Kallick v. SandRidge Energy, Inc.: Preliminary Injunction Issued for Board’s Failure to Approve Insurgent Slate for Purposes of Credit Agreement
March 11, 2013
In Kallick v. SandRidge Energy, Inc., C.A. No. 8182-CS (Del. Ch. Mar. 8, 2013), Chancellor Strine of the Court of Chancery enjoined the board of directors of SandRidge Energy, Inc. (the “Company”) from soliciting consent revocations in connection with the consent solicitation launched by a stockholder to install its own slate of directors on the Company’s board, until the incumbent board of the Company approves the members of the opposing slate for purposes of a change in control provision in the Company’s credit agreement.
Due to its frustrations with the management of the Company, TPG-Axon (“TPG”), a stockholder of the Company, launched a consent solicitation to amend the Company’s bylaws to de-stagger its board, remove all of the incumbent directors, and install its own slate of directors who are committed to change the Company’s management and explore strategic alternatives to maximize the value of the Company’s assets. Notably, the staggered board was implemented pursuant to a provision of the Company’s bylaws (as opposed to the Company’s certificate of incorporation) leaving the staggered board subject to amendment or repeal by the Company’s stockholders. In response to TPG’s consent solicitation, the Company’s incumbent board began soliciting consent revocations and warned stockholders that the election of TPG’s slate of directors would result in a “Change of Control” under the Company’s credit agreements, obligating the Company to offer to repurchase $4.3 billion of its existing debt (the “Proxy Put”). Pursuant to the Company’s credit agreement, a “Change of Control” occurs, inter alia, as a result of a change in the majority of directors on the Company’s board who are not approved by the incumbent board. Because the incumbent board refused to approve the members of TPG’s slate, the plaintiff, a stockholder of the Company and a supporter of the TPG consent solicitation, brought this action against the Company and the incumbent board, arguing that failure to approve the TPG slate is a breach of the incumbent board’s fiduciary duties. The plaintiff sought to enjoin the board from seeking consent revocations, voting proxies it received from consent revocations, or otherwise impeding TPG’s consent solicitation until it approves the TPG slate.
Consistent with Delaware’s policy of strictly upholding the fairness of corporate elections, the Court held that the board, in keeping with its fiduciary duty of loyalty, may refuse to grant approval of TPG’s slate only if it determines that the members of the slate “posed such a material threat of harm” to the Company or its creditors that it would be a breach of the board’s duty of loyalty to pass control of the Company to them. Because the incumbent board could not identify a specific and substantial risk to the Company or its creditors posed by the TPG slate and because the Court found that the incumbent board based its decision not to approve TPG’s slate solely on its view that it was better qualified to manage the Company, the Court held that the incumbent board has breached its duty of loyalty. As result, the Court enjoined the Company from soliciting consent revocations, voting proxies it received from consent revocations, or otherwise impeding TPG’s consent solicitation in any way until the incumbent board approves the TPG slate.
While the plaintiff did not challenge the Company’s decision to agree to the inclusion of a change of control provision containing a Proxy Put, the Court noted that “given the obvious entrenching purposes of a Proxy Put provision, one would hope that any public company would bargain hard to exclude that toll on the stockholder franchise and only accede to the Proxy Put after hard negotiation and only for clear economic advantage.” The Court also suggested that independent directors should “police” provisions that affect the stockholder franchise to ensure that the Company is not agreeing to such provisions simply because of their entrenching effect or when there is no need to do so.