Jonathan Thomas Jorgl v. AIM ImmunoTech Inc. ( 2022 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JONATHAN THOMAS JORGL, )
)
Plaintiff, )
)
v. ) C.A. No. 2022-0669-LWW
)
AIM IMMUNOTECH INC., )
THOMAS K. EQUELS, WILLIAM )
MITCHELL, and STEWART )
APPELROUTH, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: October 6, 2022
Date Decided: October 28, 2022
Jeffrey J. Lyons, BAKER & HOSTETLER LLP, Wilmington, Delaware; Teresa
Goody Guillén, BAKER & HOSTETLER LLP, Washington, D.C.; Marco Molina,
BAKER & HOSTETLER LLP, Costa Mesa, California; Counsel for Plaintiff
Jonathan Thomas Jorgl
Michael A. Pittenger, William R. Denny, Matthew F. Davis, Nicholas D. Mozal,
Laura G. Readinger, Carson R. Bartlett, & Shelby M. Thornton, POTTER
ANDERSON & CORROON LLP, Wilmington, Delaware; Counsel for Defendants
AIM ImmunoTech Inc., Thomas K. Equels, William Mitchell, and Stewart
Appelrouth
WILL, Vice Chancellor
The plaintiff in this matter, Jonathan Thomas Jorgl, has been a stockholder of
AIM ImmunoTech, Inc. since June 27, 2022. Jorgl first learned of AIM just days
before buying stock when his surfing buddy Michael Rice, who desired a seat on
AIM’s board, asked Jorgl to buy shares for the purpose of nominating him. Jorgl
bought about $800 worth of AIM stock and transferred the shares into his name of
record with the guidance of Rice, Rice’s former colleague Robert Chioini who also
wished to be a board candidate, and Chioini’s business associate Michael Xirinachs.
None of Rice, Chioini, or Xirinachs were AIM stockholders.
On July 8, Jorgl (working with Rice, Chioini, and counsel) submitted a notice
to AIM that proposed the nominations of Rice and Chioini to AIM’s board of
directors. The board suspected that Jorgl’s nomination was not submitted out of the
blue given that another stockholder, Walter Lautz, had tried to nominate Chioini in
April.
The board deduced that Lautz had been working on behalf of stockholder
Franz Tudor, who had been vexing AIM since 2020 with threatening emails and
interference with AIM’s business contacts. Tudor’s actions had led AIM to seek
injunctive relief against him in Florida and to send cease-and-desist letters
requesting that Tudor comply with federal securities laws. The quick succession and
commonalities between the failed Lautz nomination and the Jorgl nomination
prompted the board to investigate.
After reviewing information showing that Rice and Chioini also had ties to
Tudor, the board came to believe that Jorgl’s notice omitted to mention arrangements
or understandings with an undisclosed group. Such disclosure was required by
AIM’s advance notice bylaw. The board voted to reject Jorgl’s notice and to
commence litigation against Jorgl, Chioini, Rice, Tudor, and others for potential
violations of federal securities laws.
Jorgl responded by filing litigation in this court, seeking a preliminary
mandatory injunction requiring the board to accept his nomination and include his
nominees on a universal proxy card. Despite Jorgl’s insistence that no discovery
was necessary to prove his claim, expedited discovery ensued. That discovery
indicated that a web of individuals had worked together to bring Jorgl’s nomination
forward.
The facts read like a game of telephone. Tudor, desiring to take control of the
board, asked Lautz to nominate Chioini (and another individual). When Lautz
failed, Tudor, Chioini, and Xirinachs regrouped to find another stockholder to be the
public face of their effort. Chioini asked Rice to run alongside him, and Rice asked
Jorgl to become a stockholder. Jorgl then bought shares and transferred them into
record name with the help of Xirinachs. Rice promised Jorgl he would not be on the
hook for any expenses, and Jorgl submitted his nomination notice to AIM. Xirinachs
2
and Chioini then formally engaged counsel and Xirinachs officially agreed to
provide funding.
Other than describing a potential agreement for Chioini and Rice to reimburse
certain costs, Jorgl did not mention any arrangements or understandings with Tudor
or Xirinachs in his nomination notice. Jorgl argues that his notice was compliant
because he knew nothing about the involvement of Tudor or Xirinachs at the time
he submitted it. Maybe so. But the evidence put forward by the defendants indicates
that Jorgl’s notice was—at best—misleading.
Jorgl also asserts that the board’s rejection of his notice was inequitable,
requiring this court to step in. He argues that the board sought to entrench itself at
the expense of his rights as a stockholder. The limited record before me, however,
suggests that the directors concluded a clandestine plan was afoot. I cannot say that
they were wrong or that they acted unreasonably.
At bottom, there are myriad factual disputes that make the imposition of
mandatory relief impossible. Without the benefit of a trial, I cannot resolve these
questions of fact. And—in light of the evidence presented by the defendants—I
certainly cannot find that Jorgl is entitled to a judgment as a matter of law.
Jorgl’s motion for a preliminary mandatory injunction is therefore denied.
3
I. FACTUAL BACKGROUND
This background is drawn from the undisputed facts in the plaintiff’s Verified
Complaint and the record developed in connection with the plaintiff’s motion for a
preliminary injunction.1 The record includes over 100 exhibits and the deposition
testimony of 12 witnesses.2 Based on the current record, the following facts are
those that I conclude are likely to be found after trial.3
A. AIM and Its Board
AIM ImmunoTech, Inc. (“AIM” or the “Company”) is an immuno-pharma
company focused on the research and development of therapeutics to treat cancers,
immune disorders, and viral diseases.4 Its common stock is publicly traded on the
NYSE American exchange.5 AIM has three directors: defendants Thomas Equels,
Dr. William Mitchell, and Stewart Appelrouth.6
1
See Dkt. 1 (“Compl.”).
2
Citations in the form “PX__” refer to exhibits to the Transmittal Affidavit of Jeffrey J.
Lyons to Plaintiff’s Motion for Preliminary Injunction. Dkt. 114. Citations in the form
“DX__” refer to exhibits to the Transmittal Affidavit of Shelby M. Thornton in Support of
Defendants’ Answering Brief in Opposition to Plaintiff’s Motion for Preliminary
Injunction. Dkt. 130. Deposition transcripts are cited as “[Name] Dep.”
3
See In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 578 (Del. Ch. 2010).
4
Compl. ¶ 15.
5
Id.6
Id. ¶¶ 12-14, 18.
4
In 2015, AIM’s board of directors (the “Board”) was composed of its then-
Chief Executive Officer Dr. William Carter, Peter Rodino, Iraj Kiani, Equels, and
Mitchell. In February 2016, the Board removed Carter from his position as CEO,
and Carter resigned from the Board.7 The remaining directors resolved to appoint
Equels (a lawyer by training) as CEO and Mitchell (an academic with experience
overseeing clinical trials) as Chairman.8
In June 2016, Kiani resigned from the Board, leaving Equels, Mitchell, and
Rodino as its sole members.9 Rodino then resigned from the Board to become AIM’s
General Counsel.10 Appelrouth, who had previously performed accounting and
investigatory services for AIM, was nominated and elected as the third Board
member at the 2016 annual stockholder meeting.11
The Board has been composed of Equels, Mitchell, and Appelrouth ever since.
They have been reelected in unopposed elections each year through the present.12
At AIM’s 2021 annual meeting, the incumbent directors received slight majorities
7
DX 4; DX 100 (“Equels Dep.”) 46-51; DX 98 (“Mitchell Dep.”) 23-24; DX 96 (“Rodino
Dep.”) 106.
8
PX 4; PX 5.
9
PX 6.
10
Rodino Dep. 10, 62-65. Rodino took on other executive roles as well. Id.
11
PX 7; PX 8; Equels Dep. 79-80; DX 5 at 73.
12
Compl. ¶ 19.
5
“for” their unopposed reelection bids, with each director receiving about 79%
support excluding abstains.13
B. Tudor’s Outreach
Franz Tudor is an AIM stockholder who made himself known to AIM and its
directors in 2020. At first, Tudor sought to become AIM’s business development
consultant.14 AIM’s executives felt it would be problematic for Tudor to serve in
that role after learning that Tudor had been “convicted of insider trading.”15 In 2009,
Tudor pleaded guilty to securities fraud and conspiracy to commit securities fraud.
He was enjoined from, among other things, engaging in certain activities related to
“penny stocks.”16
After AIM declined to offer Tudor a consulting role, a “barrage of activity”
followed.17 For example, Tudor reached out to AIM’s business contacts and to a
13
See PX 22 Ex. A at 7.
14
Equels Dep. 124.
15
Id. at 124-25; see also id. at 103-04, 117-18; Rodino Dep. 180-82; DX 18. Equels, who
was deposed in this action, submitted an affidavit detailing his interactions with Tudor.
See DX 85. I attribute little weight to his “non-adversarial proffer[].” In re W. Nat. Corp.
S’holders Litig., 2000 WL 710192, at *19 (Del. Ch. May 22, 2000) (describing witness
affidavits and explaining that the court will “ordinarily attach little if any weight to such
inherently self-serving and non-adversarial proffers”). I take the same approach to the
affidavit of Robert Chioini submitted by the plaintiff. PX 22. I focus, instead, on the
contemporaneous documents and deposition testimony.
16
See DX 85 Ex. A; DX 18.
17
Equels Dep. 125.
6
lobbyist who then purportedly contacted the FDA.18 These interactions prompted
AIM to send a cease-and-desist letter to Tudor.19
In February 2021, AIM commenced litigation against Tudor in Florida state
court, seeking injunctive relief. On August 13, 2021, the Florida court entered a
stipulated injunction indefinitely enjoining Tudor from contacting AIM’s business
relations.20 Tudor subsequently contacted AIM’s financial advisor and its investor
relations firm.21 At times, Tudor has made varying representations about his own
stockholder status and claimed that he represents stockholders holding more than
one million shares of AIM stock.22
AIM stockholder Todd Deutsch—who had worked with Tudor at Galleon
Group23—also engaged in outreach to AIM and its investor relations consultant to
express his concerns with and criticisms of the company. In a May 2022 email,
18
DX 14; DX 15; DX 17; see also DX 19.
19
See DX 16; Equels Dep. 104; Rodino Dep. 181-83; see also Mitchell Dep. 58-59.
20
See PX 34; PX 35.
21
See Rodino Dep. 183; DX 55.
22
See DX 10 (Tudor writing, “I now represent over 1 mil shares btwn the various funds i
consult and my own ownership. Why do you think stock didn’t break 2.65 today? That
was us buying every share sub 2.70.”); DX 12 (Tudor stating, “I am an AIM shareholder
and represent some of AIMs largest shareholders”); DX 13 (Tudor describing himself as
“a shareholder of record and speaking for multiple large shareholders of record” he was
“in direct contact with”); but see Tudor Dep. 64 (saying that he made these representations
to get AIM’s attention).
23
Equels Dep. 107, 182 (testifying that Tudor and Deutsch were “part of” and “testified”
in connection with an insider trading probe concerning Galleon Group).
7
Deutsch represented to AIM that he owned about 2 million shares of AIM stock.24
In June, he wrote that he owned 4.9% of AIM and “5 plus times the amount of stock”
owned by Equels.25 Deutsch was communicating with Tudor, and Ted Kellner—
another AIM stockholder—about AIM during this time.26
C. The Lautz Nomination
In late 2021, Walter Lautz, who also claimed to be a “significant shareholder
of AIM,” emailed Equels and AIM’s investor relations firm, critiquing the
company’s performance and telling Equels to “[s]tep up or get out.”27 Lautz had
been introduced to Tudor in late 2020. By December 2021, they were
communicating about AIM’s performance and the need to have an “activist . . . come
in” and to “oust[]” the Board.28
24
DX 54.
25
DX 57.
26
See DX 59 (Deutsch emailing Tudor and Kellner, inadvertently copying AIM and its
investor relations firm, asking Tudor to participate in a call).
27
DX 24.
28
See DX 23 (“Aim needs an activist to come in now.”); see also DX 21 (“We need to find
a way to get [T]om [Equels] ousted.”); DX 22 (“[T]his board needs to be ousted.”); Tudor
Dep. 35-36, 44-46. The plaintiff objects to the defendants’ introduction of DX 21, DX 22,
and DX 23 (among others) on hearsay grounds. See Pl.’s Reply Br. 5. But these documents
are not being offered to prove the truth of the matter asserted. They are offered to prove
that Tudor made statements to Lautz. See Saudi Basic Indus. Corp. v. Mobil Yanbu
Petrochemical Co., 866 A.2d 1, 21 (Del. 2005) (“A statement is not hearsay if offered only
to prove that the statement was made, rather than for the truth of any matter asserted.”
(citing D.R.E. 801(c))); Hunt v. State, 1987 WL 36369, at *2 (Del. Feb. 11, 1987) (TABLE)
(explaining that testimony was not hearsay when it was “not being offered to prove the
truth of any matter asserted, but rather to prove that the statement was made” (citing D.R.E.
8
In April 2022, Lautz and Tudor discussed the possibility of Lautz nominating
two candidates for the AIM Board. Tudor set out to find potential nominees.29
Tudor contacted Robert Chioini, who he had known since 2011 or 2012 when Tudor
had worked as “a business development consultant for [Chioini]” with Rockwell
Medical Technologies, Inc.30 Chioini was a founder of Rockwell Medical and
served as its CEO until he was terminated in 2018.31 Tudor also reached out to his
friend Daniel Ring about serving as a Board candidate.32 Tudor relayed to Deutsch
that Ring could “be on the AIM B[oard]” and wrote “[w]e will need a shareholder
to make the nomination and [I] will get everything together.”33
On April 18, Tudor introduced Ring and Chioini to Lautz.34 Tudor also sent
Chioini an email with the subject line: “Rob Chioini – AIM BOD Nomination
Acceptance Letter.”35 Later that day, Lautz submitted a letter to AIM purporting to
801(c))). This is likewise the case for other exhibits that are the subject of the plaintiff’s
hearsay objection: DX 30, DX 31, DX 32, DX 33, DX 50, DX 55, DX 56, DX 58, DX 60,
DX62, DX 63, DX 65, DX 67, DX 71, DX 79, and DX 80.
29
See Tudor Dep. 46-47.
30
Id. at 38-39. Tudor had ongoing business ties to Chioini until March 2021. Id.
31
Id.
32
Id. at 48; DX 101 (“Ring Dep.”) 7-10.
33
DX 30.
34
DX 31; DX 33; see DX 97 (“Chioini Dep.”) 28-29; Ring Dep. 8; DX 103 (“Lautz Dep.”)
47-48.
35
DX 32.
9
nominate Ring as a candidate for the Chairman of the Board and Chioini as a director
candidate.36
On April 25, Chioini sent the 2021 AIM proxy statement to his business
associate, Michael Xirinachs.37 Xirinachs was, like Chioini, a founder of Rockwell
Medical.38 Chioini and Xirinachs had partnered on various endeavors regarding
medical device and drug companies.39 Chioini hoped that Xirinachs would work
with him on the AIM “opportunit[y].”40 Xirinachs was facing legal trouble at the
time of Chioini’s outreach (and recently pleaded guilty to two counts of federal wire
fraud).41 Xirinachs and Chioini continued to engage over the ensuing weeks.
D. The Renewed Nomination Effort
On April 28, AIM rejected Lautz’s proposal to nominate Chioini and Ring as
Board candidates. AIM’s letter to Lautz explained that the proposal failed to comply
with the Securities Exchange Act.42 AIM then obtained confirmation of its rejection
36
DX 37; Lautz Dep. 29-30 (testifying that Tudor drafted the nomination letter and that
Lautz reviewed but made no changes to it).
37
DX 43; see Chioini Dep. 71-74.
38
DX 1 at 7-8.
39
Chioini Dep. 73-74.
40
Id. at 74.
41
DX 91 at 19.
42
See DX 48.
10
from the SEC.43 Equels and others suspected that Tudor was involved with the Lautz
nomination.44
After the failed Lautz proposal, Chioini continued to seek a path onto the
Board.45 On April 29, Chioini sent AIM’s bylaws to Xirinachs, pointing out the
advance notice provision and timing considerations to submit a director
nomination.46 The next day, Chioini emailed Xirinachs about setting up a call with
Tudor regarding the “AIM deal.”47 On May 3, Tudor and Xirinachs were invited to
a call with Chioini and counsel from Baker & Hostetler LLP with the subject
“Potential Engagement: Proxy Contest.”48
On May 17, Tudor sent an email to AIM’s outside investor relations firm,
copying Equels. Tudor expressed frustration at being rebuffed, writing: “By totally
ignoring me and not acting professionally you now get gloves off. . . . This is just
43
DX 85 Ex. C.
44
See Equels Dep. 174-75, 215-17; Mitchell Dep. 54; Appelrouth Dep. 99.
45
See Chioini Dep. 30-33.
46
DX 49 (“The window to submit a director nomination is 90-120 days prior to the
anniversary of last year’s annual meeting. . . . The bylaws with some relevant provisions
highlighted are attached.”).
47
DX 50 (“I also want to have a call with [Tudor] today re AIM deal, preferably before
6PM because I am supposed to speak with the lawyer afterward tonight, so let [m]e know
what time you can do the call.”).
48
DX 52; see also DX 51.
11
[d]isgusting.”49 Equels assumed that Tudor’s email was prompted by the rejection
of the Lautz proposal.50
AIM’s outside counsel subsequently sent letters to Deutsch, Kellner, and
Tudor’s counsel highlighting “a series of actions about which [AIM] ha[d] serious
concerns.”51 The letters asked Deutsch, Kellner, and Tudor to comply with the
requirements of Section 13(d) of the Exchange Act.52 AIM anticipated that Tudor
and others would commence a proxy contest.53
On June 2, Tudor emailed Deutsch to report that he had “2 strong candidates
to run and get control of the BOD” and “a shareholder who [wa]s will[ing] to have
their name as the lead” but had been unsuccessful in finding “anyone to front the
$150K” of associated costs.54 Tudor and Chioini asked Lautz if he would launch a
second nomination effort.55
Lautz initially considered it, though he questioned whether his involvement
would be a “good look” since he had been the subject of a FINRA investigation.56
49
DX 55.
50
See Equels Dep. 180-82.
51
DX 61.
52
Id.; DX 66; see also DX 92 at 19.
53
Equels Dep. 179-80.
54
DX 56.
55
DX 58; Tudor Dep. 45, 47-50.
56
DX 60.
12
Tudor forwarded Lautz’s email to Chioini, who added Xirinachs to the chain.
Chioini responded that he would “have the attorney look at it.”57
Lautz subsequently declined to submit another nomination, writing that he
“c[ould] not be the face of this partaking” given the risks to his reputation.58 A few
days later, Lautz asked if Tudor had been “able to find someone to be the face of the
activist[.]”59 Tudor responded: “We are still looking.”60
In mid-to-late June, Chioini contacted Michael Rice, whose investor relations
firm had served Rockwell Medical while Chioini was CEO, to ask if Rice would
consider being a Board nominee.61 Rice agreed.62 Chioini sent Rice’s contact
information to Tudor, and Tudor sent Rice a write-up about AIM.63 The three
subsequently had a call about AIM.64
E. The Jorgl Nomination
In late June, Rice asked plaintiff Jonathan Jorgl, with whom he had a
longstanding personal relationship, to purchase AIM stock in order to submit the
57
Id.
58
DX 62.
59
Id.
60
Id.
61
See Chioini Dep. 33; DX 94 (“Rice Dep.”) 34-35.
62
See Rice Dep. 46-47.
63
DX 63; DX 64.
64
Rice Dep. 37.
13
nomination.65 Jorgl agreed.66 On June 23, Chioini texted Xirinachs and Rice saying:
“Let’s talk in the morning regarding 1000 share purchase and what needs to be done.
The most critical part will be to get the shares once they’re purchased sent to the
shareholder[’]s physical address immediately by DTC or the transfer agent.”67
The next day, Chioini emailed Rice instructions that detailed how Jorgl would
buy 1,000 AIM shares and move them into Jorgl’s name of record.68 Rice then texted
the instructions to Jorgl.69 Meanwhile, Tudor forwarded Chioini an email from
Tudor’s counsel concerning AIM’s assertion that Tudor breached the Florida
injunction.70
On June 27, after texting with Rice, Jorgl bought 1,000 shares of AIM stock.71
Separately, Chioini and Xirinachs exchanged emails about AIM titled
“AIMNominationLetter” and “SummaryofRequiredInfoandDefinitions.”72
65
See Compl. ¶ 43; Rice Dep. 78-80 (explaining that Rice met Jorgl “on the beach
surfing”).
66
See Compl. ¶ 43; Rice Dep. 80-82.
67
DX 65.
68
DX 67.
69
DX 70.
70
DX 68.
71
DX 71; DX 95 (“Jorgl Dep.”) 178-79.
72
See DX 93 at 4-5. The contents of those emails were withheld from production on the
basis of a common interest privilege. Id. The plaintiff objects to the defendants’ citations
to Chioini’s privilege log and argues that the log constitutes inadmissible hearsay. See Pl.’s
Reply Br. 23 n.3. This court regularly considers privilege logs, where appropriate, in
making fact findings. See e.g., In re Cogent, Inc. S’holder Litig., 7 A.3d 487, 512 n.91
14
Efforts then began to move Jorgl’s shares into record name. On July 5,
Chioini copied Xirinachs on an email with Baker Hostetler titled “1000 share
trade.”73 Xirinachs was assisting with the transfer of Jorgl’s shares from street name
into record name because “every minute counted” and Xirinachs “had experience . .
. and offered to help.”74 Xirinachs called Jorgl to provide guidance on how to
complete the transfer over the July 4th holiday weekend.75
Having successfully transferred the 1,000 shares into his name, Jorgl hesitated
when it came time to sign an engagement letter with Baker Hostetler. He texted
Chioini: “Sorry not trying to be difficult just not comfortable taking on that
obligation.”76 He asked Chioini and Rice to include language in the letter making
“it clear [Jorgl] was not responsible for the retainer or the fees” but that the fees
(Del. Ch. 2010) (looking to privilege log entries to assess the timing of communications);
Bandera Master Fund LP v. Boardwalk Pipeline P’rs, 2021 WL 5267734, at *46 (Del. Ch.
Nov. 12, 2021) (discussing that a privilege log revealed heavy involvement of certain
individuals). Jorgl cites no authority demonstrating that doing so is improper. As for his
hearsay objection, it is once again overruled. The defendants offer the log to demonstrate
that a communication occurred and the basis on which it was withheld. It is difficult to
understand how they could offer the log for the communication’s truth or substance when
that communication was withheld entirely. See supra note 28.
73
DX 73.
74
Chioini Dep. 106-07.
75
Jorgl Dep. 66-68; DX 72 (Chioini to Jorgl: “His name is Michael and he should be calling
you now.”).
76
DX 76. Jorgl objects to the introduction of this communication on hearsay grounds. But
the statement is admissible under Delaware Rule of Evidence 801(d)(2)(A). The same is
true regarding DX 75 and DX 77, which are also subjects of the plaintiff’s hearsay
objection.
15
“would be paid by a third party.”77 Chioini assured Jorgl multiple times in writing
that Jorgl “would not be on the hook,” emphasizing “[w]e” (i.e., not Jorgl) “are
paying [the] fees.”78
On July 8, Jorgl’s notice of intent (the “Notice”) to nominate Chioini and Rice
as candidates for election at AIM’s 2022 annual meeting was delivered to AIM.79 It
was drafted by Baker Hostetler with input by Chioini, Rice, and Jorgl.80 The Notice
represented that Jorgl owned 1,000 shares of AIM common stock, that he purchased
the shares on June 27 for $0.87 per share, and that he had not purchased or sold any
other shares of AIM common stock in the preceding two years.81 Jorgl also disclosed
that his nominees, Chioini and Rice, did not own any shares of AIM common stock.
The following day, Tudor had a call with Kellner about the nominations.82
Kellner’s handwritten notes of the call state: “Franz [Tudor] submitted 2 new
77
DX 77; see also Chioini Dep. 210-12.
78
DX 75; DX 77; Chioini Dep. 111-12, 207-11. Insofar as the messages are introduced to
demonstrate that communications occurred (or the frequency by which they were made),
such use is also permissible. See supra note 28.
79
DX 84 Ex. C (“Notice”).
80
Jorgl Dep. 145-46.
81
Notice at 4.
82
DX 78. The plaintiff objects to the introduction of Kellner’s notes on hearsay grounds.
But the notes are admissible under Delaware Rule of Evidence 803(1). They are also
admissible under Rule 801(d)(1)(A) insofar as the notes are inconsistent with Kellner’s
deposition testimony. See Kellner Dep. 10 (“That was incorrect. I learned later, when I
got information from the attorneys, it was not [Tudor], but it was a gentleman named
Jorgl.”).
16
directors on Friday July 8th: 1. Mike Rice 2. Rob Chioini.”83 Jorgl’s nomination
was not yet public.
On July 11, Xirinachs wrote to Chioini about the “AIM process,” which he
described as being in “full swing.”84 He wrote: “The way I hope this all plays out is
we get control of AIM . . . we continue to look for opportunities to either acquire,
(to spin off at a later time), license technology, or possibly merger with.”85 He twice
referred to Jorgl’s slate as “our slate.”86
F. Formal Agreements Are Reached.
Despite Chioini and others having communicated with Baker Hostetler about
the nominations since April 28, no engagement letter was executed before Jorgl’s
Notice was submitted.87 On July 11—the first business day after the Notice was
submitted—Xirinachs emailed Baker Hostetler with the subject “Engagement
83
DX 78.
84
DX 79. The plaintiff objects to the introduction of this communication on hearsay
grounds. Insofar as the document is relied upon to show that the communication was made
to Chioini, it is not hearsay. See supra note 28. To the extent that it is relied upon for the
truth of the matter (if at all), it would be admissible under Delaware Rule of Evidence
804(b)(3) as a statement against interest. Xirinachs was unavailable to testify, and the
defendants were unable to procure his attendance by reasonable means.
85
DX 79.
86
Id.
87
See Chioini Dep. 50-53 (“[A]n engagement letter actually was . . . executed after the
Jorgl notice went in on July 8th.”).
17
Letter.”88 A slew of communications among Baker Hostetler, Chioini, and Xirinachs
followed.89 On July 15, an email with the subject “Completed: Please DocuSign:
Engagement Letter (Baker Hostetler)” was sent to Chioini.90 The date of Xirinachs’
execution is unknown because he did not respond to the subpoenas served on him in
connection with this litigation.91
Efforts to confirm funding arrangements were also made. On July 11,
88
DX 93 at 7.
89
Id. at 7-8.
90
Id. at 8.
91
The defendants have also moved for adverse inferences arising from what they allege to
be Jorgl’s “intentional refusal to disclose highly relevant information” and concealment of
“the involvement of Michael Xirinachs.” See Mot. to Compel and for Adverse Inferences
1 (Dkt. 110). The defendants’ motion was prompted by Jorgl’s failure to disclose Xirinachs
in his interrogatory responses concerning: the identities of persons with knowledge of the
facts alleged in the Complaint; the identity of individuals or entities providing financing or
funding for the litigation; and communications with any person about his nomination effort.
See id. at 3; id. Ex. 2. The defendants argue that Jorgl’s incomplete responses left them
unable to learn the extent of Xirinachs’ involvement until documents including Xirinachs
were produced late in discovery. This gave the defendants limited time to serve subpoenas
on Xirinachs, which he ultimately did not respond to.
The fact that the defendants learned about Xirinachs late in the game is not ideal.
Nonetheless, I decline to impose an adverse inference. That sanction “is appropriate where
a litigant intentionally suppresses or destroys pertinent evidence.” Sears, Roebuck and Co.
v. Midcap, 893 A.2d 542, 552 (Del. 2006); see also Triton Constr. Co., Inc. v. E. Shore
Elec. Servs., Inc., 2009 WL 1387115, at *7 (Del. Ch. May 18, 2009) (issuing an adverse
inference when, knowing that litigation was imminent, the defendant intentionally or
recklessly deleted thousands of electronic files that were largely irretrievable); Kan-Di-Ki,
LLC v. Suer, 2015 WL 4503210, at *30 (Del. Ch. July 22, 2015) (granting an adverse
inference where the plaintiff recklessly failed to preserve potentially responsive
information on his cell phone). Even if Jorgl was not forthcoming, his conduct does not
rise to the level that would justify an adverse inference. He has not destroyed evidence and
I lack grounds to conclude that he intentionally or recklessly concealed it. The defendants’
motion is therefore denied.
18
Xirinachs contacted Paul Tusa of River Rock Advisors LLC about a “potential
consulting agreement that involved AIM.”92 On July 12, Xirinachs introduced Tusa
to Chioini, telling Chioini that Tusa was “aware of our plans regarding AIM and will
add valuable assistance in this process.”93
Xirinachs also told Tusa there would be “an investment opportunity”
requiring Tusa to pay certain expenses, though they “never really discussed . . . what
the expenses would be.”94 Tusa was interested in investing, but River Rock was
struggling. River Rock’s bank account was about to close due to inactivity before
Xirinachs gave Tusa $5,000 to keep the account open.95 Tusa later changed his mind
and never made a contribution concerning AIM.96
The proxy statement subsequently filed by Jorgl, Chioini, and Rice stated that
Xirinachs “paid certain expenses on behalf of River Rock [] and agreed to be jointly
responsible for expenses with Mr. Chioini going forward.”97
92
PX 88 (“Tusa Dep.”) 48; see also Rice Dep. 153-55 (testifying that Tusa was involved
in the nomination because he was contributing part of the fees).
93
DX 80.
94
Tusa Dep. 49-50.
95
See id. at 30-33.
96
Id. at 71-72, 103.
97
DX 91 at 19.
19
G. The Board Rejects Jorgl’s Proposal.
The Board was suspicious upon receiving Jorgl’s notice. It seemed strange
that Jorgl had recently purchased a small number of shares and that neither of his
nominees were stockholders. It was also striking that he had nominated Chioini,
who Lautz sought to nominate a few months earlier.98
Equels and Rodino decided to investigate. Their research of publicly
available information revealed ties among Tudor, Chioini, and Rice. In particular,
they learned that Tudor and Chioini had worked together at Rockwell Medical before
Chioini was terminated, that Rice had served as an advisor to Rockwell Medical, and
that Chioini and Tudor had also worked together at SQI Diagnostics. 99
On July 14, the AIM Board met to consider whether the Notice complied with
the advance notice provisions in AIM’s bylaws.100 The Board discussed, among
other things, the Jorgl Notice, the prior Lautz proposal, and Tudor’s interactions with
AIM. The directors considered Jorgl’s recent stock purchase and Chioini’s role in
both the Lautz and Jorgl nominations. They also assessed “various information and
98
See, e.g., Appelrouth Dep. 93; Mitchell Dep. 54; Equels Dep. 209 (“[T]he idea that
Jonathan Jorgl woke up 10 days before this nomination, ran out to buy a thousand shares
of AIM, which is exactly the same number as Walter Lautz in his proxy proposal, and then
. . . nominated Mr. Chioini, who is the same person that was nominated by Walter Lautz,
struck me as not only implausible but impossible.”).
99
See Rodino Dep. 216-17.
100
See DX 81 at 2.
20
evidence” suggesting that a nameless group was working together “with the intent
o[f] taking control of the company and potentially raiding it or taking other action
adverse to the stockholders.”101
The Board determined there was a strong likelihood that the Notice was
prompted by undisclosed arrangements or understandings.102 The individuals
identified as potential participants were Tudor, Deutsch, Kellner, Jorgl, Lautz,
Chioini, and Rice based on “both information publicly available and e-mails that the
Company received from a number of th[o]se players.”103 The Board voted
unanimously to reject the Notice.104
The Board also authorized AIM to file a complaint in the United States
District Court for the Middle District of Florida against Jorgl, Chioini, Rice, Tudor,
Deutsch, Kellner, and Lautz for failing to file a Schedule 13D notice reflecting that
they were a group for purposes of federal securities laws.105 That complaint was
filed on July 15, 2022.106
101
Equels Dep. 229; see DX 81; Mitchell Dep. 54-55; see also DX 92 at 20-21.
102
Mitchell Dep. 55; Appelrouth Dep. 98-100; Equels Dep. 229-232.
103
DX 81 at 3.
104
Id. at 1-2.
105
DX 85 ¶ 25.
106
See PX 43; see also DX 87.
21
On July 19, Jorgl was notified that his Notice had been rejected.107
H. This Litigation
Jorgl filed his Verified Complaint in this court on July 29.108 The Complaint
advances a single count seeking a declaration that the defendants have not complied
with AIM’s advance notice bylaw.
On August 1, Jorgl filed a Motion for Preliminary Injunction.109
On August 19, the court granted an order governing expedited discovery and
briefing in advance of a preliminary injunction hearing.110
After briefing on the preliminary injunction motion was completed, oral
argument was held on October 5.111
II. LEGAL ANALYSIS
“The extraordinary remedy of a preliminary injunction is granted sparingly
and only upon a persuasive showing that it is urgently necessary, that it will result
in comparatively less harm to the adverse party, and that, in the end, it is unlikely to
be shown to have been issued improvidently.”112 To obtain a preliminary injunction,
107
DX 84 Ex. D.
108
Dkt. 1.
109
Dkt. 5.
110
Dkt. 30.
111
See Dkts. 164, 201.
112
Cantor Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 579 (Del. Ch. 1998) (citation omitted).
22
Jorgl must demonstrate: “(1) a reasonable probability of ultimate success on the
merits at trial; (2) that the failure to issue a preliminary injunction will result in
immediate and irreparable injury before the final hearing; and (3) that the balance of
hardships weighs in the movant’s favor.”113
There is no fixed approach to how the court should weigh these elements
relative to one another. “A strong showing on one element may overcome a weak
showing on another element.”114 But a failure to prove any of the three elements
defeats the application.115
The first element of the injunction test requires Jorgl to establish a reasonable
probability of success on the merits of his claim. That showing “falls well short of
that which would be required to secure final relief following trial, since it explicitly
requires only that the record establish a reasonable probability that this greater
showing will ultimately be made.”116 Jorgl’s sole claim seeks a declaration that the
defendants have not complied with AIM’s bylaws regarding director nominations.
113
La. Mun. Police Empls.’ Ret. Sys. v. Crawford, 918 A.2d 1172, 1185 (Del. Ch. 2007).
114
Cantor Fitzgerald, 724 A.2d at 579.
115
Id.116
Id.23
But, as Jorgl recognizes, a higher merits standard applies.117 He asks that the
court enjoin the defendants from “refusing to acknowledge the July 8, 2022 notice”
and from “preventing” Chioini and Rice from being “voted on at the annual meeting
and included in AIM’s proxy materials.”118 In effect, he is asking the court to order
the defendants to acknowledge his nominees as valid, permit his nominees to stand
for election, and include his nominees on a universal proxy card.119 That amounts to
a request for mandatory injunctive relief.120
“[I]t is a well settled principle of equity that a preliminary mandatory
injunction will not issue unless the legal right to be protected is clearly
established.”121 To obtain mandatory relief, Jorgl must make the more onerous
117
Pl.’s Suppl. Opening Br. 33 (“Although Jorgl submits this brief in support of his Motion
for a Preliminary Injunction, he recognizes that when a plaintiff seeks the same relief
through a preliminary injunction that he hopes to receive through a final decision on the
merits, then a higher mandatory injunction standard is proper.”); Pl.’s Reply Br. 17.
118
See Dkt. 5 ¶ 1; Dkt. 4.
119
Pl.’s Suppl. Opening Br. 34. Jorgl initially also asked that the court enjoin the
defendants from disparaging him or his nominees during the proxy contest. His
preliminary injunction brief no longer seeks that relief and his request for a preliminary
injunction on that basis is waived. See Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del.
1999) (“Issues not briefed are deemed waived.”).
120
See Rosenbaum v. CytoDyn Inc., 2021 WL 4775140, at *12 (Del. Ch. Oct. 13, 2021)
(declaring that an order forcing a board to include on the ballot the nominees from the
rejected nomination notice amounted to mandatory injunctive relief); AB Value P’rs, LP v.
Kreisler Mfg. Corp., 2014 WL 7150465, at *3 (Del. Ch. Dec. 16, 2014) (explaining that
where the plaintiff requested injunctive relief allowing it to run a dissident slate, it
effectively sought a mandatory injunction requiring the board to waive the company’s
advance notice bylaw).
121
Steiner v. Simmons, 111 A.2d 574, 575 (Del. 1955).
24
“showing that [he] is entitled as a matter of law to the relief [he] seeks based on
undisputed facts.”122 That is, he must “make a showing sufficient to support a grant
of summary judgment.”123
My analysis of the merits of Jorgl’s claim proceeds in two steps. I begin by
considering whether he has demonstrated that the Board breached the bylaws when
it rejected the Notice. Because my inquiry does not end there, I then consider
whether the defendants’ rejection of the Notice was unreasonable or inequitable.
I conclude that Jorgl has not satisfied the applicable standard. It is doubtful
that he could show a reasonable probability of success on the merits—much less that
he is entitled to a judgment as a matter of law. Moreover, given the number of
important factual disputes that were raised during this proceeding, it would be
inappropriate for this court to award a mandatory injunction.
122
Alpha Nat. Res., Inc. v. Cliff’s Nat. Res., Inc., 2008 WL 4951060, at *2 (Del. Ch. Nov.
6, 2008); see also BlackRock Credit Allocation Income Tr. v. Saba Cap. Master Fund, Ltd.,
224 A.3d 964, 976-77 (Del. 2020) (“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 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))).
123
Saba Cap., 224 A.3d at 977; see also C & J Energy Servs., Inc. v. City of Miami Gen.
Empls., 107 A.3d 1049, 1053-54 (Del. Ch. 2014) (“To issue a mandatory injunction
requiring a party to take affirmative action . . . the Court of Chancery must either hold a
trial and make findings of fact, or base an injunction solely on undisputed facts.”).
25
A. Whether the Notice Complied with the Bylaws
“The 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 Delaware General Corporation Law.”124 The court is bound by
principles of contract interpretation when assessing them.125 The terms of the bylaws
will be “given their commonly accepted meaning.”126 If a bylaw is unambiguous,
the court “need not interpret it or search for the parties’ intent.” 127 Any ambiguity
in an advance notice bylaw is resolved “in favor of the stockholder’s electoral
rights.”128
Section 1.4 of AIM’s bylaws describes the requirements for providing
advance notice of the nomination of individuals to stand for election as directors.129
The nominating stockholder must be a stockholder of record at the time the notice is
delivered. The notice must be filed “not less than ninety (90) nor more than one
124
Hill Int’l, Inc. v. Opportunity P’rs L.P., 119 A.3d 30, 38 (Del. 2015).
125
Brown v. Matterport, 2022 WL 89568, at *3 (Del. Ch. Jan. 10, 2022) (“When construing
a corporation’s bylaws, the court is bound by the principles of contract interpretation.”),
aff’d, 2022 WL 2960331 (Del. July 27, 2022) (ORDER).
126
Hill Int’l, 119 A.3d at 38 (quoting Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d
1182, 1188 (Del. 2010)).
127
Gentile v. SinglePoint Fin., Inc., 788 A.2d 111, 113 (Del. 2001).
128
Saba Cap., 224 A.3d at 977 (quoting Hill Int’l, 119 A.3d at 38).
129
DX 84 Ex. B (“Bylaws”) Art. I § 1.4.
26
hundred twenty (120) days prior to the anniversary date of the immediately
preceding annual meeting of the stockholders.”130
The bylaws also set out categories of information that must be disclosed by
the nominating stockholder. Relevant here, Section 1.4(c) provides:
For any Stockholder Proposal that seeks to nominate persons to stand
for election as directors of the Corporation, the stockholder’s notice
also shall include (i) a description of all arrangements or understandings
between such stockholder and each proposed nominee and any other
person or persons (including their names) pursuant to which the
nomination(s) are to be made.131
That provision further requires the disclosure of information relating to the
nominating stockholder or the nominees “that would be required to be disclosed in
a proxy statement . . . pursuant to Section 14 of the Securities Exchange Act[.]”132
For Jorgl to prevail on his claim that the Board violated Section 1.4(c) when
it refused to accept his nominations (without regard to whether the Board acted
inequitably), he must first demonstrate that his Notice satisfied that provision.
“Clear and unambiguous advance notice bylaw conditions act, in some respects as
conditions precedent to companies being contractually obligated to take certain
actions.”133 Jorgl has failed to show that his Notice undisputedly the bylaw’s terms.
130
Id. § 1.4(a)(2).
131
Id. § 1.4(c).
132
Id.
133
Strategic Inv. Opportunities LLC v. Lee Enters., Inc., 2022 WL 453607, at *13 n.142
(Del. Ch. Feb. 14, 2022); see also Saba Cap., 224 A.3d at 979-81 (holding that a
27
1. The Arrangement or Understanding Disclosure Requirement
The Company’s letter rejecting Jorgl’s Notice stated that he failed to provide
the information required by Article I, Section 1.4, subsection (i).134 That subsection
requires the disclosure of “a description of all arrangements or understandings”
between the nominating stockholder “and each proposed nominee and any other
person or persons . . . pursuant to which the nomination(s) are being made.”135
The terms “arrangement” and “understanding” are not defined in AIM’s
bylaws. In such circumstances, Delaware courts “look to dictionaries for assistance
in determining the plain meaning” of contractual terms.136
An “arrangement” is defined by Black’s Law Dictionary as “a measure taken
or plan made in advance of some occurrence sometimes for a legal purpose; an
agreement or settlement of details made in anticipation.”137 An “understanding” is
defined as an “an agreement, especially of an implied or tacit nature.”138 Other
stockholder was not excused from its failure to comply with the letter of an advance notice
bylaw, thus giving the board grounds to reject its nomination).
134
DX 84 Ex. D.
135
Bylaws § 1.4(c).
136
Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 738 (Del. 2006).
137
Arrangement, Black’s Law Dictionary (11th ed. 2019).
138
Understanding, Black’s Law Dictionary (11th ed. 2019). An “agreement” is a “mutual
understanding between two or more persons about their relative rights and duties regarding
past or future performances; a manifestation of mutual assent by two or more persons”;
and the “parties’ actual bargain as found in their language or by implication from other
circumstances, including course of dealing, usage of trade, and course of performance.”
Agreement, Black’s Law Dictionary (11th ed. 2019) (first and second definitions).
28
definitions of those terms are similar.139 The definitions of “arrangement” and
“understanding” are consistent with the interpretation of the phrase “agreement,
arrangement or understanding” in other corporate and securities law contexts.140
Giving the terms “arrangement” and “understanding” their commonly
accepted meanings, Section 1.4(c) required Jorgl to disclose any advance plan,
measure taken, or agreement—whether explicit, implicit, or tacit—with any person
towards the shared goal of the nomination. At one extreme, a quid pro quo was not
(as Jorgl argues) required.141 Although an “arrangement” can be shown by an
139
See Arrangement, Merriam-Webster Dictionary, https://www.merriam-webster.com/
dictionary/arrangement (last visited Oct. 26, 2022) (“something arranged: such as [] a
preliminary measure . . . [or] an informal agreement or settlement especially on personal,
social, or political matters”); Arrangement, Oxford English Dictionary (2d. ed. 1989)
(“Disposition of measures for the accomplishment of a purpose; preparations for successful
performance.”); Understanding, Merriam-Webster Dictionary, https://www.merriam-
webster.com/dictionary/understanding (last visited Oct. 26, 2022) (“[A] mutual agreement
not formally entered into but in some degree binding on each side.”); Understanding,
Oxford English Dictionary (2d. ed. 1989) (“A mutual arrangement or agreement of an
informal but more or less explicit nature.”).
140
See, e.g., Totta v. CCSB Fin. Corp., 2022 WL 1751741, at *24-25 (Del. Ch. May 31,
2022) (discussing the definition of “acting in concert” as tracking “the general corporate
law understanding that persons act in concert when they have an agreement, arrangement,
or understanding regarding the voting or disposition of shares”); 17 C.F.R. § 240.13d-5
(discussing when individuals form a group for purposes of federal securities laws);
8 Del. C. § 203(c)(9)(iii); Chesapeake Corp. v. Shore, 771 A.2d 293, 353 (Del. Ch. 2000)
(discussing, in the context of Section 203, that the terms “agreement,” “arrangement,” or
“understanding” “permit a fairly high degree of informality in the form in which the parties
come together” but “presuppose[] a meeting of the minds”); see also Modernization of
Beneficial Ownership Reporting, 87 Fed. Reg. 13873-72 (proposed Mar. 10, 2022)
(proposing amendments to Rule 13D that would broaden the SEC’s view of when persons
should be treated as a “group”).
141
The plaintiff relies on then-Vice Chancellor Strine’s decision in Yucaipa American
Alliance Fund in arguing that an “arrangement” may indicate a “back and forth” that results
29
“agreement,” for example, it can also take the form of a “measure” or “plan” before
an event.142 At the other extreme, the occurrence of discussions, a prior business or
personal relationship, or an exchange of information is not alone sufficient to show
an “arrangement or understanding.”143
That description is “not odd or technical, but common sense.”144 Nor is the
phrase “arrangement or understanding” ambiguous, making the canon of
construction resolving ambiguities in favor of stockholders’ rights inapt.145
in some type of “quid pro quos.” See Pl.’s Suppl. Opening Br. 42 (quoting Yucaipa Am.
All. Fund II, L.P. v. Riggio, 1 A.3d 310 (Del. Ch. Aug. 12, 2010)). His reliance on Yucaipa
is misplaced. The passage relied upon is discussing whether a rights plan left the board
free to enter into “understandings” and notes that it is “possible to think that the [] board
might engage in back and forth with holders during the proxy solicitation process that
would raise the potential for improper quid pro quos.” Yucaipa Am. All. Fund, 1 A.3d at357 n.245; see also Portnoy v. Cryo-Cell Int’l, Inc., 940 A.2d 43, 66, 71 (Del. Ch. 2008)
(discussing an “arrangement” in the context of illegal vote-buying). It does not indicate
that the court must find a quid pro quo to conclude that an arrangement or understanding
was reached.
142
See supra note 137 and accompanying text.
143
See Totta, 2022 WL 1751741, at *25 (discussing, in the context of an “acting in concert”
provision, that a showing that “the stockholder plans to vote the same way as another
stockholder, is acquainted with another stockholder, or even has a business relationship
with another stockholder” is insufficient to demonstrate a group).
144
CytoDyn, 2021 WL 4775140, at *18.
145
See Saba Cap., 224 A.3d at 977 (“If charter or bylaw provisions are unclear, we resolve
any doubt in favor of the stockholder's electoral rights.” (quoting Hill Int’l, 119 A.3d at
38)).
30
2. Jorgl’s Notice
The clear language of the bylaws obligated Jorgl to disclose any arrangements
or understandings pursuant to which his nomination was made. Jorgl’s Notice
stated, in relevant part:
Although the Nominating Stockholder and the Nominees do not have a
formal agreement as of the date of this Notice, it is expected that the
Nominees will pay or contribute to the costs of the solicitation of
proxies for their election, including the costs and expenses of the
Nominating Stockholder. Except for the foregoing, as of the date of
this Notice, the Nominating Stockholder is not party to any agreements,
arrangements or understandings with any other stockholders of the
Company nor with the Nominees or any other person pursuant to which
the nominations are being made.146
Jorgl maintains that this narrative satisfied the requirements of Section 1.4(c). The
defendants disagree, arguing that it failed to disclose arrangements or
understandings with Xirinachs and Tudor.147
Based on the limited factual record before me, it appears that Tudor and
Xirinachs were working with Chioini and others to devise legal strategies and
formulate a plan for the proxy contest. They engaged in advance planning towards
146
Notice at 3.
147
The defendants point to other so-called conspirators that they say were parties to
arrangements or understandings, such as Deutsch. I decline to address every potentially
involved person given that the roles of Tudor and Xirinachs are most apparent (despite the
dearth of discovery about Xirinachs).
31
a common end: to find an AIM stockholder who would transfer shares into record
name and serve as the “face” of their nomination. That stockholder was Jorgl.
The evidence also indicates that Tudor’s and Xirinachs’s actions went beyond
loose discussions about the nominations. Their actions appear purposefully directed
toward a shared goal of taking control of the Board. They were coordinated and
constructed over a period of weeks.
Tudor launched the effort in the spring, leading to Lautz’s nomination of
Chioini and Ring. When that failed, Tudor tried again. Chioini put Tudor in touch
with Rice as a possible nominee, and Rice asked Jorgl to become a stockholder and
serve as the nominator. Tudor went dark around the time Jorgl entered the picture
in late June,148 though Kellner’s contemporaneous notes the day after the Notice was
submitted make clear that Tudor maintained some involvement.149
Xirinachs’s direct contact with Jorgl before July 8 was focused on helping
Jorgl transfer his shares into record name—a measure necessary for the nomination
to succeed. Behind the scenes, Xirinachs was working with counsel and Chioini to
put the “AIM process in[to] full swing.”150 He joined discussions with counsel about
148
Cf. Tudor Dep. 60, 119 (testifying that he “had no idea” the Jorgl nomination “was
happening” until he “got sued or [] saw the press releases”).
149
DX 78.
150
DX 79.
32
the “nomination, proxy contest, and strategy” before the Notice was submitted.151
Between June 2 and July 8, Xirinachs appears on Chioini’s privilege log 37 times.152
The extent and subject of these communications seem to belie Jorgl’s position that
Xirinachs remained on the periphery through July 8.
Irrespective of this evidence, Jorgl insists that the information he provided in
the Notice was truthful and to the best of his knowledge at the time. He contends
that there was no arrangement or understanding with Tudor to disclose because he
does not know Tudor and never communicated with him.153 As to Xirinachs, Jorgl
asserts that they only reached an arrangement or understanding after the Notice was
submitted. Setting aside that Jorgl’s argument would require me to overlook
questions of fact without the benefit of live testimony to resolve them, I cannot
accept it for several reasons.
151
DX 93; see also DX 50; DX 52; DX 65.
152
See DX 93. These communications were also withheld on the basis of a common
interest privilege. Id. The assertion of the common interest privilege implies that the
parties to the communication were working together towards a shared objective. See
Jedwab v. MGM Grand Hotels, Inc., 1986 WL 3426, at *2 (Del. Ch. Mar. 20, 1986) (“Rule
502(b) is a recognition that a disclosure may be regarded as confidential even when made
between lawyers representing different clients if in circumstances, those clients have
interests that are so parallel and non-adverse that, at least with respect to the transaction
involved, they may be regarded as acting as joint venturers.”); Titan Inv. Fund II, LP v.
Freedom Mortg. Corp., 2011 WL 532011, at *4 (Del. Super. Feb. 2, 2011) (describing
common interest privilege as applying to “parties engaged in a common enterprise”).
153
See Jorgl Dep. 71; Tudor Dep. 44, 113-14.
33
First, if Jorgl was uninformed about the extent of Tudor’s and Xirinachs’s
involvement, that would not necessarily mean that his Notice was complete. The
statement that Jorgl was not a “party to any agreements, arrangements or
understandings” essentially told AIM and its stockholders that Jorgl was working
alone (except for some informal agreement that Chioini and Rice would pay Jorgl’s
costs and expenses).154 The evidence suggesting that Jorgl was part of an
overarching arrangement or understanding that formed before July 8 puts the
veracity of that statement in doubt.
Second, the communications that Jorgl was a party to suggest that his
disclosure about “arrangements or understandings” was at least misleading. The
Notice did not disclose an arrangement pursuant to which Jorgl was asked to
purchase AIM shares and put them into record name. It did not disclose the
understanding that Jorgl would not have to pay any expenses if he submitted the
notice.155 And it disclosed that Rice might provide some funding, which is
contradicted by the record.156
154
Notice at 3.
155
To the extent that a quid pro quo is required to demonstrate an arrangement or
understanding, as the plaintiff contends, this could be it.
156
Rice Dep. 121, 156-57.
34
Third, even if Jorgl did not know the extent of Tudor’s and Xirinachs’ roles
in the nomination, Chioini knew. Chioini had direct involvement in the preparation
of the Notice. But he, too, stayed silent.157
Jorgl has therefore failed to show that the Notice complied with the bylaws.
Section 1.4(c) unambiguously required him to disclose any “arrangements or
understandings” pursuant to which his nomination was submitted. I cannot
conclude, on this record, that Jorgl’s Notice provided all such information.
Accordingly, Jorgl is not entitled to a judgment as a matter of law that the Board
breached the bylaws by refusing to accept his nomination.
B. Whether the Board’s Rejection of the Notice Was Equitable
The fact that the Notice did not satisfy the unambiguous requirements of the
bylaws is not the end of my inquiry. The Board’s technical entitlement to reject the
Notice does not necessarily mean that equity will allow it to stand. The court must
go on to consider whether the directors’ actions comport with the overarching
principles of Schnell that “inequitable action does not become permissible simply
because it is legally possible.”158 Here, too, Jorgl cannot demonstrate his entitlement
to a judgment as a matter of law.
157
See Pl.’s Suppl. Opening Br. 19-21.
158
Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 1971); Lee Enters., 2022
WL 453607, at *15 (“Delaware law necessarily leaves room for assessing whether a
board’s actions in enforcing a clear advance notice bylaw were justified, consistent with
the doctrine of Schnell.”).
35
1. Standard of Review
The parties agree that some form of enhanced scrutiny must guide the court’s
review of the Board’s enforcement of the bylaw. They disagree on the standard’s
label and requirements. Jorgl asserts that the defendants must show a “compelling
justification” for their actions as set forth in Blasius.159 The defendants, for their
part, assert that enhanced scrutiny review—“[w]hether labeled as Unocal or
Blasius”—that looks to the reasonableness of the Board’s actions should apply.160
“Blasius does not apply in all cases where a board of directors has interfered
with a shareholder vote.”161 If the court were required to make a “find[ing] that the
board acted for the primary purpose of disenfranchisement to trigger a more stringent
review, it will have already made a normative judgment about whether the board
engaged in manipulative conduct requiring judicial intervention.”162 Delaware
courts apply that exacting review “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.”163
159
See Pl.’s Suppl. Opening Br. 38; Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 661
(Del. Ch. 1988).
160
See Defs.’ Answering Br. 52 (quoting Lee Enters., 2022 WL 453607, at *15).
161
State of Wis. Inv. Bd. v. Peerless Sys. Corp., 2000 WL 1805376, at *9 (Del. Ch. Dec. 4,
2000); see also CytoDyn, 2021 WL 4775140, at *1.
162
Lee Enters., 2022 WL 453607, at *14.
163
In re MONY Grp. Inc. S’holder Litig., 853 A.2d 661, 674 (Del. Ch. 2004).
36
Still, this court must “reserve[] space for equity to address the inequitable
application of even validly-enacted advance notice bylaws.”164 Its careful scrutiny
of directorial actions that affect the stockholder franchise “cannot appropriately be
confined to the sort of blunt efforts to disenfranchise stockholders confronted
in Blasius.”165 In such circumstances, enhanced scrutiny supplies a framework to
assess whether directors acted in compliance with their fiduciary duties in applying
an advance notice bylaw.166
Enhanced scrutiny requires a “context-specific application of the directors’
duties of loyalty, good faith, and care.”167 The Board must “‘identify the proper
corporate objectives served by their actions’ and ‘justify their actions as reasonable
in relation to those objectives.’”168 If the Board’s actions function as a reasonable
limitation on the rights of stockholders to nominate directors, those actions “will
generally be validated.”169 The court must, however, keep a “gimlet eye out for
164
CytoDyn, 2021 WL 4775140, at *15 (emphasis removed).
165
Lee Enters., 2022 WL 453607, at *15.
166
Id. at *14-15; see also CytoDyn, 2021 WL 4775140, *18, *22 (discussing whether the
board’s actions were “reasonable”).
167
Lee Enters., 2022 WL 453607, at *16.
168
Id. (quoting Mercier v. Inter-Tel (Del.) Inc., 929 A.2d 786, 810 (Del. Ch. 2007)).
169
Id.37
inequitably motivated electoral manipulations or for subjectively well-intentioned
board action that has preclusive or coercive effects.”170
2. Application of Enhanced Scrutiny
Advance notice bylaws are “commonplace” tools for public companies to
ensure “orderly meetings and election contests.”171 They serve two primary
functions. “The first is to set a time period by which stockholders must give notice
of their intention to nominate director candidates in advance of an annual meeting.
The second is an informational requirement that serves an important disclosure
function, allowing boards of directors to knowledgably make recommendations
about nominees and ensuring that stockholders cast well-informed votes.”172
The defendants maintain that the requirements of Section 1.4(c) are intended
to serve the latter function. Jorgl does not question the Board’s intentions in
adopting its advance notice bylaw. The bylaw was adopted on a clear day in 2017—
long before Tudor, Xirinachs, or Jorgl entered the picture.173 The Board did not
change its policies or its interpretation of the bylaws to make compliance
170
Chesapeake Corp., 771 A.2d at 323.
171
Lee Enters., 2022 WL 453607, at *9.
172
Id.173
See CytoDyn, 2021 WL 4775140, at *14 (discussing bylaws adopted “years before th[e]
putative proxy contest was conceived”).
38
challenging.174 The requirements of Section 1.4(c) are not unusual or difficult to
comply with.175
Rather, Jorgl questions the provision’s potential breadth and inequity in
application. By his logic, if the phrase “arrangements or understandings” is not
limited to circumstances where exchanges of promises are made, the standard
becomes unworkable.
One can envision an advance notice bylaw with so broad a reach that it
mandated the disclosure of mere discussions among stockholders. But I need not
decide whether such a bylaw would have a legitimate corporate purpose or if a
board’s enforcement of it in rejecting a stockholder nomination would be reasonable.
As previously discussed, the plain language of the bylaw at issue is not so
sweeping.176
174
See Hubbard v. Hollywood Park Realty Enters., Inc., 1991 WL 3151, *12 (Del. Ch. Jan.
14, 1991) (finding that a board had a duty to waive an advance notice bylaw because a
“radical shift in position, or a material change in circumstances” occurred after the deadline
for nominations passed).
175
See CytoDyn, 2021 WL 4775140, at *19 (explaining that advance notice bylaw
“provisions asking stockholders to disclose supporters are . . . ubiquitous”); AB Value P’r,
2014 WL 7150465, at *3 (“The clearest set of cases providing support for enjoining an
advance notice bylaw involves a scenario where a board, aware of an imminent proxy
contest, imposes or applies an advance notice bylaw so as to make compliance impossible
or extremely difficult, thereby thwarting the challenger entirely.”).
176
See supra note 143 and accompanying text.
39
By its terms, Section 1.4(c) required the disclosure of information about
“arrangements or understandings”—that is, agreements, measures, or plans taken
towards a common end.177 That mandate was not unreasonable. There are legitimate
reasons why the Board would want to know whether a nomination was part of a
broader scheme relating to the governance, management, or control of the Company.
More critically, that information would have been important to stockholders in
deciding which director candidates to support.178
The parties clash over whether the Board’s rejection of the Notice was a
reasonable response in relation to these corporate purposes. The defendants assert
that the current record shows the Board surmised, based on the information available
to it, that the Notice was part of a scheme involving undisclosed arrangements and
understandings and acted accordingly. Jorgl disagrees, pointing to facts that he says
show the Board acted to entrench itself at the expense of his right to nominate
directors.
This factual dispute alone makes an award of a mandatory injunction
unattainable. Yet, Jorgl argues that the court can find the Board was unquestionably
177
See supra notes 140-43 and accompanying text.
178
See Hubbard, 1991 WL 3151, at *6 (“As the nominating process circumscribes the
range of the choice to be made, it is a fundamental and outcome-determinative step in the
election of officeholders.”); CytoDyn, 2021 WL 4775140, at *21 (discussing a nomination
notice that failed to provide information that would have been material to stockholders in
voting on director nominees).
40
motivated by ill intent or acted manipulatively. Making that determination would
ignore several issues that seem to undermine his position.
To start, the context in which the Board received and considered Jorgl’s
Notice cannot be ignored.179 The Board knew that Tudor had previously been
convicted of securities fraud, was the subject of an SEC injunction, and had
interfered with AIM to the point that AIM sought injunctive relief in Florida.180 The
Board also understood that AIM management suspected Tudor was behind the
defective Lautz nomination and that, after the Lautz nomination was rejected, Tudor
had threatened to take the “gloves off.”181
The Board had grounds to question Jorgl’s motives when he emerged on the
scene—having purchased shares just 10 days before submitting his Notice—to
nominate two individuals (who owned no AIM stock) including Chioini, who Lautz
had attempted to nominate.182 Of course, stockholders can buy shares just before
making a nomination and can nominate whomever they like. The confluence of
information the directors had after receiving the Notice would, however, have
piqued their suspicions. The July 14 Board minutes explain that the directors
See CytoDyn, 2021 WL 4775140, at *16 (discussing the “context” in which a notice
179
was “submitted and then considered by the incumbent Board”).
180
See supra notes 15-16, 20 and accompanying text; Equels Dep. 215-16.
181
DX 50; Equels Dep. 216-17.
182
See Equels Dep. 209.
41
rejected the Notice based on “information the Company and its advisors had learned
to date regarding the group of individuals behind the nomination notice.”183
Jorgl argues that the Board cannot justify its rejection of the Notice based on
after-discovered information, such as the role of Xirinachs, that the defendants
uncovered during this litigation. That is true. But genuine suspicions based on
known facts that are later corroborated can be a basis for a board to act.184 Here,
the directors assert that they were concerned Tudor and other undisclosed
participants were acting “with the intent o[f] taking control of the Company and
potentially raiding it or taking other action adverse to stockholders.”185 The evidence
obtained through discovery prevents me from rejecting that concern out of hand.
That is not to say that the plan conceived of by those behind Jorgl’s
nomination is bad for AIM or its stockholders or that Chioini and Rice would not be
worthy director candidates. Ideally, the stockholders—not the Board or this court—
should decide the path for AIM. But if the nomination played a role in a broader
scheme led by undisclosed supporters, that information would have been necessary
for stockholders to make an informed choice on the matter.
183
DX 81 at 1.
184
See CytoDyn, 2021 WL 4775140, at *21 (explaining that the board’s rejection of the
notice was appropriate where it “legitimately suspected” that undisclosed motivations were
behind a nomination and evidence discovered in litigation corroborated those suspicions).
185
Equels Dep. 229; see, e.g., DX 79.
42
If such arrangements or understandings were concealed, the sanctity of the
stockholder franchise would not be furthered by this court invalidating the Board’s
actions. In that case, those working through Jorgl—not the Board—would be the
ones engaging in manipulative conduct. Equity cannot bless the perverse incentives
that would be created if nominating stockholders could avoid disclosure
requirements through purposeful ignorance.
Ultimately, these are matters that I need not presently decide. The swirl of
lingering factual questions prevents me from granting judgment as a matter of law
in Jorgl’s favor. He has simply not proven his entitlement to mandatory injunctive
relief.
III. CONCLUSION
For the reasons stated above, the plaintiff’s Motion for a Preliminary
Injunction is denied.
43