Interesting opinion out of the Delaware Court of Chancery this week by Vice Chancellor Cook. Short version: Company adopted advance notice bylaws; shareholders challenged them as a breach of fiduciary duty; in Siegel v. Morse, VC Cook held the dispute was not ripe for review because the shareholders had not proposed to mount their own proxy contest.

Following Kellner v. AIM Immunoctech, VC Cook distinguished between facial challenges, which claim that the bylaws cannot be enforced under any set of circumstances, and as-applied challenges, which depend on a particular set of facts. Facial challenges, per Kellner, are only appropriate when the bylaw is unauthorized under Delaware statutory law or the corporate charter, and here, the shareholders conceded that theirs was an as-applied challenge, rooted in what they claimed was an improper motive by the board to chill all shareholder activism by imposing excessive disclosure requirements. For as-applied challenges, VC Cook held, ripeness requires a plaintiff who is actually contemplating a proxy contest; here, the plaintiffs disclaimed any such intention; therefore, the claim was not ripe.

The difficulty is, defensive measures have previously been the subject of challenges outside the context of active contests for control. For example, as the plaintiffs pointed out, in In re The Williams Companies Stockholder Litigation, 2021 WL 754593 (Del. Ch. Feb. 26, 2021), Chancellor McCormick invalidated a pill outside the context of an active proxy contest.

VC Cook acknowledged this line of precedent, but distinguished it on the ground that other defensive measures present a much greater threat than advance notice bylaws do. As he wrote:

As Defendants ably explain, an advance notice bylaw is not like a stockholder rights plan or dead hand proxy put. Those measures, when triggered, are characterized by “immediate and devastating” financial consequences, which are not present in the context of an advance notice bylaw….In contrast, when a nominating stockholder “triggers” an advance notice bylaw, the stockholder does not suffer devastating equity dilution, nor does the company confront a potentially ruinous debt acceleration. The stockholder instead faces a rejection of her nominees.

I mean, that’s true as far as it goes but, recall, the plaintiffs in Siegel argued that the advance notice bylaws had the purpose and effect of deterring would-be activists, which was what made them inequitable. Cook’s ripeness argument seems to jump ahead to the merits to conclude that, in fact, there would not be much deterrent effect, therefore, the court could afford to wait for an actual activist, making the claim unripe. Which, to me, collapses the merits of the claim with the ripeness inquiry in a manner that is not only aesthetically displeasing, but also does not engage with how aggressive advance notice bylaws deter activists by, implicitly, adding litigation to the list of gauntlets that must be run before a contest can conclude successfully. And because corporate boards have displayed a certain boundless creativity in crafting advance notice bylaws, litigation in one case does not necessarily shed a lot of light on how the next case will unfold, which only heightens the uncertainty (and risk) an activist faces.

And another thing. On this week’s Shareholder Primacy podcast, Mike Levin has a conversation with Nell Minow of ValueEdge Advisors.  Here at Apple, here at Spotify, and here at YouTube.