Plaintiffs' Firms Seek Quick Money by Challenging "Dead Hand Proxy Puts" in Debt Agreements

Wilson Sonsini Goodrich & Rosati
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Delaware corporations should be aware of the latest trend in strike suits being pursued by stockholder plaintiff law firms. Such lawsuits are increasingly being filed to challenge so-called "dead hand proxy put" provisions in credit agreements—i.e., provisions that permit a lender to accelerate or "put" amounts outstanding under the company's debt facility if a majority of the board of directors is replaced in a proxy contest, but that do not give the incumbent board the ability to approve the insurgent nominees so that their election would not count toward determining if the proxy put had been triggered (the "dead hand" feature). Although some version of such protective provisions have long been a standard part of the "change of control" event of default in credit agreements, Delaware courts have, at least in some circumstances, questioned the validity of such provisions—and the board's basis for agreeing to such restrictions—because of the possible chilling effect on proxy contests.

The recent wave of strike suits follows a bench ruling last fall by Vice Chancellor J. Travis Laster of the Delaware Court of Chancery in Pontiac Gen. Employees Retirement Syst. v. Ballantine et al. ("Healthways"),1 denying a motion to dismiss claims that a board of directors breached its fiduciary duties by entering into a credit agreement containing a "dead hand proxy put" provision and that the lender aided and abetted those breaches of fiduciary duty. Based on that ruling, stockholder plaintiffs' firms appear to be actively searching public filings for companies that have such provisions in their debt instruments and filing suit—or demanding books and records for purposes of bringing a potential suit—alleging that the directors breached their fiduciary duties by entering into credit agreements containing such provisions, regardless of the surrounding facts. As a result, and to avoid headache, companies faced with these types of claims often quickly seek to amend the credit agreement to remove the language in question. The plaintiffs' firms in turn demand a fee for "causing" the amendment, which can be substantial compared to the minimal effort invested by the plaintiffs' firm.

In light of recent Delaware authority, however, such provisions are not per se invalid. Thus, it is likely that many of the claims being brought by plaintiffs' firms reflexively challenging the mere presence of a "dead hand proxy put" provision in a credit agreement lack merit. Indeed, Vice Chancellor Laster recently clarified his Healthways ruling in the context of approving a settlement in that case, explaining that it "addressed a dead hand proxy put, adopted in the shadow of a proxy contest."2 He further noted that it was a "contextual ruling based on the facts of [the] case applying the reasonably conceivable standard [on a motion to dismiss]" and, in particular, was influenced by "the facts surrounding the timing of the adoption of the proxy put," i.e., following adoption of a precatory proposal to destagger the board.3 Although not addressed in Healthways, other factors may also undermine the merit of claims facially challenging such provisions, including whether any amounts are even outstanding under the credit agreement or the strength of the company's cash position relative to any amounts outstanding or other capacity to refinance the agreement.

Regardless, the recent trend suggests that plaintiffs' firms will continue to bring cookie-cutter claims challenging "dead hand proxy put" provisions in order to secure a quick fee. Accordingly, we recommend that public companies be proactive in checking their debt instruments and consulting with counsel to see if those agreements contain this specific form of proxy put language before receiving a demand or suit. In some cases, it may be advisable to seek an amendment to eliminate or modify these provisions.

 

1 C.A. No. 9789-VCL (Del. Ch. October 14, 2014).

2 C.A. No. 9789-VCL, at 34-36 (Del. Ch. May 8, 2015) (emphasis added).

3 Id.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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