In Siegel v. Morse, C.A. No. 2024-0628-NAC (Del. Ch. Apr. 14, 2025) (Siegel), the Court of Chancery further clarified the Delaware Supreme Court’s recent decision in Kellner v. AIM ImmunoTech Inc., 320 A.3d 239 (Del. 2024) (Kellner II) in granting the defendants’ motion to dismiss a stockholder’s breach of fiduciary duty complaint. The Court of Chancery held that before it undertakes equitable review of a corporation’s bylaws, the dispute must first be ripe.
In Siegel, stockholder Martin Siegel (Siegel) filed a complaint against The AES Corporation’s (the Company) board of directors (the Board) for adopting the Company’s amended advance notice bylaws (the Bylaws). The Bylaws included stringent enhanced disclosure requirements for stockholders to nominate a director to the Board. Siegel alleged that the members of the Board breached their fiduciary duties by adopting the Bylaws and petitioned the Court of Chancery to declare the Bylaws facially invalid. Notably, Seigel had no intention of nominating a director to the Board, nor did he know of anyone who was planning to do so. To demonstrate his claim was ripe, Siegel analogized the Bylaws to the chilling effects of stockholder rights plans and dead hand proxy puts, arguing that the Bylaws are inequitable because the Delaware courts previously held that stockholder rights plans and dead hand proxy puts are ripe for equitable challenge upon adoption.
The Court of Chancery explained that the Delaware Supreme Court in Kellner II established a two-part test when an advance notice bylaw is challenged. First, Delaware courts review the legal validity of a bylaw; second, they review the equity of a bylaw. A bylaw is considered facially valid if it is (1) authorized by the Delaware General Corporation Law, (2) consistent with the corporation’s certification of incorporation, and (3) not otherwise prohibited. Because a bylaw is presumed valid until a stockholder challenges it, a plaintiff “must demonstrate that the bylaw cannot operate lawfully under any set of circumstances.” A bylaw is equitably reviewed by analyzing its application or enforceability. A bylaw is equitable if it does not unfairly interfere with stockholder voting.
In Siegel, the Court of Chancery granted the defendants’ motion to dismiss because Siegel’s claim was not ripe since there was no “genuine, extant controversy” involving the adoption of the Bylaws. Rather, Siegel merely alleged a hypothetical dispute. Siegel failed to allege any active challenges to the Bylaws, and he neither nominated nor intended to nominate a director for the Board. Furthermore, Siegel failed to allege that the Bylaws would apply to him if he were to nominate a director.
The Court of Chancery also rejected the plaintiff’s analogy. The Court of Chancery held that the plaintiff’s analogy was inapposite because the Bylaws do not automatically cause “immediate and devastating” financial consequences once adopted. Rather, stockholders have means to remedy the situation if necessary. As such, a hypothetical dispute did not demand a preemptive equitable intervention. The Court of Chancery reiterated and further emphasized the need for immediacy and significant potential of harm before a Delaware court will equitably review a corporation’s bylaws.
*Harry Kim, a summer associate at the firm not yet admitted to the bar, contributed to this alert.