Delaware Supreme Court Limits Activist Stockholders’ Challenges to Advance Notice Bylaws

Delaware courts often field suits from activist stockholders challenging advance notice bylaws, the provisions that boards adopt to ensure advance disclosure of director nominations before annual meetings.

These bylaws face two layers of review: a facial test asking whether the provision conforms to the charter, applicable law, and a legitimate purpose, and an equitable test asking whether the board’s adoption or use was fair. Edward B. Micheletti writes for Skadden about a recent Delaware Supreme Court ruling that clarifies how far stockholders may press equitable challenges before any nomination dispute has arisen.

After the Securities and Exchange Commission (SEC )adopted its universal proxy rule, AES Corporation and Owens Corning revised their advance notice bylaws, anticipating the new rule would make proxy contests easier for activists to wage.

The amendments made the notice process the exclusive nomination method, allowed meeting chairs to reject noncompliant nominations, broadened the definition of stockholders “acting in concert” through a daisy-chain provision, and imposed expanded disclosure obligations.

Two stockholders, without any pending or threatened nomination, sued the boards for breach of fiduciary duty.

In In re The AES Corporation and Owens Corning, the Delaware Court of Chancery dismissed the suits for lack of a genuine controversy, and the Delaware Supreme Court affirmed. The courts reasoned that an equitable, “as applied” challenge requires a concrete nomination dispute so the bylaw’s real-world operation can be tested, rather than speculation about hypothetical future contests.

Because the stockholders could not point to an actual or credibly threatened nominee, their claims were unripe, warranting dismissal under Rule 12(b)(1).

This ruling confirms that boards retain considerable latitude to adopt protective advance notice bylaws outside an active contest, provided the provisions remain facially defensible. Lawyers advising on board governance and fiduciary duties should note that equitable review is deferred until a live nomination fight, which affects timing strategy in shareholder activism matters.

Counsel should remind boards that stockholders retain alternative tools, including voting, bylaw proposals, and books-and-records demands, to challenge disfavored governance measures.