Rosenbaum v. CytoDyn Inc., C.A. No. 2021-0728-JRS (Del. Ch. Oct. 13, 2021) (Slights, V.C.)
In this memorandum opinion following trial on a paper record, the Court of Chancery denied a request for a mandatory injunction to compel CytoDyn Inc. (the “Company”) to allow plaintiffs’ dissident slate of directors to stand for election to the CytoDyn board at the Company’s October 28, 2021 annual meeting. The Court concluded that plaintiffs’ nomination notice, which was submitted on the eve of the notice deadline, was deficient and the board was justified in rejecting it, despite a nearly month-long delay in responding to the notice.
Plaintiffs argued the board wrongfully rejected the nomination notice and that this conduct triggered enhanced scrutiny under Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988), while defendants argued that the analysis should be “purely contractual” with any fiduciary considerations conducted under the business judgment rule. The Court did not employ Blasius review after concluding that the board did not act for the sole or primary purpose of thwarting the effectiveness of a stockholder vote and the board’s failure to respond to the nomination notice to give plaintiffs an opportunity to cure was not manipulative conduct.
Although Blasius did not apply, the Court recognized that board members tasked with enforcing bylaws against stockholders confront a “structural and situational conflict” and the Court is empowered to address the inequitable application or enforcement of an advance notice bylaw. Here, the Court found there was no inequitable conduct on the part of the board, which, upon receiving the deficient notice on the eve of the deadline for the nomination notice, did not provide plaintiffs with an opportunity to cure their defective notice. Importantly, the Company’s advance notice bylaw did not impose an express duty on the board to reach out to stockholders to cure deficiencies or otherwise provide a process to cure a deficient notice. The Court noted that plaintiffs could have made a stronger case of manipulative conduct had they submitted their nomination notice “well in advance of the deadline,” as the board would have had more difficulty justifying its nearly month-long silence in light of its fiduciary duties if “ample time remained before the arrival of the notice deadline.” As it was, however, plaintiffs were obliged to submit a compliant notice given their last-minute submission. Their failure to do so left no room for equitable principles to override the decision by the board.