Ted D. Kellner v. AIM ImmunoTech Inc.
No. 3, 2024 (Del. 2024) (2024)
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Rule of Law:
Delaware courts apply enhanced scrutiny to a board's adoption, amendment, or application of advance notice bylaws during a proxy contest, requiring the board to demonstrate a proper purpose in responding to a legitimate threat and that its actions are proportionate and not preclusive or coercive to the stockholder franchise; bylaws adopted for the primary purpose of entrenchment are unenforceable, regardless of facial validity.
Facts:
- AIM ImmunoTech, Inc. (AIM) is a publicly traded pharmaceutical company whose stock price had fallen significantly since 2016.
- In 2020, Franz Tudor, a convicted felon (securities fraud, insider trading) and business associate of Todd Deutsch, began an activism campaign to gain a formal role with AIM or elect new directors.
- Walter Lautz, recruited by Tudor, submitted a nomination notice to the AIM board for Daniel Ring and Robert Chioini, but it was rejected for noncompliance with federal securities law.
- Ted D. Kellner, a major AIM stockholder and acquaintance of Deutsch, became aware of Tudor's criminal background and the prior failed nomination efforts after AIM counsel warned the group about Section 13(d) compliance.
- In March 2023, the AIM board, in response to the ongoing activist campaign and to modernize its governance, unanimously adopted sweeping amendments to its advance notice bylaws.
- In August 2023, Kellner submitted a notice to nominate himself, Chioini, and Deutsch as director candidates, which the AIM board rejected for alleged noncompliance with the newly Amended Bylaws, citing deficient disclosure of "agreements, arrangements, or understandings" (AAUs) and other omissions.
Procedural Posture:
- In 2022, Jonathan Jorgl (with Chioini and Rice as nominees) submitted a nomination notice, which AIM rejected for noncompliance.
- Jorgl sued AIM in the Delaware Court of Chancery (Jorgl v. AIM ImmunoTech, Inc.), seeking a mandatory preliminary injunction to place his nominees on the annual meeting ballot, which the court denied due to factual disputes.
- AIM filed a lawsuit in Florida state court against Tudor, Deutsch, Kellner, Jorgl, Lautz, Chioini, and Rice, alleging violations of Section 13(d) of the Exchange Act, which was initially dismissed as moot but later revived and denied.
- Ted D. Kellner filed a complaint in the Delaware Court of Chancery, naming AIM and its board members as defendants, seeking declarations that the Amended Bylaws were unlawful or inequitable as applied, and that the board breached its fiduciary duties.
- AIM and the board counterclaimed in the Court of Chancery, seeking declarations that the Amended Bylaws were lawful and valid, and that Kellner's notice was lawfully rejected.
- After a three-day expedited trial, the Court of Chancery invalidated four of the six main Amended Bylaws, reinstated the 2016 version of one (the AAU Provision), and ultimately upheld the board's rejection of Kellner’s nomination notice based on noncompliance with the two remaining Amended Bylaws (including the reinstated 2016 AAU Provision) and the First Contact and Questionnaire Provisions.
- Kellner appealed to the Delaware Supreme Court as Appellant/Cross-Appellee, challenging the Court of Chancery's findings regarding the 2016 AAU Provision, the enhanced scrutiny review of certain bylaws, and the compliance of his notice.
- AIM and the board cross-appealed to the Delaware Supreme Court as Appellees/Cross-Appellants, challenging the Court of Chancery's invalidation of four bylaws and its application of the facial validity standard.
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Issue:
Does a corporate board act inequitably, thus rendering its advance notice bylaws unenforceable, when it adopts overly broad and ambiguous disclosure requirements during an ongoing proxy contest with the primary purpose of impeding stockholder nominations, even if the bylaws are facially valid and the board identifies a legitimate threat to its information-gathering function?
Opinions:
Majority - Chief Justice Seitz
No, the AIM board acted inequitably when it adopted the Amended Bylaws for the primary purpose of interfering with, and ultimately rejecting, Kellner’s nominations, thereby rendering the remaining challenged bylaws unenforceable, even though they were facially valid. The Court first clarified the distinction between a bylaw's "validity" (whether it is consistent with the DGCL, certificate of incorporation, and addresses a proper subject matter, applicable under any circumstances) and its "enforceability" (whether its adoption or application is equitable, subject to fiduciary duty principles). The Court found that, with the exception of the "indecipherable" Ownership Provision which it deemed invalid, the other challenged Amended Bylaws were facially valid. However, the Court applied the Coster two-part enhanced scrutiny review (which subsumes Schnell and Blasius principles) to assess the board's equitable conduct. While acknowledging the board faced a legitimate threat to its information-gathering function due to the insurgent group's history, the Court found the board's primary purpose in adopting the majority of the Amended Bylaws was improper. The unreasonableness, vagueness, and overbreadth of provisions like the AAU Provision (especially its "Stockholder Associated Person" (SAP) term), the Consulting/Nomination Provision (with its ten-year look-back and SAP term), and the Known Supporter Provision (with its unqualified "support" definition and SAP term) demonstrated that they were designed as "tripwires" to block nominations, rather than as tools for legitimate information gathering. This improper motive constituted a breach of the duty of loyalty. Consequently, because the board's actions failed the first prong of enhanced scrutiny, the challenged Amended Bylaws (excluding the already invalid Ownership Provision) are unenforceable. The Court also reversed the Court of Chancery's decision to revert to and apply the 2016 AAU Provision, as the 2023 AAU Provision, though unenforceable, was still valid and had not been repealed. The Court acknowledged that Kellner's notice contained false and misleading responses but determined that no further action was warranted given the board’s own inequitable conduct.
Analysis:
This case significantly clarifies the distinction between the facial validity and equitable enforceability of corporate bylaws under Delaware law, particularly in the context of advance notice provisions. It reinforces that even facially valid bylaws can be rendered unenforceable if a board's primary purpose in adopting or applying them is inequitable, such as entrenchment or thwarting a legitimate proxy contest, thereby solidifying Coster's enhanced scrutiny framework for such actions. The ruling serves as a strong deterrent against boards adopting overly broad, vague, or onerous disclosure requirements in advance notice bylaws, emphasizing the protection of the shareholder franchise. Future cases will likely scrutinize the specific language of such bylaws more closely to ensure they genuinely serve corporate interests rather than operating as "tripwires."
