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Sarissa Capital Domestic Fund LP v. Innoviva, Inc.: Court of Chancery Enforces Oral Contract to Settle Proxy Fight by Requiring the Seating of Two Insurgent Directors

March 8, 2018

In Sarissa Capital Domestic Fund LP v. Innoviva, Inc., 2017 WL 6209597 (Del. Ch. Dec. 8, 2017), the Delaware Court of Chancery, in a fact-intensive, post-trial memorandum opinion, specifically enforced an oral agreement to settle a proxy contest between Innoviva, Inc. (“Innoviva”) and Sarissa Capital Domestic Fund LP (“Sarissa”). In so doing, the Court ordered Innoviva to expand the size of its board of directors and seat two of Sarissa’s director nominees.

In early 2017, Sarissa launched a proxy contest with the goal of electing three directors to the board at Innoviva’s annual meeting of stockholders. Innoviva’s proxy solicitor advised Innoviva that the outcome of the proxy contest would likely depend on the votes of two key undecided stockholders: Vanguard Group, Inc., which was expected to side with the incumbents, and BlackRock, Inc., which was expected to vote for Sarissa’s slate.

With the outcome of the election still in doubt two days before the scheduled annual meeting, James Tyree, Innoviva’s then vice chairman, and Alexander Denner, Sarissa’s chief investment officer, engaged in settlement discussions on behalf of their respective principals. The two camps were in basic agreement that the proxy contest could be settled if Innoviva agreed to seat two of Sarissa’s proposed directors, but negotiations broke down because Sarissa was not willing to enter into a standstill agreement preventing it from acquiring more Innoviva shares or engaging in another proxy contest in the future.

The day before the annual meeting, Innoviva learned that Vanguard had voted for Sarissa’s slate and, as a result, Sarissa would prevail in the proxy contest if BlackRock also voted for Sarissa’s slate, as expected. Now facing likely defeat, the board determined to drop the standstill requirement if Sarissa would agree to include a conciliatory quote in a joint press release announcing the settlement. The board authorized Tyree to convey the revised settlement offer to Denner. In anticipation that the revised offer would likely be accepted, the board adopted resolutions conditionally resolving to expand the size of the board and fill the resulting newly created directorships with two of Sarissa’s nominees.

After the board meeting, Tyree made the revised settlement offer to Denner, as instructed. Denner quickly accepted the proposal, given that the key sticking point from Sarissa’s perspective—the standstill—had been resolved in Sarissa’s favor. At the end of the call, both Tyree and Denner confirmed that they “had a deal” and that they would leave it to their respective teams to finalize the paperwork. However, neither party indicated that the settlement was contingent upon execution of a written settlement agreement or that it was subject to further approval of the board. Thereafter, counsel for the respective parties worked to finalize a written settlement agreement memorializing the terms agreed to by Tyree and Denner during the call. The parties also exchanged comments on, but did not finalize, the press release.

Before the settlement agreement was executed by the parties, BlackRock unexpectedly voted in favor of Innoviva’s slate. With complete victory in the election now assured, Innoviva ceased all settlement discussions with Sarissa and elected to proceed with the annual meeting the next day without executing the settlement agreement. Innoviva held the annual meeting as scheduled, and all of Innoviva’s nominees were elected. That same day, Sarissa filed a verified complaint pursuant to Section 225 of the General Corporation Law of the State of Delaware with the Court to enforce the oral settlement agreement reached the day before.

The Court held a one-day trial to determine whether the parties had entered into a valid, enforceable settlement agreement. The Court’s post-trial opinion resolved three primary issues disputed by the parties: (1) whether Tyree had authority to bind Innoviva to an oral settlement agreement, (2) whether the discussion between Tyree and Denner on the day prior to the annual meeting was sufficient to create a binding oral settlement agreement, and (3) whether the oral settlement agreement should be specifically enforced.

The Court concluded that a single director is capable of binding a corporation to a contract provided that the director has actual or apparent authority to do so. The Court held that Tyree had actual authority because, among other things, the board had appointed him as the lead negotiator in settlement discussions with Sarissa and authorized him to convey the final settlement agreement terms. Tyree also had apparent authority because, among other things, Denner reasonably believed that Tyree was Innoviva’s sole negotiator and was authorized to bind Innoviva to the settlement agreement based on their prior negotiations and his conduct during the settlement discussions. The Court also rejected an argument that, under Sections 141 and 223 of the General Corporation Law of the State of Delaware and Innoviva’s bylaws, the board had impermissibly delegated its authority with respect to the settlement (and the filling of the newly created board seats) to Tyree because the full board had in fact approved the very same settlement terms that Tyree had conveyed to Denner and taken preliminary steps at the key board meeting to implement the terms of the settlement.

The Court also found that Tyree and Denner had in fact formed a binding oral contract during the settlement discussion because the parties had reached a meeting of the minds on all of the key terms to the settlement, and there was no indication by either party that the agreement would only be effective upon the execution of a written agreement. The Court reasoned that merely expressing or manifesting intent to prepare a written memorial of an oral agreement does not prevent contract formation absent a positive agreement that it should not be binding until reduced to writing and formally executed. Given the extreme time pressure the parties were operating under in the hours leading up to the annual meeting, the Court concluded that a reasonable negotiator would have expected that the oral settlement agreement was binding and enforceable.

Finally, the Court concluded that Sarissa was entitled to specific performance of the oral settlement agreement, finding that the balance of equities favored granting specific performance because “Innoviva’s opportunistic maneuvers to escape its contractual obligations offend[ed] basic notions of equity.” Accordingly, the Court entered an order of specific performance requiring Innoviva to expand the size of the board and seat two of Sarissa’s director nominees.