Rosenbaum v. CytoDyn Inc., C.A. No. 2021-0728-JRS (Del. Ch. Oct. 13, 2021) (Slights, V.C.)
In this memorandum opinion and following trial on a paper record, the Delaware Court of Chancery denied plaintiffs’ request for a mandatory injunction to compel CytoDyn Inc. (the “Company”) to allow plaintiffs’ dissident slate of directors to stand for election to the board at the Company’s October 28, 2021, annual meeting. The Court concluded that plaintiffs’ nomination notice, which was submitted on the eve of the notice deadline specified in the Company’s bylaws, was deficient and the board was justified in rejecting it, despite a nearly month-long delay in responding to the notice.
Plaintiffs, who had launched a proxy contest in July 2021 to replace five of six incumbent directors at the Company’s 2021 annual meeting, argued that the board wrongfully rejected the nomination notice, triggering enhanced scrutiny under Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988). Defendants argued in the alternative that the Court’s legal analysis should be “purely contractual,” with any fiduciary considerations analyzed under the deferential business judgment rule. The Court declined to invoke Blasius review after concluding that the board did not act for the sole or primary purpose of thwarting the effectiveness of a stockholder vote. The Court further concluded that the board’s failure to respond to the activist group in order to give plaintiffs an opportunity to cure “materially deficient disclosures” contained in the notice was not manipulative conduct.
Although Blasius did not apply, the Court recognized that board members tasked with enforcing bylaws against stockholders confront a “structural and situational conflict,” and the Court is empowered to address the inequitable application or enforcement of an advance notice bylaw. In this instance, the Court found there was no inequitable conduct on the part of the board, which, upon receiving the deficient notice on the eve of the deadline specified in the Company’s bylaws, did not afford plaintiffs an opportunity to cure the notice defect. Importantly, the Company’s advance notice bylaw did not impose an express duty on the board to reach out to stockholders to cure deficiencies or otherwise to provide a process to cure a deficient notice.
The Court noted that plaintiffs could have made a stronger case of manipulative conduct had they submitted their nomination notice “well in advance of the deadline,” as the board would have had more difficulty justifying its nearly month-long silence in light of its fiduciary duties if “ample time remained before the arrival of the notice deadline.” On the record presented, however, the Court concluded that plaintiffs were required to submit a compliant notice given the last-minute nature of their submission, and their decision to submit the nomination notice on the eve of the deadline left no room for the Court to invoke equitable principles to override the decision made by the Company’s board.
Importantly, the CytoDyn opinion represents the first ruling on the merits by a Delaware court analyzing a board’s rejection of a nomination notice for disclosure deficiencies relating to information required by an advance notice bylaw. As noted by the Court, “[w]here Plaintiffs ultimately went wrong here is by playing fast and loose in their responses to key inquiries embedded in the advance notice bylaw….”