Kallick v. SandRidge Energy, Inc., C.A. No. 8182-CS (Del. Ch. Mar. 8, 2013) (Strine, C.)
In this opinion, the Court of Chancery granted a stockholder of SandRidge Energy, Inc. (“SandRidge” or the “Company”) injunctive relief after concluding that defendant-directors of SandRidge likely violated their fiduciary obligations in failing to approve a dissident slate in order to neutralize the effect of a proxy put in the Company’s indentures.
TPG-Axon, the holder of a 7% stake in SandRidge, launched a consent solicitation to de-stagger SandRidge’s board of directors, remove the incumbent directors and install its own slate. Defendants opposed the consent solicitation and sought revocations of any such consents delivered by stockholders. Under the terms of the Company’s indentures, the election of the TPG-Axon slate without the approval of at least two-thirds of the incumbent directors would constitute a change of control, and as a result, SandRidge would be required to offer to repurchase the outstanding debt (the “proxy put”). In its initial consent revocation statement filings, defendants warned stockholders that the Company may not have sufficient liquidity to fund such repurchase obligations, and that a refinancing “would present an extreme, risky and unnecessary financial burden” on the Company. Thereafter, plaintiff filed the instant action, claiming that the defendants breached their fiduciary duties in failing to approve the TPG-Axon slate for the purpose of neutralizing the proxy put. One month later, the Company filed an 8-K indicating that the Company’s lenders were not likely to redeem their notes given the trading prices and that the Company would be able to obtain backup financing necessary to repurchase any notes that were tendered. The defendants did not, however, determine whether to approve the TPG-Axon slate for purposes of the proxy put.
In defense of its non-decision with respect to the approval of the TPG-Axon slate, defendants alleged that the nominees lacked sufficient energy industry experience. Defendants also argued that the approval of the dissident slate would compromise the Company’s ability to secure financing because lenders may charge a higher price for credit, perceiving SandRidge as a company that circumvents protective change of control provisions. The Court rejected these arguments, concluding that defendants did not have a reasonable basis to dispute the qualifications of the nominees. The Court also noted the current availability of credit and the absence of any evidence suggesting that lenders place a tangible value on a proxy put trigger. Following a review of the aforementioned arguments, the Court considered the applicable standard of review. Defendants urged the application of the business judgment rule and plaintiff argued that the refusal to approve the TPG-Axon slate should be reviewed under the Blasius standard of review. The Court rejected both of these arguments, and applied the Unocal standard of review. The Court stated that Blasius did not address the instant situation where the proxy put did not have the “sole or primary purpose” of impeding the stockholders’ vote because it may have a legitimate purpose of protecting creditors who insisted on its inclusion, but does not have the “obvious potential to tilt the electoral playing field toward the incumbent board.”
Applying the Unocal standard to the instant facts, the Court concluded that the defendant-directors failed to demonstrate a reasonable justification for their refusal to determine whether to approve the TPG-Axon slate. In San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals, 983 A.2d 304 (Del. Ch. 2009), the Court of Chancery held that a board deciding whether to approve a dissident slate of directors for purposes of a proxy put may withhold such approval only if it determines that the candidates pose such a material threat of harm to the corporation that it would constitute a breach of the director’s duty of loyalty to pass control to them. Chancellor Strine observed that “where an incumbent board cannot identify that there is a specific and substantial risk to the corporation or its creditors posed by the rival slate, and approval of that slate would therefore not be a breach of the contractual duty of good faith owed to noteholders … the incumbent board must approve the new directors as a matter of its obligations to the company and its stockholders … .” Applying Amylin to the instant facts, the Court determined that there were no facts to suggest that SandRidge would be better served by the defendant-directors’ failure to make a decision regarding whether or not to approve the TPG-Axon slate. Accordingly, the Court found that defendants likely breached their fiduciary duties to SandRidge and its stockholders.
In light of the foregoing and because plaintiff satisfied the other elements necessary for the granting of a preliminary injunction, the Court concluded that plaintiff was entitled to some form of negative injunctive relief (and not mandatory or declaratory relief). The Court enjoined defendants from (i) soliciting additional consent revocations, (ii) relying on or giving effect to any consent revocations received prior to the Court’s decision, and (iii) impeding TPG-Axon’s consent solicitation process, unless and until defendants approved the TPG-Axon slate for the limited purposes of the proxy put.