at CytoDyn’s Oct. 28 annual meeting. The ruling is noteworthy because it clarifies the standards for disclosure required to comply with an advance notice bylaw and for proof of wrongful manipulative conduct by the company that rejects a notice.
Blackrock, not Blasius
The court rejected the plaintiffs’ contention that the incumbent board’s alleged self-serving conduct and mismanagement triggers review under former Chancellor William Allen’s seminal Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 660 (Del. Ch. 1988) decision that subjects the defendant directors’ actions to enhanced scrutiny as to whether they “act[ed] for the primary purpose of preventing the effectiveness of a shareholder vote” and requires them to prove a “compelling justification for [their] action[s].”
Instead, the vice chancellor said, the case should be reviewed according to the standards set in BlackRock Credit Allocation Income Tr. v. Saba Cap. Master Fund, Ltd., 224 A.3d 964, 980 (Del. 2020), where the Delaware Supreme Court made clear that “advance notice bylaws are commonplace and are interpreted using contractual principles.” The high court explained that Delaware law will protect shareholders “in instances where there is manipulative conduct or where the electoral machinery is applied inequitably,” but found no justification to apply heightened scrutiny in that situation.
Vice Chancellor Slights said although the incumbent directors in the contest-for-control that sparked the litigation allegedly exhibited some mismanagement and conflicts of interest , they did not use manipulative action and the plaintiff faction went wrong “by playing fast and loose in their responses to key inquiries embedded in the advance notice bylaw, and then submitting their Nomination Notice on the eve of the deadline, leaving no time to fix the deficient disclosures when the incumbent Board exposed the problem.”
CytoDyn’s best hope for a profitable product when it reincorporated in Delaware in 2015 and adopted new bylaws three years later was Leronlimab, a monoclonal antibody intended as a treatment for HIV and cancer. But when government regulatory approval had not yet appeared on the horizon by March 2021, some of its officers and shareholders began to organize support for a new slate of directors at the next annual meeting in October.
The incumbent directors rejected the dissidents’ advance notice of their intent to nominate rival candidates, claiming it intentionally failed to disclose:
1. Certain information in their Nomination Notice to hide the central role that rival company IncellDx and its shareholders – some of whom overlap CytoDyn — are playing in support of plaintiffs’ nominees,
2. The prior proposal that CytoDyn acquire IncellDx,
3. The existence (much less the identity) of any supporters of the nominations
The vice chancellor said plaintiffs fall far short of fulfilling their contractual duty regarding the advance notice bylaw and they seek to excuse that failure by extending Blasius beyond its intended limits. “Blasius does not apply in all cases where a board of directors has interfered with a shareholder vote,” he wrote. Rather, “courts will apply the plaintiffs exacting Blasius standard sparingly, and only in circumstances in which self-interested or faithless fiduciaries act to deprive stockholders of a full and fair opportunity to participate in the matter,” and that isn’t the case here.
Plaintiffs cannot escape the fact that they were obliged to identify their supporters, the vice chancellor ruled. “This was vitally important information; the Board was not nitpicking when it flagged the omission as material and ultimately disqualifying.”
Moreover, “the Board rejected the Nomination Notice, in part, because it did not disclose the possibility that Plaintiffs’ Nominees would propose that CytoDyn revisit its decision to pass on the acquisition of IncellDx,” he said. “The failures with respect to disclosing support for the nominations cut across the entire Nomination Notice and justified the Board’s rejection of the notice in its entirety.”