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Sarissa Capital Domestic Fund LP, et al. v. Innoviva, Inc., C.A. No. 2017-0309-JRS (Dec. 8, 2017) (Slights, V.C.)

December 8, 2017

In this post-trial memorandum opinion addressing claims brought under Section 225 of the Delaware General Corporation Law, the Court of Chancery analyzed a board member’s authority to bind a corporation to an oral agreement with dissident stockholders to end their proxy campaign, and held that a binding agreement was in fact created, obligating the board to seat directors nominated by the dissident group notwithstanding the subsequent results of the company’s annual stockholder meeting at which the board’s slate of directors prevailed.

The dispute arose after a group of stockholders of defendant Innoviva, Inc., Sarissa Capital Management LP and certain of its investment funds (“Sarissa”), mounted a proxy contest to elect three director nominees to Innoviva’s seven-member board of directors at the company’s 2017 annual stockholder meeting.  After three proxy advisory firms recommended that Innoviva’s stockholders vote for Sarissa’s director nominees, the company began exploring a potential settlement of the proxy contest.

Settlement negotiations escalated in the days leading up to the annual meeting.  The key area of disagreement, however, was Sarissa’s demand that the board forgo a “standstill” provision that would preclude Sarissa, for a fixed period of time, from (1) acquiring more than a certain percentage of the company’s outstanding voting stock; (2) soliciting proxies; or (3) making any merger proposal or tender offer with respect to the corporation or its stockholders.  With only two days left until the stockholder meeting, both parties saw the standstill provision as a “deal breaker.” 

On the day immediately before the meeting, however, Innoviva learned that one of its largest stockholders—The Vanguard Group, Inc.—intended to vote in favor of Sarissa’s nominees.  The board concluded it would therefore likely lose the vote of another key stockholder, BlackRock, Inc., and, as a result, would lose the contest entirely.  The board met that afternoon and resolved to offer to settle with Sarissa without insisting on a standstill provision.  Innoviva would also agree to expand the board from seven to nine members and appoint any two of Sarissa’s three nominees to fill the new seats, but would require Sarissa to include a conciliatory quote about Innoviva in a joint press announcement regarding the settlement. 

Before adjourning their meeting, the board authorized its Vice Chairman to convey the settlement proposal to Sarissa.  The Vice Chairman called Sarissa with the offer that afternoon, and Sarissa promptly accepted it.  At the end of the call, the parties confirmed that they “had a deal” and that they would leave it to their respective attorneys to paper the agreement.  Neither party indicated that the agreed-upon deal was contingent upon the execution of a written agreement or further board approval.

Later that same afternoon, after a confirmatory writing had been finalized (though not signed), but before the joint press release was finalized, Innoviva learned that, contrary to its expectations,  BlackRock had decided to vote in favor of the board’s slate of director nominees.  BlackRock’s vote effectively ensured that the board’s nominees—and not Sarissa’s—would win the impending election.  With victory in hand, the Innoviva board changed course, ceased discussions with Sarissa, and decided to jettison the settlement and proceed with the stockholder vote at the annual meeting the following day.  Innoviva’s Vice Chairman emailed Sarissa that evening with the news that the settlement was off.

The next day, Innoviva’s annual meeting was held as scheduled and the stockholders voted to elect all of the board’s nominees.  That same day, Sarissa filed this action under 8 Del. C. § 225 seeking (i) a declaratory judgment that the parties had entered into a binding agreement during their phone call the day before the annual meeting, which orally bound Innoviva to the agreed-upon settlement; and (ii) specific enforcement of the settlement agreement.

The Court divided the parties’ dispute into three issues: (1) whether Innoviva’s board member had authority to bind the company to an oral settlement agreement with Sarissa; (2) if the board member had such authority, whether his phone call with Sarissa created a binding oral settlement agreement; and (3) if there were a binding oral settlement agreement, whether specific enforcement of that agreement was warranted.

First, the Court held that the Vice Chairman of Innoviva’s board had authority to enter into an oral settlement agreement with Sarissa on behalf of Innoviva.  The Court noted that an individual corporate director may negotiate a settlement on behalf of the corporation—and bind the corporation to an agreed-upon settlement—provided the director has actual or apparent authority to do so.  In this case, the Vice Chairman had both actual and apparent authority.  The board had expressly authorized him to convey Innoviva’s settlement offer to Sarissa, thus granting actual authority.  Further, Sarissa reasonably believed that the Vice Chairman had authority to act on behalf of Innoviva as he had been presented as Innoviva’s “lead negotiator” and served as the corporation’s exclusive channel of settlement-related communications with Sarissa during the two-day period in question, thus demonstrating apparent authority.  The Court rejected Innoviva’s defense that delegating the authority to enter into an oral settlement agreement to its Vice Chairman would involve an improper delegation of the board’s fiduciary and statutory duties under 8 Del. C. §§ 141(b) and 223(a)(1) and Innoviva’s bylaws.

Second, the Court held that Innoviva’s Vice Chairman and Sarissa’s representative formed a valid, binding contract during their phone call.  In so holding, the Court noted, among other things, that the parties’ manifesting an intent to prepare and adopt a written memorial of an agreement will not prevent a finding of contract formation prior to the written memorial if evidence reveals oral manifestations of assent that are in themselves sufficient to comprise a contract.

Third, the Court held that specific enforcement of the oral settlement agreement was warranted.  The Court found that (1) the agreement at issue was a valid, binding contract; (2) the essential elements of the contract were “clear and definite”; (3) Sarissa was without a legal remedy, as no sum of money damages would fully compensate it for its loss of the opportunity to secure representation on Innoviva’s board; (4) Sarissa was ready, able, and willing to perform its obligations under the agreement; and (5) the balance of equities favored granting specific performance.  Regarding the balance of equities, the Court pointed out that “Innoviva’s opportunistic maneuvers to escape its contractual obligations offend basic notions of equity. . . . Innoviva has nothing but misguided opportunism to place in its weighing pan” on the scale that balances the equities here.

The full opinion is available here