Kallick v. SandRidge Energy, Inc.: Delaware Court of Chancery Enjoins Board from Resisting Insurgent Director Slate; Will Limit Use of Debt Change of Control Put ProvisionsSullivan & Cromwell LLP - March 14, 2013
In an opinion issued on March 8, 2013, the Delaware Court of Chancery preliminarily enjoined the board of SandRidge Energy, Inc. from impeding a consent solicitation by one of the Company’s largest stockholders to replace the incumbent directors, finding that the directors likely would be breaching their duty of loyalty if they did not “approve” the insurgent slate in the face of a change of control put provision in the company’s public notes that would be triggered upon election of an unapproved dissident slate.
Analyzing the SandRidge board’s behavior under the Unocal standard, Chancellor Strine found that the board did not identify any reasonable basis for their failure to approve the dissident nominees, and thereby nullify the change of control put, and that the only apparent threat the board perceived was a threat to their incumbency, a threat that could not justify their actions. The Court concluded that the board appeared to be intentionally pressuring the Company’s stockholders to oppose the consent solicitation out of a desire for self-preservation, a likely breach of the directors’ duty of loyalty.
The Court’s opinion has the following implications for directors of Delaware corporations:
- Directors who have the contractual option to nullify change of control put provisions triggered by a turnover in the majority composition of the board should do so in the face of an insurgent slate unless the insurgents pose a “specific and substantial risk” to the corporation (e.g. lack ethical integrity, are known looters or threaten the corporation’s ability to meet its legal obligations to creditors), even if the incumbent directors believe they are better qualified than their rivals.
- The SandRidge opinion reinforces the fact that Delaware courts will scrutinize closely board action taken in the context of the shareholder franchise and the apparent entrenchment of insiders.
- In dicta, the Court, opining that change of control put provisions may be used for insider entrenchment, stated that “directors should police aspects of agreements like this,” making clear that management and advisors should bring change of control put provisions, especially ones triggered by changes in the composition of the board, to the specific attention of the board, and that directors should attempt to negotiate the terms of the puts out of indentures or at least ensure that the inclusion of such provisions in particular circumstances is warranted by benefits to the corporation.