Delaware Business Litigation Report

Chancery Denies Request for Mandatory Preliminary Injunction to Waive Advance Notice Bylaw and Permit Director Nominees to Stand for Election

Paragon Tech., Inc. v. Cryan, C.A. 2023-1013-LWW (Del. Ch. Nov. 30, 2023).
In Delaware, 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.” A party seeking a mandatory injunction must also show entitlement to the relief it seeks as a matter of law based on undisputed facts – akin to a summary judgment standard. In this case, “with some trepidation[,]” the Court of Chancery denied a request for preliminary mandatory injunctive relief due to factual disputes concerning whether a stockholder plaintiff complied with advance notice bylaws requiring disclosure of plans to change the corporation’s business and potential conflicts of interest.  

The Court noted that the plaintiff here might have been able to satisfy a the lower “reasonable probability of success” standard that applies to preliminary injunctions seeking prohibitive relief. The incumbent directors took questionable actions arguably motivated by a desire to keep the plaintiff from nominating directors, such as adopting extensive advance notice bylaws, seemingly delaying in rejecting the plaintiffs’ nomination notices, and producing a laundry list of notice deficiencies. The Court stated that the preliminary record prompted it to look “skeptically” at the directors’ response to the plaintiff’s notice. It explained that some of the alleged notice deficiencies were “nitpicky” and others were “suspect.”

On the other hand, however, the Court reasoned that advance notice bylaws requiring disclosure of a stockholder’s plans for significant business changes and conflicts of interest serve important corporate interests. The limited factual record supported that the plaintiff may have had plans for transformative changes and potential conflicts – including from seeking a potential stock-for-stock merger with the corporation – that were omitted from its nomination materials. Contributing to the uncertainty in the record, the plaintiff’s principal had deleted all of his text messages relating to these matters. The Court thus reasoned that such factual disputes meant plaintiff’s motion for mandatory injunctive relief had to be denied. 

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