Paul A. Rosenbaum v. CytoDyn Inc.
This text of Paul A. Rosenbaum v. CytoDyn Inc. (Paul A. Rosenbaum v. CytoDyn Inc.) is published on Counsel Stack Legal Research, covering Court of Chancery of Delaware primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PAUL A. ROSENBAUM, JEFFREY P. ) BEATY, and ARTHUR L. WILMES, ) ) Plaintiffs, ) ) v. ) C.A. No. 2021-0728-JRS ) CYTODYN INC., SCOTT A. KELLY, ) NADER Z. POURHASSAN, JORDAN G. ) NAYDENOV, ALAN P. TIMMINS, ) SAMIR R. PATEL, and GORDON A. ) GARDINER, ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: October 8, 2021 Date Decided: October 13, 2021
Lisa Zwally Brown, Esquire of Greenberg Traurig, LLP, Wilmington, Delaware; Hal S. Shaftel, Esquire and Sarah E. Atlas, Esquire of Greenberg Traurig, LLP, New York, New York; and Brendan Quigley, Esquire and Brian Kerr, Esquire of Baker Botts LLP, New York, New York, Attorneys for Plaintiffs.
Kevin R. Shannon, Esquire, Jonathan A. Choa, Esquire, Christopher N. Kelly, Esquire and Daniel M. Rusk, IV, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware and Andrew W. Stern, Esquire, Isaac S. Greaney, Esquire, Alex J. Kaplan, Esquire and Charlotte K. Newell, Esquire of Sidley Austin LLP, New York, New York, Attorneys for Defendants.
SLIGHTS, Vice Chancellor On October 28, 2021, the stockholders of Defendant, CytoDyn Inc.
(“CytoDyn” or the “Company”), will hold their annual meeting (the “Annual
Meeting”). At that meeting, among other things, the stockholders will elect the latest
iteration of CytoDyn’s board of directors (the “Board”). CytoDyn’s bylaws require
stockholders to provide advance notice of matters they wish to place on the agenda
for the Annual Meeting, including their intent to nominate candidates for election to
the Board.
The plaintiffs in this action lead a group of dissident CytoDyn stockholders
who have proposed a slate of candidates for election to the Board. They allege they
provided advance notice of their nominations in compliance with CytoDyn’s bylaws
(the “Nomination Notice”). CytoDyn’s incumbent Board disagrees and has rejected
the Nomination Notice. Having done so, they now refuse to place Plaintiffs’
proposed slate of nominees on the ballot. In response, Plaintiffs initiated this action
against the incumbent Board and the Company to secure a declaration that the
Company has wrongfully rejected the Nomination Notice and a mandatory
injunction compelling the Company to allow Plaintiffs’ nominees to stand for
election.
1 The Court granted Plaintiffs’ application to expedite the litigation; the parties
have engaged in expedited discovery; and the matter has been submitted for decision
following a trial on a “paper record.” As explained below, my verdict is for
Defendants.
In a twist that suggests the law in this area may not be as settled as one would
think, particularly given the density of our jurisprudence in the “advance notice
bylaw” space, the parties have offered two very different perspectives of the standard
of review by which I should review the evidence and ultimately adjudicate the
dispute. Plaintiffs maintain the evidence presents a classic scenario that triggers
“Blasius review,” invoking Chancellor Allen’s seminal decision to argue that the
Court should subject Defendants’ conduct to enhanced scrutiny since the incumbent
Board has “act[ed] for the primary purpose of preventing the effectiveness of a
shareholder vote.”1 In doing so, Plaintiffs say, the Court should require Defendants
to prove a “compelling justification for [their] action[s].”2
Defendants, on the other hand, argue this case implicates nothing more than a
straightforward “contractual analysis,” arguing that since the bylaws represent a
contract between the Company and its stockholders, and the evidence clearly reveals
1 Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 660 (Del. Ch. 1988). 2 Id. at 661.
2 that Plaintiffs did not comply with the advance notice bylaw, Plaintiffs cannot
achieve the remedy they seek because they have not performed the contract they
seek to enforce. In this regard, they invoke our Supreme Court’s recent decision in
BlackRock Credit Allocation Income Trust v. Saba Capital Master Fund, Ltd., where
the Court made clear that “advance notice bylaws are commonplace and are
interpreted using contractual principles.”3 The Court went on to explain that
Delaware law will protect shareholders “in instances where there is manipulative
conduct or where the electoral machinery is applied inequitably,” but it ultimately
declined to apply heightened scrutiny upon concluding the evidence did not support
a finding that the incumbent board had engaged in “manipulative conduct.”4
Having carefully considered the parties’ arguments, I am satisfied that
enhanced scrutiny under Blasius is not justified here. As explained below,
CytoDyn’s advance notice bylaw had been in place for years before Plaintiffs
submitted their Nomination Notice. No one disputes that the bylaw was adopted on
the proverbial “clear day.” And Plaintiffs were well aware of, and understood, the
advance notice bylaw; indeed, the evidence reveals they parsed it carefully before
submitting their Nomination Notice.
3 BlackRock Credit Allocation Income Tr. v. Saba Cap. Master Fund, Ltd., 224 A.3d 964, 980 (Del. 2020) (internal quotation marks omitted). 4 Id. at 981.
3 Where Plaintiffs ultimately went wrong here is 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. While
the incumbent Board was not as responsive as it perhaps should have been, and was
operating under the structural conflicts that confront any incumbent board charged
with enforcing an advance notice bylaw in the face of a notice that stockholders
intend to propose a dissident slate for election to the board, the evidence presented
at trial does not support a finding that this incumbent Board engaged in manipulative
conduct in its dealings with Plaintiffs.
Applying the unambiguous terms of the advance notice bylaw, it is clear
Plaintiffs’ Nomination Notice fell short of what was required. In particular,
Plaintiffs were obliged to disclose who was “supporting” their efforts and
information regarding potential conflicts. Rather than offer specific information, or
even general information, regarding their supporters, Plaintiffs chose to disclose
nothing. They also failed to provide information regarding an obvious conflict
involving a nominator and a nominee. These omissions, in turn, left their
Nomination Notice fatally incomplete. And, since it was incomplete when
submitted on the eve of the deadline, the Nomination Notice did not provide “Timely
Notice” as defined and required by the advance notice bylaw. After so concluding,
4 the incumbent Board was justified in rejecting the Nomination Notice. Under these
circumstances, neither the bylaws nor equity justify the extraordinary remedy
Plaintiffs seek here. Their request for declaratory and mandatory injunctive relief,
therefore, must be denied.
I. BACKGROUND
The following facts were proven by a preponderance of the trial evidence.5
A. The Parties
Plaintiffs, Paul A. Rosenbaum, Jeffrey P. Beaty and Arthur L. Wilmes, are
individual stockholders of CytoDyn who, as of June 30, 2021, the date on which
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PAUL A. ROSENBAUM, JEFFREY P. ) BEATY, and ARTHUR L. WILMES, ) ) Plaintiffs, ) ) v. ) C.A. No. 2021-0728-JRS ) CYTODYN INC., SCOTT A. KELLY, ) NADER Z. POURHASSAN, JORDAN G. ) NAYDENOV, ALAN P. TIMMINS, ) SAMIR R. PATEL, and GORDON A. ) GARDINER, ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: October 8, 2021 Date Decided: October 13, 2021
Lisa Zwally Brown, Esquire of Greenberg Traurig, LLP, Wilmington, Delaware; Hal S. Shaftel, Esquire and Sarah E. Atlas, Esquire of Greenberg Traurig, LLP, New York, New York; and Brendan Quigley, Esquire and Brian Kerr, Esquire of Baker Botts LLP, New York, New York, Attorneys for Plaintiffs.
Kevin R. Shannon, Esquire, Jonathan A. Choa, Esquire, Christopher N. Kelly, Esquire and Daniel M. Rusk, IV, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware and Andrew W. Stern, Esquire, Isaac S. Greaney, Esquire, Alex J. Kaplan, Esquire and Charlotte K. Newell, Esquire of Sidley Austin LLP, New York, New York, Attorneys for Defendants.
SLIGHTS, Vice Chancellor On October 28, 2021, the stockholders of Defendant, CytoDyn Inc.
(“CytoDyn” or the “Company”), will hold their annual meeting (the “Annual
Meeting”). At that meeting, among other things, the stockholders will elect the latest
iteration of CytoDyn’s board of directors (the “Board”). CytoDyn’s bylaws require
stockholders to provide advance notice of matters they wish to place on the agenda
for the Annual Meeting, including their intent to nominate candidates for election to
the Board.
The plaintiffs in this action lead a group of dissident CytoDyn stockholders
who have proposed a slate of candidates for election to the Board. They allege they
provided advance notice of their nominations in compliance with CytoDyn’s bylaws
(the “Nomination Notice”). CytoDyn’s incumbent Board disagrees and has rejected
the Nomination Notice. Having done so, they now refuse to place Plaintiffs’
proposed slate of nominees on the ballot. In response, Plaintiffs initiated this action
against the incumbent Board and the Company to secure a declaration that the
Company has wrongfully rejected the Nomination Notice and a mandatory
injunction compelling the Company to allow Plaintiffs’ nominees to stand for
election.
1 The Court granted Plaintiffs’ application to expedite the litigation; the parties
have engaged in expedited discovery; and the matter has been submitted for decision
following a trial on a “paper record.” As explained below, my verdict is for
Defendants.
In a twist that suggests the law in this area may not be as settled as one would
think, particularly given the density of our jurisprudence in the “advance notice
bylaw” space, the parties have offered two very different perspectives of the standard
of review by which I should review the evidence and ultimately adjudicate the
dispute. Plaintiffs maintain the evidence presents a classic scenario that triggers
“Blasius review,” invoking Chancellor Allen’s seminal decision to argue that the
Court should subject Defendants’ conduct to enhanced scrutiny since the incumbent
Board has “act[ed] for the primary purpose of preventing the effectiveness of a
shareholder vote.”1 In doing so, Plaintiffs say, the Court should require Defendants
to prove a “compelling justification for [their] action[s].”2
Defendants, on the other hand, argue this case implicates nothing more than a
straightforward “contractual analysis,” arguing that since the bylaws represent a
contract between the Company and its stockholders, and the evidence clearly reveals
1 Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 660 (Del. Ch. 1988). 2 Id. at 661.
2 that Plaintiffs did not comply with the advance notice bylaw, Plaintiffs cannot
achieve the remedy they seek because they have not performed the contract they
seek to enforce. In this regard, they invoke our Supreme Court’s recent decision in
BlackRock Credit Allocation Income Trust v. Saba Capital Master Fund, Ltd., where
the Court made clear that “advance notice bylaws are commonplace and are
interpreted using contractual principles.”3 The Court went on to explain that
Delaware law will protect shareholders “in instances where there is manipulative
conduct or where the electoral machinery is applied inequitably,” but it ultimately
declined to apply heightened scrutiny upon concluding the evidence did not support
a finding that the incumbent board had engaged in “manipulative conduct.”4
Having carefully considered the parties’ arguments, I am satisfied that
enhanced scrutiny under Blasius is not justified here. As explained below,
CytoDyn’s advance notice bylaw had been in place for years before Plaintiffs
submitted their Nomination Notice. No one disputes that the bylaw was adopted on
the proverbial “clear day.” And Plaintiffs were well aware of, and understood, the
advance notice bylaw; indeed, the evidence reveals they parsed it carefully before
submitting their Nomination Notice.
3 BlackRock Credit Allocation Income Tr. v. Saba Cap. Master Fund, Ltd., 224 A.3d 964, 980 (Del. 2020) (internal quotation marks omitted). 4 Id. at 981.
3 Where Plaintiffs ultimately went wrong here is 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. While
the incumbent Board was not as responsive as it perhaps should have been, and was
operating under the structural conflicts that confront any incumbent board charged
with enforcing an advance notice bylaw in the face of a notice that stockholders
intend to propose a dissident slate for election to the board, the evidence presented
at trial does not support a finding that this incumbent Board engaged in manipulative
conduct in its dealings with Plaintiffs.
Applying the unambiguous terms of the advance notice bylaw, it is clear
Plaintiffs’ Nomination Notice fell short of what was required. In particular,
Plaintiffs were obliged to disclose who was “supporting” their efforts and
information regarding potential conflicts. Rather than offer specific information, or
even general information, regarding their supporters, Plaintiffs chose to disclose
nothing. They also failed to provide information regarding an obvious conflict
involving a nominator and a nominee. These omissions, in turn, left their
Nomination Notice fatally incomplete. And, since it was incomplete when
submitted on the eve of the deadline, the Nomination Notice did not provide “Timely
Notice” as defined and required by the advance notice bylaw. After so concluding,
4 the incumbent Board was justified in rejecting the Nomination Notice. Under these
circumstances, neither the bylaws nor equity justify the extraordinary remedy
Plaintiffs seek here. Their request for declaratory and mandatory injunctive relief,
therefore, must be denied.
I. BACKGROUND
The following facts were proven by a preponderance of the trial evidence.5
A. The Parties
Plaintiffs, Paul A. Rosenbaum, Jeffrey P. Beaty and Arthur L. Wilmes, are
individual stockholders of CytoDyn who, as of June 30, 2021, the date on which
Plaintiffs submitted their Nomination Notice to CytoDyn, collectively owned
2,278,888 shares of CytoDyn common stock.6
The individual defendants are all members of the incumbent Board.7
In addition to serving as directors, Defendants, Scott A. Kelly and Nader Z.
5 Joint trial exhibits are cited as “JX #.” Depositions taken for trial and submitted to the Court are cited as “[Witness Name] Dep. [Page:Line].” For ease of reference, individuals are identified by their surnames without regard to formal titles, such as “Dr.” No disrespect is intended. 6 Pls.’ Verified Compl. for Declaratory Relief (D.I. 1) (“Compl.”) ¶ 6. 7 Compl. ¶ 9.
5 Pourhassan, are both officers of CytoDyn, holding the positions of Chief Medical
Officer and Chief Executive Officer, respectively.8
Defendant, CytoDyn, is a pharmaceutical firm with its principal place of
business in Vancouver, Washington.9 CytoDyn is in the process of developing and
commercializing a new drug, Leronlimab, a monoclonal antibody intended as a
treatment for COVID-19, HIV and cancer.10 The drug is still in development and
has yet to receive regulatory approval.11
B. The CytoDyn Bylaws
CytoDyn was initially formed as a Colorado corporation but was
reincorporated in Delaware in 2015.12 The reincorporation was effected by the
merger of the Colorado entity with and into a newly formed, wholly owned Delaware
subsidiary, leaving CytoDyn as the surviving entity.13 As part of the reincorporation
process, the Company adopted a new certificate of incorporation and new bylaws,
8 Id. 9 Compl. ¶¶ 2, 8. 10 Compl. ¶¶ 2, 8, 15. 11 Compl. ¶¶ 8, 15; Defs.’ Answer and Defenses to Verified Compl. ¶ 8; Defs.’ Opening Pre-Trial Br. (“DOB”) (D.I. 42) at 3; JX093.0001; JX266.0002. 12 JX004.0002. 13 Id.
6 which, along with the reincorporation and terms of the merger, were approved by
CytoDyn’s stockholders at the Company’s 2015 Annual Meeting.14
As described in the Form 8-K filed by CytoDyn on November 19, 2018,
CytoDyn engaged in a holding company reorganization under Section 251(g) of the
Delaware General Corporation Law (“DGCL”) in 2018.15 To effect the
reorganization, the Company needed to adopt amended and restated bylaws.16
Accordingly, CytoDyn adopted the Amended and Restated By-Laws of
CytoDyn Inc. on November 16, 2018 (the “Bylaws”). As required under
Section 251(g) of the DGCL, the substance of the Bylaws was identical to the bylaws
14 Id. 15 CytoDyn Inc., Current Report (Form 8-K), at 2, 7 (Nov. 19, 2018). While neither party disputes that the Bylaws were properly adopted years before the Nomination Notice was submitted, neither party cited to evidence that supported this assumption. In their opening brief, Defendants cite to JX004 (Form 8-K for CytoDyn filed on September 1, 2015) to support the fact that CytoDyn adopted new governing documents in connection with its reincorporation from Colorado to Delaware. Yet, to support the statement that CytoDyn properly adopted the amended and restated bylaws on November 16, 2018, Defendants cite only to JX239, which is a copy of the actual bylaws. Accordingly, I turned to the Form 8- K filed by CytoDyn on November 19, 2018, to confirm that the current bylaws were properly adopted, even though the filing was not submitted as an exhibit. CytoDyn was required by law to file the Form 8-K disclosing the adoption of the Bylaws, and so it is properly subject to judicial notice for the limited purpose of confirming that the current bylaws were adopted as disclosed. See, e.g., In re Tyson Foods, Inc. Consol. S’holder Litig., 919 A.2d 563, 584 (Del. Ch. 2007) (holding that the court may take judicial notice of public documents such as SEC filings that are required by law to be filed); accord Wal- Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 n.28 (Del. 2004) (same). 16 CytoDyn Inc., Current Report (Form 8-K), at 7 (Nov. 19, 2018).
7 adopted by CytoDyn’s stockholders in 2015.17 The Bylaws remain in force today
and include the advance notice bylaw at issue here.18
The advance notice bylaw, Article I, Section 2 of the Bylaws, is entitled
“Notice of Stockholder Business and Nominations” (the “Advance Notice
Bylaw”).19 It provides, in relevant part, that “[n]ominations of persons for election
to the Board of Directors and the proposal of other business to be considered by the
stockholders may be brought before an Annual Meeting only”: (i) pursuant to
CytoDyn’s notice of a meeting, (ii) by or at the direction of the Board or (iii) by a
qualifying stockholder.20 It then clarifies that, for nominations by stockholders, such
nominations may be made “by any stockholder of [CytoDyn] who was a stockholder
of record at the time of giving of notice provided for in this [Bylaw], who is entitled
to vote at the meeting, and who complies with the notice procedures set forth in this
[Bylaw] as to such nomination or business.”21
17 Id. 18 DOB at 6. 19 JX017.0001 (Bylaws Art. I § 2). 20 JX017.0001 (Bylaws Art. I § 2(a)(1)). 21 Id. The parties do not dispute that Plaintiffs were stockholders of record at the time the Nomination Notice was submitted and that Plaintiffs are entitled to vote at the upcoming annual stockholder meeting. As previewed, this dispute centers around whether Plaintiffs complied with the requisite notice procedures.
8 Section 2(a)(2) of the Advance Notice Bylaw provides that for a stockholder’s
nomination to be deemed proper,
the stockholder must (i) have given Timely Notice (as defined below) thereof in writing to the Secretary of the Corporation, (ii) have provided any updates or supplements to such notice at the times and in the forms required by this [Bylaw], and (iii) together with the beneficial owner(s), if any, on whose behalf the nomination or business proposal is made, have acted in accordance with the representations set forth in the Solicitation Statement (as defined below) required by this [Bylaw].22
Additionally, the Advance Notice Bylaw details categories of information that
“[s]uch stockholder’s Timely Notice shall set forth.”23 According to Defendants,
four such categories are relevant here:24
First, the Advance Notice Bylaw incorporates the disclosure requirements in
Regulation 14A of the Securities Exchange Act of 1934:25
(A) as to each person whom the stockholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for
22 See JX017.0001 (Bylaws Art. I § 2(a)(2)). To be considered a “Timely Notice,” a stockholder’s compliant written notice must be received by CytoDyn’s secretary at CytoDyn’s principal executive offices no later than close of business on the 90th day nor earlier than the close of business on the 120th day prior to the one-year anniversary of the preceding year’s Annual Meeting. While the Bylaws do provide for alternative methods of calculating the notice deadline if no Annual Meeting was held in the preceding year, there is no dispute that, this year, any stockholder notice of nomination was due, at the latest, on July 2, 2021. 23 Id. 24 DOB at 7–11. 25 Regulation 14A sets forth the rules relating to the solicitation of proxies, including Rules 14A-1 to 14B-2.
9 election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected) provided, further, that the Corporation may require any proposed nominee to furnish such other information as the Corporation may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the Corporation.26
That same information is required with respect to the “Proposing Persons” and their
solicitation:27
(C) (i) the name and address of the stockholder giving the notice, as they appear on the Corporation’s books, and the names and addresses of the other Proposing Persons (if any) and . . . (iv) any other information relating to such stockholder and beneficial owner, if any, required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitation of proxies for, as applicable, the proposal and/or for the election of directors in an election contest pursuant to and in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder;28
Second, in Subsection D, the Advance Notice Bylaw requires disclosure of
additional information regarding the Proposing Persons:
(D) (i) a description of all agreements, arrangements or understandings by and among any of the Proposing Persons, or by and among any Proposing Persons and any other person (including with
26 JX239.0001. 27 “Proposing Persons” is defined in the Advance Notice Bylaw as “the following persons: (i) the stockholder of record providing the notice of nominations or business proposed to be brought before a stockholders’ meeting, and (ii) the beneficial owner(s), if different, on whose behalf the nominations or business proposed to be brought before a stockholders’ meeting is made.” JX017.0001. 28 JX239.0001–0002.
10 any proposed nominee(s), including any agreements, arrangements or understandings relating to any compensation or payments to be paid to any such proposed nominee(s)), pertaining to the nomination(s) or other business proposed to be brought before the meeting of stockholders (which description shall identify the name of each other person who is party to such an agreement, arrangement or understanding) . . . .29
Third, Subsection D then requires that a Timely Notice disclose the:
(ii) identification of the names and addresses of other stockholders (including beneficial owners) known by any of the Proposing Persons to support such nominations or other business proposal(s), and to the extent known the class and number of all shares of the Corporation’s capital stock owned beneficially or of record by such other stockholder(s) or other beneficial owner(s);30
Fourth, “[i]n addition to the requirements set forth elsewhere,” the Advance
Notice Bylaw requires that “to be eligible to be a nominee,” one “must deliver, in
accordance with the time periods for delivery of Timely Notice . . . a completed and
signed questionnaire with respect to the background and qualification of such
proposed nominee and the background of any other person or entity on whose behalf
the nomination is being made. . . .”31
29 JX239.0002 (emphasis added). 30 JX239.0002. 31 JX239.0004; accord JX061.0004 (memo from Rosenbaum outlining certain requirements of the Advance Notice Bylaw).
11 The Advance Notice Bylaw explicitly provides that except as provided by the
Exchange Act, “only such persons who are nominated in accordance with the
provisions of this By-law shall be eligible for election . . . .”32 The consequences for
non-compliance are stated clearly:
The Board of Directors or a designated committee thereof shall have the power to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the provisions of this By-law. . . . If the Board of Directors or a designated committee thereof or the presiding officer, as applicable, determines that any stockholder proposal or nomination was not made in accordance with the provisions of this By-law, such proposal or nomination shall be disregarded and shall not be presented for action at the meeting.33
C. Plaintiffs’ Proposed Slate
Plaintiffs’ proposed director slate consists of Plaintiff, Rosenbaum, and non-
party nominees, Thomas Errico, Bruce Patterson, Melissa Yeager and Peter Staats
(collectively, “Plaintiffs’ Nominees”).34 Patterson and Beaty have ties to another
company, IncellDx, Inc. (“IncellDx”), which itself was a CytoDyn stockholder as of
the date of the Nomination Notice.35 According to Defendants, Plaintiffs
32 JX239.0003. 33 Id. 34 Compl. ¶ 7. 35 JX178.0037 (Schedule 13D submitted on behalf of Plaintiffs and other dissident stockholders: “The shares listed as being beneficially owned by Dr. Patterson are directly owned by IncellDx, of which Dr. Patterson is the Chief Executive Officer.”). Patterson is the founder, Chief Executive Officer and director of IncellDx, which is a private 12 intentionally failed to disclose certain information in their Nomination Notice to hide
the central role that IncellDx and its owners—among them, Plaintiff Beaty and
Nominee Patterson—are playing in support of Plaintiffs’ Nominees.36
D. CytoDyn’s History with IncellDx
The complicated relationship between CytoDyn and IncellDx, which certainly
colors the parties’ adversarial positions in this action, extends beyond having
potentially overlapping owners and directors. Between October 2018 and
May 2020, Patterson served as a consultant for CytoDyn, providing assistance with
certain assay tests relating to HIV and COVID-19.37 This relationship was governed
by a consulting agreement dated October 10, 2018 (the “Consulting Agreement”).38
More relevant here, on May 22, 2020, Patterson emailed a presentation to
Defendants Pourhassan and Kelly outlining a proposal whereby CytoDyn would
acquire IncellDx for as much as $350 million.39 The proposal contemplated that
diagnostics company incorporated in Delaware. JX175.0140; Beaty Dep. 24:4, 145:11; JX265. Patterson and his wife collectively own approximately 33.04% of IncellDx. JX175.0144. Beaty, like Patterson, is an IncellDx director and stockholder. Beaty Dep. 24:18–25:1. Beaty is the owner of roughly 2.3% of IncellDx’s common stock. Beaty Dep. 26:17–19. 36 DOB at 2. As discussed below, Defendants maintain that IncellDx is not aligned with the long-term interests of CytoDyn and its stockholders. 37 JX014. 38 JX014; JX023.0001. 39 JX025.0003–0017; Beaty Dep. 73:23–74:3. According to the proposal, notwithstanding IncellDx’s relatively steep asking price, IncellDx’s annual revenue in 2019 was only 13 CytoDyn would employ Patterson if the transaction was consummated.40 Once
received, Kelly promptly forwarded the proposal for action by the entire Board.41
That same day, Patterson resigned from his consultant position and expressed
excitement regarding his future employment with CytoDyn.42 After consideration
by the Board, CytoDyn did not accept the proposal.43
Less than two months after resigning as a consultant for CytoDyn, Patterson
filed an application with the United States Patent and Trademark Office on behalf of
IncellDx to patent methods for treating certain infections using means similar to
CytoDyn’s drug, Leronlimab.44 CytoDyn subsequently (and successfully)
challenged the move by filing a third-party submission to the United States Patent
Office to block IncellDx’s patent application.45 According to Defendants, this patent
$4 million. JX025.0010; JX207.0010. I note that the parties dispute who, as among CytoDyn and IncellDx, made the first overture. Because I am satisfied the answer to that question ultimately does not matter, I decline to resolve that dispute here. 40 JX025.0013. 41 JX025.0001. 42 JX024.0002. 43 Beaty Dep. 83:17–20. 44 JX028.0001; JX250. 45 JX250.
14 dispute was fresh in the minds of Plaintiffs when they submitted their Nomination
Notice.46
E. Plaintiffs Prepare for a Proxy Contest
Plaintiffs began considering a proxy campaign as early as March 2021.
On March 22, 2021, Rosenbaum, a former practicing attorney, sent a memo to
certain CytoDyn stockholders, which summarized the Bylaws pertaining to director
candidate nominations and provided advice on how to comply with the
requirements.47 Rosenbaum wrote:
It is crucial to strictly follow all of these procedures because if it is determined by the Board “or a designated committee thereof or the presiding officer,” that “any stockholder proposal or nomination was not made in accordance with the provisions of this By-law, such proposal or nomination shall be disregarded and shall not be presented for action at the meeting.”48
Five days later, on March 27, 2021, apparently as a reminder, Rosenbaum
forwarded an email to himself, dated November 28, 2020, that was originally sent to
CytoDyn’s Board “on behalf of CytoDyn shareholders representing over
46 DOB 12, 18. 47 DOB at 13; JX050.0002–0005; JX061.0001–0004; JX074.0001. 48 JX050.0003 (citing the Bylaws); JX061.0001 (same).
15 175,000,000 shares of common stock and growing.”49 In this email, among other
initiatives, the stockholders advocated for the “reestablish[ment] [of] a robust
cooperative, collaborative, and harmonious scientific and business relationship”
between CytoDyn, Patterson and IncellDx.50 The email reported that the interested
CytoDyn stockholders “believe that negotiations between the parties would be
mutually beneficial and critical to the success of CytoDyn.”51
A few weeks later, on April 16, 2021, Wilmes sent Rosenbaum an excerpt of
the Bylaws, including the Advance Notice Bylaw, and asked, “Has the date for the
Annual Meeting been set? You are aware of the 90[-day] prior deadline for filing
nominations.”52 Rosenbaum replied, “Not yet!!! Have my eye on it.”53
Patterson’s and IncellDx’s Role
By the start of the following month, preparations for the Plaintiffs’ proxy
contest were well underway, including the hiring of lawyers, a proxy solicitation
49 JX052.0001. See Beaty Dep. 116:22–23. The stockholder who originally sent this email ultimately provided financial support for the Rosenbaum-led proxy contest. He is also an IncellDx shareholder. See Patterson Dep. 194:24–195:5. 50 Id. 51 JX052.0002. 52 JX058.0001. 53 Id.
16 firm and a public relations firm to support Plaintiffs’ efforts.54 Following a May 6,
2021 meeting of dissident stockholders, including Dr. Patterson and “35 very large
stockholders of [CytoDyn],” a non-party CytoDyn stockholder wrote in an email that
the stockholder group believed “the lack of management experience” was hurting
CytoDyn’s effort to obtain FDA approval for Leronlimab.55 The email stated that
the group planned to replace certain executive members of the Board by means of a
proxy vote at the upcoming Annual Meeting.56 According to the email, Patterson
and ex-CEO of eBay, Devon Williams, would be nominated and, once in place,
“Patterson [] said he would consider merging IncellDx with [CytoDyn] to help give
[CytoDyn] immediate creditably [sic] and the resources to get the drug approved.”57
54 JX251; JX252; Rosenbaum Dep. 47:11–14. 55 JX076.0001. I note that Plaintiffs went to great lengths in their briefs to justify the bona fides of their proxy contest. For instance, they remind the Court that just last year Vice Chancellor Fioravanti “rebuked Pourhassan, Kelly and other Board members” for demonstrating “unmitigated greed” in granting themselves “improper stock grants.” Pls.’ Opening Br. in Advance of Final Hr’g on the Merits (“POB”) (D.I. 41) at 3. They also question a governance structure where Pourhassan, as Board member, is meant to answer to the Chairman of the Board, Kelly, while Kelly, as Chief Medical Officer, is meant to answer to Pourhassan as Chief Executive Officer. POB at 9 (citing Kelly Dep. 9:2–17; Pourhassan Dep. 19:23–20:10). While these are troubling facts, they are, as explained below, ultimately irrelevant to the issues presented here. CytoDyn has an Advance Notice Bylaw. Plaintiffs failed to comply with that bylaw in the submission of their Nomination Notice. And the deficiencies were significant. Accordingly, the incumbent Board properly rejected the defective notice. 56 JX076.0001. 57 Id.
17 The email went on to solicit donations to pay for legal fees and advertising to support
the effort, with funds to be held by “CCTV.”58 CCTV was likely a reference to
CCTV Proxy Group, LLC (short for “CytoDyn Committee To Victory”), a limited
liability company formed by Rosenbaum to fund the proxy contest.59 Rosenbaum
maintained handwritten notes of the names of the donors to CCTV, their incremental
donation amounts and the total donation tallies as of various dates.60
Throughout May 2021, Rosenbaum sent multiple emails to CytoDyn
stockholders regarding the pending proxy contest.61 In a May 8 email to dissident
stockholders, Rosenbaum announced that “Dr[.] Bruce Patterson will head up the
proposed new BD for CytoDyn if were [sic] successful.”62 Four days later,
Rosenbaum sent another email announcing that the dissident stockholders had met
their minimum goal of getting “5% of the outstanding shares of the company,” but
still needed financial contributions to pay (1) a law firm for filing requirements and
legal issues, (2) a proxy firm to help win an election, and (3) a social media firm.63
58 Id. 59 JX095.0001–0002; see also Rosenbaum Dep. 44:16–22. 60 JX243. 61 JX080; JX087. 62 JX270.0002. 63 JX087.0001 (emphasis omitted).
18 In the same email, Rosenbaum assured the stockholders that he and three other
“activist investors” would form an LLC “and take most of the responsibilities.”64
Based on the evidence, it is reasonable to infer that this LLC was, in fact, CCTV.
Defendants’ Reactions to Plaintiffs’ Organizing Efforts
While Plaintiffs were busy coordinating their proxy contest, the Board was
busy taking actions that Plaintiffs allege were meant deliberately to undermine
Plaintiffs’ efforts.65 The Board’s first move came on May 19, 2021, when Kelly
wrote to the other CytoDyn directors to share his view that the actions of the
dissident group justified “considering Gordon Gardiner at your earliest convenience
[to be seated as an additional] independent director.”66 In response, Patel asked for
more information on the proxy campaign and on Gardiner, to which Kelly rejoined,
“[w]e believe having another independent director at this time would be of value to
the company and for our shareholders.”67 On June 30, 2021, Gardiner’s appointment
to the Board was approved, effective the following day.68
64 Id. 65 POB at 25. 66 JX096.0002. 67 JX096.0001. 68 JX184.0002. Plaintiffs do not directly challenge Gardiner’s appointment and seek no relief in that regard.
19 In an attempt to stay abreast of Plaintiffs’ burgeoning proxy contest,
Defendants employed stockholder Chris Lonsford as a consultant.69 Lonsford
surreptitiously accessed emails among dissident stockholders and forwarded them to
Pourhassan, attempted to sow discord among the dissident group, wrote weekly
summaries about CCTV, and monitored Patterson’s role in the proxy campaign and
the general sentiments of the stockholders (both pro-management and dissident).70
On May 14, 2021, Lonsford updated CytoDyn’s Corporate Secretary, Arian
Colachis, that “Bruce Patterson’s agenda is to get [IncellDx] aquired [sic] and
nothing more.”71
Rosenbaum was suspicious of Lonsford’s role as a potential ‘spy’ and
dispatched his son, Russ Rosenbaum, covertly to monitor attendance at dissident
stockholder meetings.72 In an email to his father, Rosenbaum’s son wrote:
“Of course I’ll be watching out for Chris Lonsford. Be really interesting to see if he
donates.”73
69 JX182.0001. 70 JX079.0001–0004; JX139; JX167; JX182; JX197; JX 267. 71 JX089.0002. 72 JX081.0001–0002. Rosenbaum wrote to his son “[w]hat name did you use?” The response: “Sam Brown.” JX081.0001. 73 JX081.0001.
20 F. Plaintiffs File Their Schedule 13D and Nomination Notice
On May 24, 2021, Plaintiffs filed a Schedule 13D with the Securities
Exchange Commission (“SEC”).74 They sent their Nomination Notice to CytoDyn
more than a month later, on June 30, 2021.75 The Nomination Notice was received
by the Company the next day, one day before the deadline set by the Advance Notice
Bylaw.76
The 222-page Nomination Notice provided information about the Plaintiffs,
their nominees and answers to the questionnaires that were incorporated within the
Advance Notice Bylaw.77 Relevant here, one of the questions to which Patterson
responded reads as follows:
B1. Since June 1, 2019, have you . . . engaged in any “transaction,” or has any “transaction” which currently is under consideration been proposed, in which [CytoDyn] or any of its “subsidiaries” was or is to be a participant and the amount involved exceeds $120,000 and in which you . . . will have a direct or indirect “material” interest? . . . In response to this question, you should include any indirect interest arising from a position or relationship you have with an entity engaged in the transaction with the [CytoDyn] or its subsidiary . . . You should
74 JX102; JX104.0001. 75 JX175. 76 Compl. ¶ 22. Under Section 2(a)(2) of the Bylaws, nomination notices were required to be received between 90 to 120 days before the Annual Meeting, which is set to occur on October 28 of this year. JX017.0001. 77 JX175.0001–0222.
21 also include any direct or indirect remuneration from [CytoDyn] or any “subsidiary” to you . . . .78
Patterson responded by disclosing the existence and monetary terms of the
Consulting Agreement and a license and supply agreement between CytoDyn and
IncellDx involving certain patent rights.79 According to his response, he received
approximately $90,000 from CytoDyn under the Consulting Agreement, and as of
June 24, 2021, IncellDx had purchased $4,500 worth of PA-14 and PRO 140 under
the license and supply agreement.80 Patterson, however, elected not to disclose that
IncellDx had made a proposal to CytoDyn the year before to be acquired for as
much as $350 million.81
The questionnaire also asked about the nominees’ control over business
entities and whether there were anticipated transactions between any of those entities
and CytoDyn. Patterson’s answers are noted in bold:
B6. Do you control, either directly or indirectly, any [such] entities?82 X No.83
78 JX175.0143. 79 JX175.0144. 80 JX175.0145 81 JX025.0003–0017; Beaty Dep. 73:23–74:3. 82 JX175.0146. 83 Id.
22 B7. Can you exert significant influence, either directly or indirectly, over any entities, to the extent that the entity may be prevented from fully pursuing its own separate interests with regard to any transaction with [CytoDyn] and its affiliates? A relationship that meets this level of influence should be identified even if there are no current or anticipated transactions between the entity and [CytoDyn] and its affiliates.84 X No.85
F7. Are you or an “immediate family member” a partner in, or a “controlling” shareholder or an “executive officer” of, any entity to which [CytoDyn] made, or from which [CytoDyn] received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is greater, other than (i) payments arising solely from investments in the [CytoDyn]’s Securities; or (ii) payments under non-discretionary charitable contribution matching programs?86 X Yes. CEO of IncellDx which has had business dealings with [CytoDyn] as described in the response to Question B1.87
F.14 Do you have any relationship that could interfere, or be viewed by third parties as interfering, with your exercise of independent judgment in carrying out your responsibilities as a director?88 X No.89
84 Id. 85 Id. 86 JX175.0156–0157. 87 JX175.0157. 88 Id. 89 Id.
23 Again, Patterson did not disclose the prior IncellDx proposal or that a potential future
transaction between CytoDyn or IncellDx was being considered by IncellDx
insiders, as discussed below.
The questionnaire then required that the Proposing Persons identify those who
support the nomination efforts. Specifically, as noted, Section 2(D)(ii) of the
Advance Notice Bylaw requires, in part:
[I]dentification of the names and addresses of other stockholders (including beneficial owners) known by any of the Proposing Persons to support nominations or other business proposal(s), and to the extent known the class and number of all shares of the Corporations’ capital stock owned beneficially or of record by such other stockholder(s) or other beneficial owner(s) . . . .90
The Nomination Notice identified no such supporters. Indeed, the response
to Section 9(A) of the Advance Notice Bylaw appears to have been intended to take
the Board off the scent of any behind-the-scenes support:
9. (A) A description of all agreements, arrangements or understandings by and among any of the Proposing Persons and any other person (including with any Nominee(s), including any agreements, arrangements or understandings relating to any compensation or payments to be paid to any such Nominee(s)), pertaining to the nominations (which description shall identify the name of each other person who is party to such agreement, arrangement or understanding), and (B) identification of the names and addresses of other stockholders (including beneficial owners) known by any Proposing Person to support such nominations, and to the extent known the class and number of all shares of the Corporation’s capital stock owned
90 JX239.0002.
24 beneficially or of record by such other stockholder(s) or other beneficial owner(s).91 X Except as otherwise disclosed in this Notice,92 there are no arrangements or understandings among any Proposing Persons or between any Proposing Persons and the Nominees or any other person or persons pertaining to the nominations.93
Surprisingly, CCTV’s role was not identified, even in Rosenbaum’s response
to the following questions in the questionnaire:
A8. Is there any “arrangement” or understanding between you and any other person or persons pursuant to which you are receiving or may receive any compensation (including any non-cash compensation) for your candidacy as a director nominee or service as a director of [CytoDyn]?94 X No.95
B6. Do you control, either directly or indirectly, any entities?96 X No.97
91 JX175.0010 92 No “arrangements or understandings” are “otherwise disclosed in [the] Notice.” 93 Id. 94 JX175.0089. 95 Id. 96 JX175.0092. 97 Id.
25 G. Defendants Reject the Nomination Notice
On July 7, 2021, the Board met to discuss the Nomination Notice but took no
formal action.98 On July 20, 2021, having received no response from the Board,
Plaintiffs filed a preliminary proxy statement with the SEC. 99 Three days later, on
July 23, the Board met again to discuss the Nomination Notice and authorized the
transmittal of a letter to Plaintiffs rejecting the Nomination Notice (the “Deficiency
Letter”) for failure to comply with the Advance Notice Bylaw and federal securities
regulations.100
On July 30, 2021, almost a full month after receiving the Nomination Notice,
CytoDyn sent the Deficiency Letter to Plaintiffs.101 This was the Company’s first
formal communication with Plaintiffs since receiving the Nomination Notice.102
Several deficiencies were identified, but chief among them were the failure to
disclose the prior proposal that CytoDyn acquire IncellDx, Patterson’s patent
disputes with the Company, the intent to name Patterson as CMO of CytoDyn and
98 JX185.0001. 99 JX193. 100 JX196.0001. 101 JX201. 102 Kelly Dep. 69:6–20, 156:18–25, 157:1.
26 the existence (much less the identity) of any supporters of the nominations, including
CCTV.103
Specifically, with regard to Patterson, the Deficiency Letter explained:
c. Question B6 asks whether Dr. Patterson controls any entities, either directly or indirectly. Dr. Patterson’s response is “no,” but it is clear that Dr. Patterson controls IncellDx as both its CEO and a significant stockholder (together with his wife, Dr. Patterson owns approximately 34% of IncellDx).104
d. Question B7 asks whether Dr. Patterson can exert significant influence over an entity, to the extent that such entity may be prevented from pursuing its own separate interests in a transaction with [CytoDyn]. Dr. Patterson’s response is “no,” but Dr. Patterson clearly exerts significant influence over IncellDx as both its CEO and a significant stockholder. In a potential transaction between [CytoDyn] and IncellDx, Dr. Patterson would be highly conflicted if he were serving on the [CytoDyn] board.105
i. Dr. Patterson’s response to question F7 fails to specify that Dr. Patterson is a controlling stockholder of IncellDx. Together with his wife, Dr. Patterson owns approximately 34% of IncellDx; that substantial ownership stake, combined with his role as CEO and his relationship with IncellDx’s directors, including Mr. Beaty, leads us to conclude that Dr. Patterson is IncellDx’s controlling stockholder. This seems largely corroborated by Dr. Patterson’s beneficial ownership disclosure, in which he identifies himself as beneficially owning shares that are directly owned by IncellDx.106
103 JX201.0004. 104 JX201.0005. 105 JX201.0005–0006 (emphasis in original). 106 JX201.0006
27 j. In his response to question F14, Dr. Patterson states that he has no relationships that could interfere with his independent judgement in carrying out his duties as a director. Again, Dr. Patterson fails to state that he is CEO and a significant stockholder in IncellDx, a company that has had a working relationship with [CytoDyn] in the past and has expressed interest in being purchased by [CytoDyn] in the future, as evidence by the May 22, 2020 proposal put forth by IncellDx . . . wherein [CytoDyn] was to acquire IncellDx for $350 million and Dr. Patterson was to become an employee of [CytoDyn].107
Moreover, Exchange Act Rule 14a-9 mandates that the Proposing Persons may not omit “to state any material fact necessary in order to make statements [in the Notice Letter] not false or misleading.” In fact, the Notice Letter omits multiple facts that make it incomplete, false and misleading. For instance, the Notice Letter fails to discuss the prior relationship between one of the nominees, Dr. Patterson, who is the CEO of IncellDx, Inc., and [CytoDyn]. The Notice Letter does not state that: (i) [CytoDyn]’s consulting agreement with IncellDx was terminated by Dr. Patterson, (ii) in May 2020, IncellDx made a private offer to be purchased by [CytoDyn], which [CytoDyn] rejected because it was not in the best interest of [CytoDyn] and its stockholders, and (iii) Dr. Patterson attempted to patent certain uses of [CytoDyn]’s drug candidate, [L]eronlimab, as his own, which was rejected by the U.S. Patent and Trademarks Office. These facts make Dr. Patterson highly conflicted with respect to [CytoDyn] and are therefore material, and none of these material facts have been disclosed in the Notice Letter.108
With regard to CCTV, the Deficiency Letter explained:
[T]he Notice Letter omits the material fact that Mr. Rosenbaum formed an entity called CCTV Proxy Group, LLC . . . CCTV is the entity through which the Proposing Persons will ostensibly be managing and funding their proxy campaign, but the Notice Letter does not disclose
107 JX201.0006–0007. 108 JX201.0004.
28 the existence of CCTV, nor provide any information about which individuals control CCTV or where CCTV receives its funding.109
H. The Parties Correspond Regarding the Deficient Nomination Notice
On August 11, 2021, Plaintiffs, through their legal counsel, responded to the
Deficiency Letter (the “Response Letter”).110 They claimed they had properly
disclosed the requested information relating to Patterson, and they disputed whether
IncellDx’s prior proposal to be acquired or the patent dispute between CytoDyn and
IncellDx were sufficiently material to require disclosure.111 As for CCTV, Plaintiffs
maintained that the Advance Notice Bylaw did not require the disclosure of CCTV’s
funders.112 Nevertheless, Plaintiffs included a supplemental notice with the
Response Letter containing additional information that purportedly cured any
deficiencies and demonstrated their willingness to disclose all information needed
to move forward with their nominees.113 Finally, Plaintiffs stated that if CytoDyn
did not “honor” the Nomination Notice by August 18, 2021, they would initiate legal
proceedings to compel compliance.114
109 Id. 110 JX211. 111 JX211.0007. 112 JX211.0008–0009. 113 POB at 56. 114 JX211.0020.
29 On August 18, 2021, CytoDyn responded via letter that the supplemental
notice included with the Response Letter had not cured the deficiencies, and then
declared that Plaintiffs did “not have the right to nominate any candidates for
election as directors at the 2021 Annual Meeting.”115
I. Procedural History
CytoDyn beat Plaintiffs to the litigation punch. On August 5, 2021, after
rejecting the Nomination Notice, CytoDyn filed suit in the United States District
Court for the District of Delaware against Plaintiffs and their nominees for violations
of the Securities and Exchange Act of 1934.116 Just over a week later, on August 13,
Plaintiffs filed an amended preliminary proxy in which they provided more detail
regarding Patterson’s prior acquisition proposal on behalf of IncellDx to CytoDyn,
the nature of the patent dispute between the two companies, and the existence of
CCTV and its financial backers.117 Plaintiffs filed their definitive proxy statement
on August 18.118
115 JX216.0001. 116 JX208. 117 JX258.0023, JX258.0042. 118 JX215.
30 Plaintiffs initiated this action on August 24, 2021.119 They sought expedited
scheduling, which the Court granted on September 2, 2021.120 The parties ultimately
agreed to dismiss the District Court action without prejudice, and then proceeded
with expedited discovery in this case through September 20, 2021.121 The Court
convened a trial on a paper record on October 6, 2021, and received supplemental
submissions from the parties regarding the standard of review on October 8, 2021.
The matter was deemed submitted for decision that day.
II. ANALYSIS
I begin with a brief exposition on the applicable standard of review. Upon
concluding that enhanced scrutiny under Blasius is not justified here, I then consider
the unambiguous terms of the Advance Notice Bylaw and the evidence of Plaintiffs’
non-compliance with those terms. By a preponderance of the evidence, I conclude
that Plaintiffs’ Nomination Notice was deficient and there is no basis in equity to
excuse the deficiency.122 The verdict, therefore, is for Defendants.
119 D.I. 1. 120 D.I. 31. 121 JX238.0002; D.I. 23. 122 See Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 1971) (holding that “inequitable action does not become permissible simply because it is legally possible”).
31 A. The Applicable Injunction Standard and Standard of Review
As noted, Plaintiffs seek both declaratory and injunctive relief.123 As for the
injunctive relief, through the briefing, it appeared the parties were disputing the
precise nature of the equitable relief Plaintiffs were seeking.124 To the extent that
question remains in dispute, it is clear Plaintiffs seek permanent, mandatory
injunctive relief. First, their prayer for remedies includes an order that would
definitively allow Plaintiffs’ Nominees to stand for election notwithstanding the
Board’s rejection of the Nomination Notice.125 This amounts to all of the injunctive
relief Plaintiffs could hope to achieve through a final judgment on the merits. That
is permanent injunctive relief.126 Second, they seek an order that would require the
123 Compl. ¶ 42. 124 E.g., DOB at 27 (“The relief they seek is purportedly preliminary, but their request amounts to a mandatory, permanent injunction that would award them all relief requested in connection with the 2021 annual meeting.”); Pls.’ Answering Br. in Supp. of Final Hr’g on the Merits (“PAB”) (D.I. 55) at 44 (“Plaintiffs are not requesting, and have not requested, preliminary relief.”). 125 Compl. ¶ 42. 126 See, e.g., Saba, 224 A.3d at 976–77 (“There is a ‘higher mandatory injunction standard where, instead of seeking to preserve the status quo as interim relief, [plaintiffs], as a practical matter, seek the very relief that they would hope to receive in a final decision on the merits.’” (quoting Alpha Builders, Inc. v. Sullivan, 2004 WL 2694917, at *3 (Del. Ch. Nov. 5, 2004)); H.F. Ahmanson & Co. v. Great W. Fin. Corp., 1997 WL 305824, at *6, 12 (Del. Ch. June 3, 1997) (outlining the burdens imposed upon the movant who seeks permanent injunctive relief).
32 Board to do that which it does not wish to do––to place the Plaintiffs’ Nominees on
the ballot for the Annual Meeting.127 That is mandatory injunctive relief.128
Defendants argue that Plaintiffs cannot sustain their burden to prove any of
the prima facie elements for permanent injunctive relief—that the merits of their
claim are supported by the law and the preponderance of the evidence, that Plaintiffs
would suffer irreparable harm absent the injunction, and that the balance of equities
favors the award of injunctive relief.129 I need not dwell on irreparable harm or
balance of the equities because I am satisfied Plaintiffs have failed to meet their
burden to prove the merits of their claim.130
Turning to the merits, as noted, Plaintiffs argue the Court should analyze the
Board’s rejection of their Nomination Notice under the standard laid out in Blasius,
while Defendants contend the analysis is purely contractual and that any review of
127 Compl. ¶ 42. 128 C&J Energy Servs., Inc. v. City of Miami Gen. Empls.’ & Sanitation Emps.’ Ret. Tr., 107 A.3d 1049, 1053–54 (Del. 2014) (observing that “[m]andatory injunctions” are orders of the court “requiring a party to take affirmative action,” and holding that such relief “should only issue with the confidence of findings made after a trial or on undisputed facts”). 129 H.F. Ahmanson & Co., 1997 WL 305824, at *6. 130 See N. River Ins. Co. v. Mine Safety Appliances Co., 105 A.3d 369, 384 (Del. 2014) (observing that a permanent injunction is “an extraordinary form of relief” that requires a showing of “actual, rather than probable success on the merits”).
33 fiduciary conduct should be conducted solely under the deferential business
judgment rule.131 As explained below, I reject both approaches.
To reiterate, in Blasius, Chancellor Allen reasoned that “[a]ction designed
principally to interfere with the effectiveness of a vote inevitably involves a conflict
between the board and a shareholder . . . .”132 To account for that conflict, when the
board acts “for the primary purpose of impeding the exercise of stockholder voting
power,” the board will “bear[] the heavy burden of demonstrating a compelling
justification for such action.”133 Over time, Blasius has been interpreted “as holding
that director conduct intended to interfere with or frustrate shareholder voting rights
is presumptively inequitable and will be invalidated, unless the directors are able to
rebut that presumption by showing a compelling justification for their actions.”134
131 DOB at 5 (“No heightened scrutiny applies here; the business judgment rule attaches to the Board’s decision . . . .”); see Kallick v. SandRidge Energy, Inc., 68 A.3d 242, 257 (Del. Ch. 2013) (describing the business judgment rule as “as close to non-review as our law contemplates”); eBay Domestic Hldgs., Inc. v. Newmark, 16 A.3d 1, 40 (Del. Ch. 2010) (“When the business judgment rule applies, the board’s business decisions ‘will not be disturbed if they can be attributed to any rational business purpose.’” (citing Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971)). 132 Blasius, 564 A.2d at 660. 133 Id. at 661. 134 Hubbard v. Hollywood Park Realty Enters., Inc., 1991 WL 3151, at *8 (Del. Ch. Jan. 14, 1991); MM Cos. v. Liquid Audio, Inc., 813 A.2d 1118, 1128 (Del. 2003) (same); Coster v. UIP Cos., 255 A.3d 952, 962 (Del. 2021) (same).
34 Plaintiffs maintain that Blasius’s “compelling justification” standard applies
because the Board rejected their Nomination Notice and thereby seek to prevent
CytoDyn’s stockholders from exercising their franchise in the selection of their
board of directors.135 As Plaintiffs correctly observe, “when facing an electoral
contest, incumbent directors are not entitled to determine the outcome for the
stockholders. Stockholders elect directors, not the other way around.”136
By Plaintiffs’ lights, Blasius applies as the default standard whenever a board of
directors deprives the stockholders of their right to elect directors through the
wrongful enforcement of an advance notice bylaw.137
Plaintiffs seek to extend Blasius beyond its intended limits. “Blasius does not
apply in all cases where a board of directors has interfered with a shareholder
vote.”138 Rather, “courts will apply the 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.”139 “For the
135 Letter from Lisa Zwally Brown to the Court Regarding Standard of Review (Oct. 8, 2021) (D.I. 61) (“Brown Ltr.”), at 2. 136 Pell v. Kill, 135 A.3d 764, 769 (Del. Ch. 2016). 137 Brown Ltr. at 2, 5. 138 State of Wis. Inv. Bd. v. Peerless Sys. Corp., 2000 WL 1805376, at *9 (Del. Ch. Dec. 4, 2000). 139 In re MONY Gp. Inc. S’holder Litig., 853 A.2d 661, 674 (Del. Ch. 2004).
35 Blasius standard to be invoked, the challenged action had to be ‘taken for the sole or
primary purpose of thwarting a shareholder vote.’”140
Plaintiffs wisely have not argued that Blasius applies to the adoption of the
Advance Notice Bylaws. They were adopted years before this putative proxy contest
was conceived. And they serve an indisputably legitimate purpose.141 Nor do
Plaintiffs argue that the terms of this Advance Notice Bylaw are overtly
unreasonable. Again, this is wise given that the terms comport with bylaws our
courts have characterized as “commonplace.”142 Plaintiffs instead focus on the
Board’s application of the Advance Notice Bylaw following Plaintiffs’ allegedly
timely Nomination Notice. Even there, however, Plaintiffs cannot invoke Blasius in
the absence of evidence that the Board’s response was the product of “manipulative
140 Kallick, 68 A.3d at 258 (citing Blasius, 564 A.2d at 662). 141 Saba, 224 A.3d at 980 (observing that advance notice bylaws serve the laudable purposes of “permit[ing] orderly . . . election contests” and “provid[ing] fair warning to the corporation so that it may have sufficient time to respond to shareholder nomination”). 142 Id. (“Bylaws, including advance notice bylaws, are ‘commonplace.’”) (quoting Gaggin v. Vermillion, Inc., 2011 WL 2347704, at *4 (Del. Ch. June 3, 2011)); 2 Robert S. Saunders et al., Folk on the Delaware General Corporation Law § 211.06[c], 7-24 (7th ed. 2021) (“Courts have since noted that advance notification bylaws are commonplace.”); see also Openwave Sys. Inc. v. Harbinger Cap. P’rs Master Fund I, Ltd., 924 A.2d 228 (Del. Ch. 2007) (upholding bylaws that require advance notice be given “not less than 20 days nor more than 90 days prior to the first anniversary of the preceding year’s annual meeting”); Harbinger Cap. P’rs Master Fund I, Ltd. v. Nw. Corp., 2006 WL 572823 (Del. Ch. Feb. 23, 2006) (denying motion to expedite proceedings in a case challenging advance notice bylaw that required plaintiff “to identify its slate of proposed board candidates three months in advance of the meeting”).
36 conduct.”143 Thus, contrary to Plaintiffs’ position, the Court will not draw upon
Blasius unless the evidence reveals the Board engaged in “manipulative conduct” in
responding to the Nomination Notice.144 As explained below, I do not see adequate
evidence of such conduct in this record to relieve Plaintiffs of their burden to
demonstrate compliance with terms of the Advance Notice Bylaw.
Defendants argue that because Blasius does not apply, I must default to the
deferential business judgment rule to the extent I determine it is necessary to evaluate
the conduct of the fiduciaries involved in the decision to reject the Nomination
Notice.145 Here again, the argument stretches basic propositions of our law too far.
Any question regarding the most “sacrosanct”146 of stockholder rights—voting
power—must be viewed with an understanding of the “authority as between the
143 Saba, 224 A.3d at 981 (reversing the trial court’s determination that an incumbent board had “gone too far” in its efforts to thwart a dissident stockholder group’s attempt to nominate a dissident slate of directors by imposing a requirement that the stockholder group respond to over-broad questions, and holding that the board’s conduct should be measured under “contractual principles”). 144 Id. at 979–82. 145 See Defs.’ Pre-Trial Answering Br. (“DAB”) (D.I. 56) at 20–21; Letter from Kevin R. Shannon to the Court Regarding Standard of Review (Oct. 8, 2021) (D.I. 62), at 6. Defendants point to MONY, 853 A.2d at 674–75 to support this argument. There, the court observed, “courts will apply the 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 to thwart what appears to be the will of a majority of the stockholders . . . Where such circumstances are not present, the business judgment rule will ordinarily apply . . . .” Id. (emphasis added). 146 EMAK Worldwide, Inc. v. Kurz, 50 A.3d 429, 433 (Del. 2012).
37 fiduciary and the beneficiary.”147 When it comes to the enforcement of bylaws
against stockholders, the board does not act simply as an arms-length contracting
partner; board members are fiduciaries and, in the context of an advance notice
bylaw, they are fiduciaries confronting a structural and situational conflict.148
With these principles in mind, the Delaware Supreme Court wrote 50 years
ago in Schnell that “inequitable action does not become permissible simply because
it is legally possible.”149 It is emphatically the Court’s duty to ensure that bylaws
“afford the shareholders a fair opportunity to nominate candidates.”150 Despite the
limitations of Blasius’s reach, Delaware courts have reserved space for equity to
address the inequitable application of even validly-enacted advance notice
bylaws.151 “[T]he inquiry ultimately focuses on whether the by-law, as applied in
147 Blasius, 564 A.2d at 658 (emphasis omitted). 148 See Loft, Inc. v. Guth, 2 A.2d 225, 238 (Del. Ch. 1938), aff’d, 5 A.2d 503 (Del. 1939) (“It has frequently been said by this court . . . that the directors of a corporation stand in a fiduciary relation to the corporation and its stockholders.”); Pell, 135 A.3d at 785–86. I acknowledge that, according to Defendants, “three of the six directors who unanimously voted to reject the Nomination Notice are not running for re-election, and therefore had nothing to gain by their vote.” DAB 5–6. 149 Schnell, 285 A.2d at 439. 150 Hubbard, 1991 WL 3151, at *11. 151 AB Value P’rs, LP v. Kreisler Mfg. Corp., 2014 WL 7150465, at *3 (Del. Ch. Dec. 16, 2014) (“[T]hose cases enjoining advance notice bylaws are context-specific applications of the Delaware Supreme Court’s opinion in Schnell . . . and its oft-quoted statement that ‘inequitable action does not become permissible simply because it is legally possible.’”) (citing Schnell, 285 A.2d at 439); 1 R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations & Business Organizations, § 7.9, 7-35 (3d ed. 2021) 38 these circumstances, has afforded the shareholders a fair opportunity to nominate
director candidates.”152 Any attempt to “utilize the corporate machinery and the
Delaware Law for the purpose of perpetuating [oneself] in office” by “obstructing
the legitimate efforts of dissident stockholders in the exercise of their rights to
undertake a proxy contest” must be denied because those are “inequitable purposes,
contrary to established principles of corporate democracy.”153
Indeed, even though the parties vigorously dispute whether Blasius applies
here, when pressed, defense counsel readily acknowledged that overarching
equitable principles, flowing from Schnell, are very much in play.154 Thus, while
the burden may not lie with Defendants to prove a “compelling justification” for
their rejection of the Nomination Notice under Blasius, Plaintiffs may still turn to
(“The application of certain by-law provisions requiring advance notice of nominations or business has been found to have been inequitable in specific factual circumstances.”). 152 Hubbard, 1991 WL 3151, at *11 (emphasis supplied). 153 Schnell, 285 A.2d at 439. 154 Trial Tr. 72:9–15 (in response to the Court’s inquiry: “Mr. Stern: Your Honor, I think Schnell is an overarching principle that does apply. I will not argue to the Court that the Court shouldn’t be considering Schnell. The notion that, you know, whether the conduct is equitable or not doesn’t matter, I know we’re in a court of equity, and I think that’s always a guiding principle.”). See also In re Investors Bancorp, Inc., 177 A.3d 1208, 1222 (Del. 2017) (holding that fiduciary conduct is always “twice-tested, first for legal authorization, and second by equity”) (internal quotation marks omitted).
39 equity for relief by proving there are “compelling circumstances” that justify a
finding of inequitable conduct.155
B. The Application of Contractual Principles and Schnell
Notwithstanding their acknowledgement that Schnell applies, Defendants are
quick to remind the Court that it must strictly construe the Advance Notice Bylaw
in order to stay true to Delaware’s highly contractarian public policy.156 To be sure,
the canons of contract construction apply when construing bylaws,157 as “bylaws of
a Delaware corporation constitute part of a binding broader contract among the
directors, officers, and stockholders formed within the statutory framework of the
DGCL.”158 Defendants again point the Court to Saba for guidance as the Court
155 AB Value P’rs, LP, 2014 WL 7150465, at *5. See also Hill v. Int’l, Inc. v. Opportunity P’rs LP, 119 A.3d 30, 38 (Del. 2015) (noting that, given the quintessential importance of corporate democracy, Delaware law will “resolve any doubt” as to the proper application of bylaws “in favor of the stockholder’s electoral rights”). To be clear, if the evidence reveals that a board has applied lawfully adopted advance notice bylaws in an inequitable fashion, clamors of “strict compliance” and “business judgment rule deference” will not prevent this court from exercising its equitable powers in defense of the franchise. 156 E.g., Lyons Ins. Agency, Inc. v. Wark, 2020 WL 429114, at *4 (Del. Ch. Jan. 28, 2020) (“Delaware is a pro-contractarian state.”) (citing Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 2012 WL 3201139, at *26 (Del. Ch. Aug. 7, 2012)). 157 Saba, 224 A.3d at 980 (“Bylaws . . . are interpreted using contractual principles.”); Hill Int’l Inc., 119 A.3d at 38 (“Because corporate charters and bylaws are contracts, our rules of contract interpretation apply.”). 158 Boilermakers Loc. 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 939 (Del. Ch. 2013).
40 orients itself to undertake the contract construction exercise in this case.159 There,
the Court determined that the bylaw at issue was unambiguous and held the plaintiff
stockholders to account for their failure to comply with the letter of the bylaw.160
In doing so, the Court rejected plaintiffs’ attempt to “proffer after-the-fact reasons
for their non-compliance.”161
Plaintiffs counter that they missed no deadlines here.162 They submitted their
Nomination Notice on time and stood ready to engage with the Board to address any
perceived shortcomings. The Board refused to engage. Instead, it intentionally
allowed the Nomination Notice to languish before hitting Plaintiffs with the
Deficiency Letter in which the Board outlined deficiencies almost too numerous to
count. This, say Plaintiffs, is all the Court needs to invoke Schnell as a basis to
override the Board’s rejection of the Nomination Notice.163 But there is more to the
evidentiary picture; Plaintiffs ignore the fundamental nature of the materially
deficient disclosures in their Nomination Notice.
159 Saba, 224 A.3d at 977–81. 160 Id. at 979. 161 Id. at 980. 162 PAB at 20–21. 163 Id. at 10–16.
41 Before turning to the deficiencies, it is useful to explore the context in which
the Nomination Notice was submitted and then considered by the incumbent Board.
As they prepared their Nomination Notice, Plaintiffs were focused on the clear
admonition in the Advance Notice Bylaw that “[i]f the Board of Directors . . .
determines that any stockholder proposal or nomination was not made in accordance
with the provisions of this By-law, such proposal or nomination shall be disregarded
and shall not be presented for action at the meeting.”164 Plaintiffs also well
understood the deadline.165 Unlike many advance notice bylaws,166 the Advance
Notice Bylaw at issue here provided no express process by which a stockholder
164 JX017.0003; JX061.0001 (Rosenbaum’s email to stockholders: “It is crucial to strictly follow all of these procedures because if it determined by the Board . . . that ‘any stockholder proposal or nomination was not made in accordance with the provisions of this By-law, such proposal or nomination shall be disregarded and shall not be presented for action at the meeting.’”) (citing the Bylaws at JX017.0003). 165 JX058.0001; JX061.0003–0004; JX017.0001. 166 See, e.g., Saba, 224 A.3d at 974–78 (explaining the detailed cure process provided for by the advance notice bylaw at issue).
42 could cure a deficient notice.167 Yet Plaintiffs inexplicably elected to submit their
Nomination Notice on the eve of the deadline.168
Had Plaintiffs submitted their Nomination Notice well in advance of the
deadline, they might have a stronger case that the Board’s prolonged silence upon
receipt of the notice was evidence of “manipulative conduct.”169 Although the
Bylaws do not explicitly provide for an iterative process by which a stockholder can
cure a deficient nomination notice, the Board certainly would have a harder time
167 Plaintiffs argue that the Bylaws expressly endorse an iterative process following the stockholder’s submission of the nomination notice, pointing to Sections 2(a)(2), 2(a)(2)(A), and 2(a)(3). But those provisions do not support Plaintiffs’ contention. Section 2(a)(3) requires the stockholder to “further update and supplement such notice, if necessary, so that the information . . . shall be true and correct.” JX017.0002. This places an obligation on the stockholder to correct and update the information provided in the notice as the Annual Meeting approaches; it does not impose an express duty on CytoDyn’s Board to reach out to the stockholder to cure deficiencies. Next, Section 2(a)(2) concerns the proper timing of a nomination notice and any supplements. It demands, in part, that a stockholder timely provide “any updates or supplements to [their nomination] notice at the times and in forms required by this By-law.” JX017.0001. Here again, this language imposes obligations on the nominating stockholder, not the Board. Finally, Section 2(a)(2)(A) provides “that the Corporation may require any proposed nominee to furnish such other information as the Corporation may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the Corporation.” Id. This provision allows CytoDyn’s Board to ask for additional information after the filing of a nomination notice to assist in its determination of the eligibility of a nominee to serve as a director, as occurred in Saba. See Saba, 224 A.3d at 969. Here, however, because Plaintiffs failed to provide any disclosure regarding their supporters and certain material ties to IncellDx, it cannot be argued that the Board was obliged to seek clarifying or additional information concerning the proposed candidates, as there was no information to clarify or augment. 168 JX175. 169 Saba, 224 A.3d at 981.
43 justifying its silence in the face of its fiduciary duties when, upon receipt of a
deficient nomination notice, ample time remained before the arrival of the notice
deadline.170 Of course, that is not what happened here. Plaintiffs filed their
Nomination Notice just before the deadline with full understanding of the
consequences of doing so and without any assurance in the unambiguous terms of
the Advance Notice Bylaw that the Board would be required to engage with them
beyond the deadline.171 Given that Plaintiffs waited until the last minute to submit
their Nomination Notice, they were obliged to submit a compliant notice. They did
not do so.
C. The Nomination Notice’s Failures
The Nomination Notice was deficient in at least two key respects. First, it
did not disclose who was supporting Plaintiffs’ proxy contest. Second, it did not
170 Cf. In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 64, 66 (Del. 2006) (defining bad faith a few different ways, including “fiduciary conduct motivated by an actual intent to do harm” and an “intentional dereliction of duty, a conscious disregard for one’s responsibilities”). 171 See Openwave Sys. Inc., 924 A.2d at 238–39 (noting that deadlines in advance notice bylaws “function to permit orderly meetings and election contests and to provide fair warning to the corporation so that it may have sufficient time to respond to shareholder nominations”); Saba, 224 A.3d at 980 (“A rule that would permit election-contest participants to ignore a clear deadline and then, without having raised any objection, proffer after-the-fact reasons for their non-compliance with it, would create uncertainty in the electoral setting. Encouraging such after-the-fact factual inquiries into missed deadlines could potentially frustrate the purpose of advance notice bylaws, which are designed and function to permit orderly meetings and election contests and to provide fair warning to the corporation so that it may have sufficient time to respond to shareholder nominations.”) (internal quotation marks omitted).
44 disclose that Patterson might seek to facilitate a future IncellDx/CytoDyn
combination if seated on the Board. The prospect that a nominee may seek to
facilitate an insider transaction is the type of potential conflict that stockholders are
entitled to know about when voting for directors.
CCTV and “Supporters”
The Board rejected the Nomination Notice, in part, because it failed to
disclose the existence of CCTV, which was founded by Rosenbaum and collected
donations to support the proxy fight.172 Plaintiffs argue they were not obliged to
disclose the role of CCTV and its funders under the Advance Notice Bylaw because
“Plaintiffs’ slate of Nominees was not disclosed to the so-called ‘Gifting Persons’”
at the time they made their donations.173 The Advance Notice Bylaw requires
information regarding those known to “support” the “nominations” through
“all agreements, arrangements or understandings.”174 According to Plaintiffs,
Rosenbaum collected funds for CCTV before a candidate slate was identified,
and so, by definition, the purpose of the contributions could not be to “support” the
“nominations” because those nominations were not yet known. Thus, the argument
172 JX201.0004. 173 PAB at 5. Plaintiffs define “Gifting Persons” in their Amended Preliminary Proxy as “[c]ertain stockholders of the Company” who “have gifted money to CCTV in connection with its preliminary activities.” JX258.0023. 174 JX017.0002.
45 goes, Plaintiffs “had no basis to know if the Gifting Persons would support one or
more of their Nominees” because donors were “entirely free to support whomever
they want.”175 In other words, there were no “supporters” to disclose.
This argument fails on several grounds. First, Plaintiffs’ explanation for the
non-disclosure is refuted by a common-sense reading of the Advance Notice
Bylaw’s language. By answering “no” to the question of whether anyone supports
the nominations, Plaintiffs essentially were advising the Company and its
stockholders that they had no support or funding for their proxy campaign. Upon
receiving this facially disingenuous response, the Board would be reasonable in
concluding that Plaintiffs were purposefully trying to hide who was behind the
scenes supporting their efforts.176 Had Plaintiffs at least paid lip service to the fact
that their proxy campaign was receiving outside support, they might have a stronger
argument that the Board should have sought clarification or more details. But
Plaintiffs said nothing, choosing instead to rest on a strained reading of the Advance
175 PAB at 5. 176 See Beaty Dep. 201:21–22 (discussing how IncellDx, among others, supported the campaign by paying certain legal fees).
46 Notice Bylaw and a misplaced hope that equity would ride to the rescue should the
Board call them out on the woefully deficient disclosure.177
Second, the canon of construction resolving ambiguities in bylaws in favor of
stockholders’ rights does not save Plaintiffs’ omission.178 There is no ambiguity in
the Advance Notice Bylaw at issue. The definition of “supporter” proposed by the
Defendants is not odd or technical, but common-sense. Rather, it is the Plaintiffs’
proffered (and apparently litigation-driven) construction that would have the Court
interpret the Bylaw in a way that stretches credulity.179
Third, the evidence reveals that at least some of the nominees were known to
supporters of the proxy contest before they contributed and before the Nomination
Notice was sent to the Board. An email from CytoDyn stockholder,
177 See JX061.0002–0003 (revealing that Rosenbaum was focused on the need to disclose “agreements, arrangements, or understandings, by and among any Proposing Person and any other person ‘pertaining to the nomination’” (emphasis in original)). 178 E.g., 2 Robert S. Saunders et al., Folk on the Delaware General Corporation Law § 211.06, 7-25 (7th ed. 2021) (“To the extent there is any ambiguity in an advance notification bylaw, courts resolve the ambiguity in favor of the stockholders’ electoral rights.”); Openwave Sys. Inc., 924 A.2d at 239 (“If the language is found to be ambiguous, doubt is resolved in favor of the stockholders’ electoral rights.”). 179 I say “litigation driven” because Plaintiffs themselves seem to understand that funding a proxy contest is tantamount to “supporting” that proxy contest. See, e.g., Staats Dep. 81:3–9 (Q: “As far as you are aware, members of the 13D group and the Gifting Persons support the proxy fight?” . . . A: “That’s correct.”); Errico Dep. 112:13–14 (“support to me meant contribute funds”); Rosenbaum Dep. 184:13–85:7 (Q: “When you submitted the nomination notice . . . did you have an understanding at that time whether [Caracciolo and Pestell] supported your proxy campaign?” A: “I am assuming yes. Why wouldn’t they?” . . . Q: “And they gifted money to support the campaign?” A: “Yes.”).
47 Glenn Eisenberg, dated May 7, 2021, explained the plan to wage a proxy contest and
replace certain members of management with “Dr. Bruce Patterson and
Devon Williams.”180 An email from Rosenbaum to a large shareholder proclaimed,
“Dr[.] Bruce Patterson will head up our slate.”181 While it may be that not all of the
nominees were known by all of the dissident stockholder group or the Gifting
Persons, even under Plaintiffs’ strained construction, the evidence reveals that some
“supporters” were, in fact, supporting specific nominees. This information was in
hand when Plaintiffs submitted their Nomination Notice, yet they deliberately chose
not to disclose it.182
Finally, endorsing Plaintiffs’ proffered construction would foment bad policy.
As stated above, advance notice bylaws are commonplace, and provisions asking
stockholders to disclose supporters are equally ubiquitous.183 If a nominating
180 JX076.0001. Eisenberg was later disclosed to be a Gifting Person. JX235.0003. 181 JX270.0001 (emphasis omitted). 182 See JX270.0002; JX087.0001; JX243; Rosenbaum Dep. 44:16–22. 183 E.g., Moderna, Inc., Registration Statement (Form S-1) (Oct. 9, 2018); Intellia Therapeutics, Inc., Quarterly Report (Form 10-Q) (May 7, 2020); Citrix Sys., Inc., Annual Report (Form 10-K) (Feb. 14, 2020); Caladrius Biosciences, Inc., Current Report (Form 8-K) (Sept. 21, 2017); Health Catalyst, Inc., Registration Statement (Form S-1) (July 12, 2019); Jetblue Airways Corp., Proxy Statement (Form Def 14A) (Apr. 3, 2020); see also Lawrence A. Hamermesh, Director Nominations, 29 Del. J. Corp. L. 117, 141–42 (2014) (“Advance notice bylaws also frequently contain an informational component . . . In their ‘early’ form (through the 1980s, at least), advance notice bylaws required submission of the information that would be required under the federal proxy rules to be included . . . [A]dvance notice bylaws have come to require a submission of a number of additional informational matters, and even substantive representations and agreements, 48 stockholder did not have to disclose her supporters so long as the exact nominees
were not known at the time funds to finance the proxy contest were solicited, then
such bylaw provisions would be rendered useless. To avoid disclosure, stockholders
would enlist supporters but deliberately delay naming their formal slate until just
before they submitted their nomination notice. Delaware law counsels against
constructions that would facilitate such perverse incentives.184
Plaintiffs were obliged to identify their supporters.185 This was vitally
important information; the Board was not nitpicking when it flagged the omission
as material and ultimately disqualifying.186 Rosenbaum was focused on this
disclosure requirement and emphasized it to others in the dissident stockholder
group before the Nomination Notice was submitted.187 Yet Plaintiffs elected to say
nothing of supporters, preferring instead to withhold the information based on an
unreasonable interpretation of their disclosure obligations under the Advance Notice
such as: . . . Responses to a questionnaire, presumably prepared by management or the board of directors but with content not specified in the bylaw . . . .”). 184 E.g., Horizon Personal Commc’ns, Inc. v. Sprint Corp., 2006 WL 2337592, at *21 (Del. Ch. Aug. 4, 2006) (stating that this Court “strives to avoid . . . interpretations” that produce “absurd result[s]”); 11 Williston on Contracts § 32:11 (4th ed. 2021) (“The words of a contract should be given a reasonable meaning rather than an unreasonable one . . . .”). 185 See JX017. 186 Indeed, Section 14(a)-101 of the Exchange Act requires disclosure of “persons who the cost of solicitation has been or will be borne, directly or indirectly.” 187 See JX061.0002–0003.
49 Bylaw. Having provided no information on the subject, there was no basis for the
Board to seek supplementation. Under these circumstances, the Board was justified
in rejecting the Nomination Notice and refusing to recognize Plaintiffs’ Nominees
on this basis alone.188
IncellDx
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.189 The Board members were keenly
aware of the rejected proposal and reasonably believed that a future transaction
188 Although not entirely clear, it appears Plaintiffs argue the Court must undertake a nominee-by-nominee analysis when assessing the sufficiency of the Nomination Notice. See POB at 56; PAB at 27. While this argument was not meaningfully pressed at trial, I address it briefly here. First, I note that Plaintiffs cite no authority for the proposition that a Board must dissect a facially deficient nomination notice to ascertain whether parts of it, with respect to individual nominees, might pass muster. The cases they cite for the proposition do not say that. POB at 56. On the other hand, Defendants cite no authority for the counter-proposition–that the Board can justify rejecting a notice of one nomination based on deficiencies in the notice with respect to another nomination (in this case, deficient disclosures regarding one nominee that do not apply to other nominees). While the law is not at all developed on this point, I think Plaintiffs have the better of the argument. The Board is obliged to review a nomination notice carefully and with an open mind. Just because it finds disclosures inadequate with respect to one nominee, that does not mean, or justify a finding, that the entire notice is deficient. Even so, with respect to the issue of supporters, the Nomination Notice failed to provide information regarding supporters for any of the Plaintiffs’ Nominees. See JX175.0008–0010. This fundamental failure affects the viability of each of their candidacies and justified the Board’s rejection of the entire Nomination Notice. 189 JX196.
50 between CytoDyn and IncellDx could be on the horizon should the dissident
stockholder group gain control of the Board.190
In response, Plaintiffs argue that (1) the past proposal for CytoDyn to acquire
IncellDx did not need to be disclosed because there was no consummated
transaction, as the Board was well aware, and (2) they did not need to disclose that
a future transaction might be facilitated by Plaintiffs’ Nominees because, in fact, no
such transaction is being contemplated by Plaintiffs or Plaintiffs’ Nominees.
Plaintiffs, again, would have the Court focus on only part of the picture.
I accept as fact that a reasonable stockholder would want to know that certain of
Plaintiffs’ Nominees were tied to a past proposal whereby CytoDyn would acquire
IncellDx for nearly $350 million. She also would want to know that this nominee
may seek to facilitate a renewed proposal along the same lines as the previously
rejected proposal before casting her vote in an election where potentially conflicted
nominees were on the ballot.191 Any future acquisition of IncellDx likely would not
190 JX052.0002; JX201.0004–0006; JX202.0005–0007; JX089.0002 (“Bruce Patterson’s agenda is to get [IncellDx] aquired [sic] and nothing more.”); Kelly Dep. 77:1–7 (“Bruce Patterson was trying to have our company buy his company of IncellDx, but failed to disclose that for shareholders when it was [$]150 million up front and $200 million in milestones. And Jeff Beaty was involved in it as well.”). 191 On this front, I decline to lump Plaintiffs’ Nominees together because the preponderance of evidence suggests that only one of the Plaintiffs’ Nominees had any connection to IncellDx. I gather the Board operated on the assumption that Rosenbaum and Patterson had assembled a slate of nominees who would support the initiatives they cared about, including a potential IncellDx/CytoDyn combination. Their supposition in this regard is understandable. See JX052 (stockholder email to CytoDyn endorsing, among other things, 51 be subject to a stockholder vote, so the directors could approve it unilaterally.192
Stockholders would want to know that when deciding how to vote their shares.193
Plaintiffs make two arguments in response. First, the Board cannot justify its
rejection of the Nomination Notice on facts it did not know when it sent the
Deficiency Letter. Second, the Board cannot justify its rejection on misplaced facts;
renewed negotiations with IncellDx). But the credible evidence reveals that only Patterson (nominee) and Beaty (nominating person) have ties to IncellDx that would oblige them to disclose material information regarding the potential conflict arising from the failed attempt at an IncellDx/CytoDyn transaction and the possibility of a future attempt to revive that transaction. See JX175.0140 (Patterson questionnaire disclosing he is CEO of IncellDx and IncellDx board member); JX175.0144 (Patterson disclosing that he and his wife collectively own 33.04% of IncellDx’s outstanding common stock); Beaty Dep. 24:18–25:1 (Beaty testifying he is an IncellDx stockholder and board member). The other nominating persons (Rosenbaum and Wilmes), and the other nominees (Rosenbaum, Yeager, Errico, and Staats), have no demonstrable ties to IncellDx, and each adamantly denied any connection with IncellDx or intent to see an IncellDx/CytoDyn transaction happen in the future. See Rosenbaum Dep. 149:23–154:8; Yeager Dep. 122:16–123:23, 125:14–24; Errico Dep. 99:13–102:11, 106:22–110:15; Staats Dep. 96:19–105:23. While there is room to question Rosenbaum’s denial of support for a future IncellDx/CytoDyn combination, see JX078.0001 (Rosenbaum forwarding email, dated May 27, 2021, endorsing future IncellDx/CytoDyn combination); Rosenbaum Dep. 165:1–168:19 (explaining that while he does not recall forwarding JX078, he sees nothing “wrong with” Patterson endorsing a future IncellDx/CytoDyn combination should he be seated on the CytoDyn Board), it is difficult to discern where the Advance Notice Bylaw, or the associated questionnaire, would require Rosenbaum to say anything in the Nomination Notice about IncellDx. 192 See In re Tesla Motors, Inc. S’holder Litig., 2018 WL 1560293, at *12 (Del. Ch. Mar. 28, 2018) (observing that a corporation’s determination to acquire another corporation generally is not required to be submitted for shareholder approval under the DGCL). 193 See Louden v. Archer-Daniels-Midland Co., 700 A.2d 135, 143 (Del. 1997) (“An omitted fact is material if there is a substantial likelihood that a reasonable stockholder would consider it important in deciding how to vote.”).
52 contrary to the Board’s supposition, none of the Plaintiffs’ Nominees have any intent
to propose an acquisition of IncellDx now or down the road.
As for the first argument, I agree. The Board cannot base its decision to reject
the Nomination Notice on after-discovered facts. But that is not what happened here.
The Board legitimately suspected that Patterson and others were keen on revisiting
the failed attempt to combine IncellDx and CytoDyn.194 More to the point, the Board
was correct in expecting that Patterson and Beaty would disclose the past failed
proposal and their intentions, one way or the other, with respect to a future
IncellDx/CytoDyn transaction, particularly given the obvious ties between them and
IncellDx. For Plaintiffs not to appreciate the presence of that elephant in the room
reflects either reckless indifference or deliberate gamesmanship.
As for the evidence corroborating the Board’s suspicion, while the IncellDx
board minutes do not reflect any discussions at the board level regarding an
acquisition by CytoDyn,195 other evidence clearly reveals that such a transaction was
at least being contemplated by the IncellDx insiders and Rosenbaum. CytoDyn
stockholder, Glenn Eisenberger, emailed other interested stockholders to discuss the
proxy contest and recounted how Patterson had acknowledged he would consider a
194 JX052.0002; JX089.0002; JX201.0004–0006; JX202.0005–0007; JX225.0001; Kelly Dep. 77:1–7. 195 JX265.
53 CytoDyn/IncellDx merger post-election.196 Another email chain reveals that
Patterson continues to believe that a merger would be in the best interests of both
companies; he writes: “it HAS to happen solely because of our IP. We haven’t made
a big deal about it because we view the 13D as an opportunity to bring this together
in a 1+1=3 scenario.”197 In yet another email, Patterson declares, “The takeover is
starting!,” and then explains, “Yes this is the beginning of getting the deal I sent to
you consummated!!”198
I express no opinion on the desirability of a CytoDyn/IncellDx transaction.
Indeed, the combination may well be beneficial for both companies. But, as
factfinder, I do have a view of whether information relating to the possibility of a
future transaction would be material to stockholders. It would be. And the
Nomination Notice failed to provide that information with respect to a conflicted
196 JX076.0001. During trial, Plaintiffs lodged an objection to this exhibit on the ground that the email is inadmissible hearsay. Trial Tr. 144:4–17. I disagree. The exhibit is offered to reveal the declarant’s then-existing state of mind. See DRE 803(3). Moreover, the exhibit is offered to impeach Patterson’s evasive testimony regarding his intentions with respect to a future transaction. See, e.g., Patterson Dep. 132:6–13 (“Q. As you sit here today, do you think there is still potential for IncellDx to become the R&D engine for CytoDyn? . . . [Patterson]: There’s been no discussion of that.”) (emphasis supplied); Patterson Dep. 134:7–11 (“Q. Is it part of the plan if you win the proxy contest to do a transaction with IncellDx? A. Never been discussed . . .”); Patterson Dep. 135:4–10 (“Q. If you win the election, do you plan to cause IncellDx and CytoDyn to collaborate in any way?” . . . [Patterson]: There hasn’t been any discussion in that regard.”) (emphasis supplied). 197 JX187.0001. 198 JX177.0001.
54 nominee and a conflicted Proposing Person despite being required to do so. In that
regard, it was deficient.
* * * * *
While I acknowledge that Plaintiffs submitted a supplement to the
Nomination Notice soon after the Board sent its Deficiency Letter,199 and then
supplemented their proxy filings with certain information omitted from the
Nomination Notice,200 the effort came too late.201 The fundamental nature of the
omissions, and the “eve of” timing of the Nomination Notice’s submission, leave no
room for Schnell-inspired equitable principles to override the decision by the Board
to reject the Nomination Notice. Even though the Board delayed in responding to
the Nomination Notice, given the nature of the omissions, they rejected it on
reasonable grounds. There was no manipulation; there was no inequitable conduct.
199 JX205. 200 JX213. 201 See Bay Cap. Fin., L.L.C. v. Barnes & Noble Educ., Inc., C.A. No. 2019-0539-KSJM, at 8 (Del. Ch. Aug. 14. 2019) (TRANSCRIPT) (denying a motion for summary judgement on the ground that, “[n]ot even Delaware’s strong public policy favoring the stockholder franchise will save Bay Capital from its dilatory conduct. Bay Capital blew the deadline. It then made up excuses for doing so. No record evidence suggests that the company is in any way at fault for that mistake. If this Court required the company to accept the nomination in these circumstances, advance notice requirements would have little meaning under Delaware law.”).
55 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. Separately, the failure to disclose information regarding the failed
IncellDx/CytoDyn transaction, and the intent of a conflicted Proposing Person
(Beaty) and a conflicted nominee (Patterson) with respect to a future
IncellDx/CytoDyn transaction, justified the Board’s rejection of the Nomination
Notice with respect to Patterson, but not the other nominees.
III. CONCLUSION
Because Plaintiffs have not succeeded on the merits of their claim, their
request for declaratory and permanent, mandatory injunctive relief must be
DENIED. Final judgment is entered for Defendants.
IT IS SO ORDERED.
Related
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