Dead Hand Proxy Puts Face Continued Scrutiny
"Dead hand proxy puts" have emerged as the target du jour for entrepreneurial plaintiffs counsel litigating corporate governance claims. Since last fall, at least seven separate actions have been filed in the Delaware Court of Chancery challenging these change-of-control provisions commonly found in corporate debt instruments. During this same period, numerous companies have received stockholder demands seeking to investigate purported corporate mismanagement due to the presence of dead hand proxy puts in their debt instruments.
This explosion in litigation activity has been fueled, in part, by the Court of Chancery’s characterization of dead hand proxy puts in October 2014 as "highly suspect" entrenchment devices. More recently, however, the Court of Chancery has questioned whether the removal of these provisions confers a meaningful, quantifiable benefit on corporations, particularly in the absence of a pending or threatened proxy contest. The Court of Chancery also has noted that as Delaware case law concerning proxy puts becomes more developed, "the situation begins to be less like chaining up a vicious bulldog and more like chaining up a toothless bulldog." Because these more recent observations focus more on the value than the validity of claims challenging dead hand proxy puts, there is a "cost-of-defense" leverage point that is irresistible to certain entrepreneurial plaintiffs firms. As a result, this litigation activity is likely to be a fixture of the corporate governance landscape for as long as dead hand proxy puts remain in corporate debt instruments.