Board Deadlock Requires Corporate Neutrality in Proxy Contest

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. ¹  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 Delaware 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.”

In a typical proxy contest, the incumbent board majority approves a slate of nominees in opposition to a dissident stockholder’s slate, but in this case, there was no board majority to take a company position on either side’s slate.  Thus, “[a]bsent that authorization [from a majority vote of directors at a meeting at which a quorum is present], the defendants were not permitted to act on the Company’s behalf in an election contest involving competing halves of the Board.”  The court also held that the CEO’s authority as an officer did not extend to issuing corporate press releases relating to the competing slate.

Importantly, the court acknowledged that each slate had nominated seemingly qualified individuals and that the defendants’ actions were apparently taken in good faith.  The court also refused several other claims for relief sought by the plaintiffs.  Nevertheless, it found that the neutrality principle applied when a board is evenly divided.

¹ In re Aerojet Rocketdyne Holdings, Inc., C.A. No. 2022-0127-LWW (Del. Ch. June 16, 2022).