Delaware Court Of Chancery Declares Company Actions On Behalf Of One Half Of Deadlocked Board Were Unauthorized And Contrary To Corporate Neutrality Principle
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  • Delaware Court Of Chancery Declares Company Actions On Behalf Of One Half Of Deadlocked Board Were Unauthorized And Contrary To Corporate Neutrality Principle

    On June 16, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted declaratory judgment in favor of plaintiffs — four members of the board of Aerojet Rocketdyne Holdings, Inc. (the “Company”), including its Executive Chairman — against defendants — the other four members of the Company’s board, including its CEO — after the eight-member board had deadlocked in connection with the Company’s impending board election.  In Re Aerojet Rocketdyne Holdings Inc., No. CV 2022-0127-LWW (Del. Ch. June 16, 2022).  The case arose after each faction had proposed its own slate of board nominees.  Plaintiffs challenged certain actions allegedly undertaken by the Company at the behest of defendants, such as the issuance of a Company press release purporting to express the Company’s disappointment in the slate proposed by plaintiffs and the retention of counsel on behalf of the Company to pursue litigation against plaintiffs.  Following a trial, the Court held that such actions were unauthorized and contrary to the corporate neutrality principle.  The Court 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,” and [w]here a board cannot validly exercise its ultimate decision-making power, neither faction has a greater claim to the company’s name or resources.”

    Specifically, the Court found that defendants were “not permitted to act on the Company’s behalf in an election contest involving competing halves of the Board.”  Therefore, the Court concluded, defendants could “not deploy the [C]ompany’s resources in support of their slate or to discredit the plaintiffs’ slate.”

    The Court noted that the “default standard under Delaware law” — as confirmed also by the Company’s bylaws — is that a board cannot take action without the approval of the majority of the directors present at a meeting at which a quorum is present or by unanimous written consent (and five directors were required by the bylaws for a quorum).  According to the Court, defendants “did not refute” that the challenged actions were taken without approval, but instead argued that they were in “good faith” in response to what defendants perceived as a “threat to the [C]ompany.”  However, the Court found that defendants’ good faith beliefs “did not provide them with the legal authorization to act” on behalf of the Company without the requisite approval.  The Court also highlighted that “[c]orporate democracy not an attack.”

    In addition, the Court rejected the contention that the CEO’s authority to run the Company’s business enabled the challenged actions because they were not “ordinary course.”  Thus, to the extent that certain actions, including the use of the Company’s employees and outside advisors by the CEO to respond to the opposing board nomination, “required the deployment of corporate resources to advantage the defendants or disable the plaintiffs, they were inconsistent with corporate neutrality.”  The Court explained:
    The two halves of the Board have separate—but equally valid—pitches to make to stockholders.  The Company, which is necessarily guided by the Board, could not (and cannot) take sides pending the outcome of the election.  To hold that one stockholder-nominated slate comprising half of the incumbent directors can advantage itself with access to the company’s name, funds, and employees because it includes management would unfairly tip the scales in that slate’s favor.

    Therefore, the Court found that plaintiffs were entitled to a declaration that the principle of corporate neutrality applied to the contested election and was violated.  The Court also issued permanent injunctive relief to enforce neutrality and preclude Company employees, advisors, and agents from taking action on behalf of the Company in support of the election efforts of any board candidate.  The Court also ordered the issuance of certain “corrective disclosures,” including to retract the challenged press release and “explain that the Company takes no position on the outcome of the pending director election.”

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