March 11, 2013

Delaware Chancery Court Requires Proxy Put Approval

Here’s news from Greenberg Traurig’s Cliff Neimeth: Notwithstanding the procedural – and to a lesser extent, fact-specific – context of the preliminary injunction decision in the recently decided Kallick v. Sandridge Energy, this is an impact case which, read in conjunction with the Chancery Court’s Amylin Pharmaceuticals decision, counsels that, under certain circumstances, an incumbent board’s failure to prevent the consequences of a “poison put” covenant in an indenture (i.e., by “approving” a majority opposition slate of directors in a pending election contest for purposes of such covenant) could constitute a breach of loyalty.

Chancellor Strine applied Unocal rather than Blasius as the judicial review standard in this context (because it wasn’t apparent that the sole or primary purpose of such provision – which often is inserted at the lenders’ insistence in a credit agreement or arms’-length bargaining with the placement agent/underwriter for note purchasers – was pure entrenchment and the frustration of voting rights) and he makes an interesting distinction between the “poison put'” at issue vis-a-vis change-in-control acceleration provisions in other contexts (e.g., executive parachutes, equity plans and other such provisions in instruments triggered in a hostile acquisition not involving an election contest). The incumbent board’s disclosure ‘flip-flopping” certainly did not help their defense.

From a policy perspective – and in line with precedent decisions – this is not necessarily a surprising result in view of the Delaware judiciary’s respect for the sanctity of the proxy machinery and the uncoerced ability of non-affiliate stockholders to vote their will. The right to vote freely for director candidates is a raw nerve that should be touched rarely, and only with an abundance of novocain, a sharp drill and in a procedure of expedited duration. Interesting lesson when negotiating these provisions in the future.