June 24, 2022

Proxy Contests: Deadlocked Board Requires Company Neutrality

I don’t know about you, but I can’t think of many situations that would be more of a hot mess than when a deadlocked board can’t agree on a slate of nominees & both sides decide to launch a proxy contest to elect competing slates.  That’s the situation the Chancery Court recently confronted in In Re Aerojet Rocketdyne Holdings(Del. Ch.; 6/22), where it was called upon to address whether either side had the ability to speak “for the company” in connection with the proxy fight.

As this recent memo from Hunton Andrews Kurth’s Steve Haas points out, Vice Chancellor Will held that neither side had authority to speak on the company’s behalf & that, in the absence of authorization from a majority of the directors, the company must remain neutral. This excerpt summarizes the Court’s decision:

The Delaware Court of Chancery recently held that a corporation had to be neutral when its board split into even factions wrestling for corporate control. The court ruled that neither faction of the board was entitled to issue statements on behalf of the corporation or use corporate resources in the proxy fight.

By way of background, an eight-member board of directors had split into equal factions, thus preventing a board majority from approving a slate of director nominees or taking other corporate actions relating to board composition. As a result, each faction initiated a proxy contest seeking control of the board at the company’s upcoming annual meeting of stockholders. The plaintiff’s faction brought suit challenging several actions taken by the other faction, including that the CEO, who was in the other faction, caused the corporation to issue press releases concerning the plaintiff’s faction; the other faction jointly engaged the corporation’s counsel to represent it and to threaten litigation against the other directors; and the corporation paid a retainer to the law firm for the joint representation.

Initially, the Court of Chancery issued a temporary restraining order preventing either faction from unilaterally using corporate resources. Following an expedited, three-day trial, Vice Chancellor Lori W. Will held that the corporation has to remain neutral in a proxy contest when the board is evenly divided. She explained that “a corporation must remain neutral when a there is a legitimate question as to who is entitled to speak or act on its behalf. Where a board cannot validly exercise its ultimate decision-making power, neither faction has a greater claim to the company’s name or resources.”

John Jenkins