Rarely is one happy to find themselves in the middle of a precarious situation, but a recent bench ruling and companion letter opinion from Vice Chancellor Lori Will in In re Aerojet Stockholder Litigation, No. 2022-0127-LWW, confirms that the middle, in a field of neutrality, is exactly where a company and its resources must remain in the midst of contested director elections involving a mixed bag of incumbent directors and insurgents.

Background

• Tension Builds Between the Company’s Two Camps of Directors

Aerojet Rocketdyne Holdings (the company) has an eight-seat board of directors comprised of two four-seat factions. In the first faction sits Warren Lichtenstein, the Company’s executive chair and the founder of one of the Company’s significant stockholders—Steel Partners Holdings L.P. and affiliates (Steel)—and three other directors. In the second faction sits Eileen P. Drake, the company’s chief executive officer, and three other directors.

In December 2020, the company agreed to be acquired by Lockheed Martin Corp. (Lockheed) in a deal expected to yield the company’s stockholders a 33% premium over the price of their stock on the day before announcement of the acquisition.

Over the following year, negotiations related to the Lockheed acquisition and fallout from the Federal Trade Commission’s January 2022 decision to block the deal created tension between Lichtenstein and Drake, leading to an intractable fracture between their respective factions of the board.

That same month, in the face of a deadlocked board and a looming director election, Lichtenstein and Steel proposed that Steel, in its capacity as stockholder, would not run a proxy contest if the company would agree to Steel’s slate of directors consisting of all the current incumbents except for one director who had already expressed a desire to step down. No agreement was reached and tensions increased.

• The Competing Camps Draw Lines in the Sand

On Feb. 2, 2022, Steel publicly disclosed the nomination of its proposed slate of directors for election—those in the Lichtenstein camp and three new directors. Steel’s slate did not include Drake (who, by that time, had expressed a willingness to resign subject to agreeable terms of separation) nor any of the other incumbent directors from the Drake camp.

The Drake camp—again, none of whom were nominated by Steel—then took to utilize company resources without board approval to mount a legal and media response to Steel’s nominations. Acting purportedly on behalf of the entire company, the Drake camp had issued a company press release questioning the motivations of Lichtenstein and Steel with respect to the launch of a “disruptive proxy contest.”

• The Competing Camps File Competing Litigations

After the press release, the Lichtenstein camp was the first to the courthouse with an action seeking, among other things, to permanently enjoin the Drake camp “from taking any action … on behalf of the company without proper authorization.” The Drake camp’s lawsuit followed, seeking, among other things, to disqualify Steel’s slate of director candidates.

The court heard argument on the Lichtenstein camp’s motion for a temporary restraining on Feb. 15, 2022. Vice Chancellor Will ruled from the bench that the Lichtenstein camp’s pleadings “stated a colorable claim that neither faction of the board presently has the authority to unilaterally act on the company’s behalf or use its resources in the context of the upcoming director election.” The bench ruling from her honor “emphasized that the ruling was intended to maintain the company’s neutrality regarding the contested director election.”

At the close of the hearing, Vice Chancellor Will addressed the “balance of equities” and found the Lichtenstein camp’s originally proposed order went a step too far. As such, the vice chancellor instructed the parties to meet and confer, and submit a form of order reflective of the specific guidance offered in the bench ruling.

• The Competing Camps File Competing Interim Forms of Order

The Lichtenstein and Drake camps could not agree on a form of the temporary restraining order and instead filed competing forms of order for her honor’s consideration, leading to the court’s letter opinion.

Analysis

Upon consideration of the competing orders, the court adopted the Lichtenstein camp’s proposed order, which better “advances the court’s goal of ensuring corporate neutrality.”

In so doing, the court rejected the Drake camp’s attempt to add terms to the order such as the establishment of a “$20 million ‘common fund’ to cover each of the competing slates’ proxy solicitation expense” up to a certain amount. According to the Drake camp, a Company-funded “common fund” would help “level the playing field” for the incumbent directors in the face of a proxy contest funded by a stockholder with vast resources.

The court, however, disagreed with the purportedly “customary” “common fund” practice sponsored by the Drake camp and its offer of scholarly secondary opinions, distinguishing the instant dispute from that of a “traditional proxy contest.” Here, “a single slate of incumbent directors” does not “seek reelection over insurgent candidates.” Instead, “half of the board supports one slate and half supports another (yet to be nominated) slate.” The term “insurgent,” according to the court, does not include incumbents.

In the words of her honor, the “common fund” proposal prompts a critical question: where does the power to direct the use of the company’s resources for a contested director election lie? In my view, that power does not lie with the court. It is a core tenant of Delaware corporate law that “the board … has the ultimate responsibility for managing the business and affairs of a corporation.” If the board is deadlocked, the court does not act as a tiebreaker that chooses whether to open the corporate purpose strings to fund the proxy contests of competing incumbent slates… . The board that stockholders elect can [later] decide whether proxy expenses should be reimbursed.

Takeaways

First, there is no alternative to company neutrality on matters involving a divided board. Delaware law does not permit corporate management to unilaterally take upon itself to speak for the company on contested matters of the board. This is especially so when it comes to matters involving director elections. In the words of Vice Chancellor Will, “If the board is divided on this issue of which slate of nominees it will support, the company doesn’t take a side.”

Second, individual directors still have a voice despite an order of corporate neutrality. The vice chancellor’s decision does not limit the ability of directors to publicly share and advocate their personally sponsored opinions. In fact, the court’s rulings repeatedly call for the opposite: encouraging directors to share their personal views so long as the views are framed as they are—personal.

Third, corporate resources cannot fuel the fire of the dispute. Even in the face of a proposal for a company-funded “common fund” equally available to both camps involved in the proxy contest, the “core tenants” of Delaware corporate law underscore that a stockholder-elected board of directors, not the court, wields the power to decide when to open an entity’s purse strings. It is a decision for the future board to decide whether the costs of the proxy contest can be reimbursed.

Mackenzie M. Wrobel, an associate at Duane Morris, practices in the area of corporate and commercial litigation.

Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.