Invoking the recent Delaware Supreme Court decision Kellner v. AIM ImmunoTech Inc., 320 A.3d 239 (Del. 2024) (“Kellner”), which we discussed in previous client alerts (“Delaware Supreme Court Strikes Down Advance Notice Bylaws as ‘Unintelligible’ or Adoption with an Improper Purpose on a ‘Cloudy Day’” and “Court of Chancery Provides Further Guidance on Advance Notice Bylaw Amendments Amidst a Proxy Contest”), the Court of Chancery held that equitable challenges to the enforceability of advance notice bylaws are not ripe for dispute in the absence of an actual deterrence to nominating a director. Siegel v. Morse, et al., C.A. No. 2024-0628-NAC (Del. Ch. Apr. 14, 2025).
In Siegel v. Morse, the board of directors (the “Board”) of The AES Corporation (the “Company”) approved the adoption of amendments to the Company’s advance notice bylaw provisions. The plaintiff stockholder alleged that the members of the Board breached their fiduciary duties in approving two of the advance notice bylaw provisions and petitioned the Chancery Court to conclude that those advance notice bylaws were unenforceable.[1] The plaintiff did not challenge the facial validity of the advance notice bylaws nor did the plaintiff (or any other stockholder) intend to nominate a director to the Board or state any other stockholder who intended to nominate a director but did not due to the bylaw amendments.
Twice Tested
As reiterated by the Delaware Supreme Court in Kellner, challenged advance notice bylaws are “twice-tested – first for legal authorization [(i.e., facial validity)], and second by equity.”
Under Delaware law, advance notice bylaws are facially valid if they are (1) authorized by the Delaware General Corporation Law; (2) consistent with the corporation’s certificate of incorporation; and (3) not otherwise prohibited. The burden is on the party challenging that bylaw provision to overcome this presumption by demonstrating “that the bylaw cannot be valid under any circumstance.” In Siegel, the plaintiff withdrew its challenge to the facial validity of the advance notice bylaws after the issuance of the Kellner decision and instead asserted that the Board “acted defensively” when it adopted the advance notice bylaws and requested that the Chancery Court undertake an equitable review of the challenged bylaws.
For advance notice bylaws to prevail in an equitable review, the challenged bylaws must “‘be reasonable in their application’ and not unfairly interfere with stockholder voting.” In Siegel, the Chancery Court ruled that, before a court undertakes an equitable review of advance notice bylaws, the dispute must be ripe—such that if the challenge is successful, the court can identify those against whom such bylaws cannot be enforced.
Ripeness in Equitable Challenges
In Siegel, the Chancery Court concluded that the dispute was not ripe and dismissed plaintiff’s equitable challenge. The court acknowledged longstanding Delaware jurisprudence providing that “Delaware does not permit challenges to bylaws based on hypothetical abuses.” Rather, the court explained that an equitable bylaw review is appropriate only when “a ‘genuine, extant controversary’ involving the adoption, amendment, or application” of the bylaws is before the court. In the case at bar, the plaintiff’s challenge was purely hypothetical; the plaintiff did not have an interest in running a proxy contest or an intention of nominating a director candidate, and, although the plaintiff argued that the advance notice bylaws had a chilling effect on the stockholder franchise, the plaintiff could not identify a stockholder who was deterred from nominating a director candidate by the challenged bylaws.
The Chancery Court considered and rejected plaintiff’s analogy of the chilling effect of advance notice bylaws on the stockholder franchise to the effect of stockholder rights plans and dead hand proxy puts, which Delaware courts have ruled are ripe for equitable challenge upon adoption. The Chancery Court emphasized the lack of immediate and significant potential for harm and stockholder’s recourse for a denial of its nominees, noting that “[u]pon a rejection of nominees, the proverbial eggs are perhaps broken, but hardly scrambled; equity need not leap to the stove before anyone even considers a meal.”
[1] The challenged advance notice provisions included (1) the definition of “acting in concert” and (2) a requirement to disclose any equity interest in the Company, the history of ownership of stock and derivative interests in the Company, and any material relationship with, or any direct or indirect material interest in any material contract or agreement with, the Company or any principal competitor of the Company.
