The Delaware Court of Chancery has preliminarily enjoined the board of SandRidge Energy, Inc. ("SandRidge"), an oil and natural gas business, from resisting the consent solicitation of a hedge fund, TPG-Axon ("TPG"), a stockholder with a 7% stake in SandRidge. The consent solicitation sought to elect TPG's board nominees who had committed to change the management of the company and explore strategic alternatives, including a sale of SandRidge's assets. In response, SandRidge's incumbent board campaigned to convince SandRidge's stockholders not to give consents to TPG and to revoke those consents already given. Further, SandRidge's board warned that the election of TPG's proposed slate of directors would constitute a "change of control" for purposes of SandRidge's credit agreements, requiring SandRidge to offer to repurchase its existing debt under its note indentures (a "Proxy Put"). That is, the incumbent board told stockholders that if they chose to elect TPG's board, SandRidge would suffer material, economic harm due to a Proxy Put.
A shareholder of SandRidge who supported the TPG consent solicitation filed an injunction against SandRidge and its directors, arguing that the board breached its fiduciary duties by failing to approve the TPG slate, which would have allowed SandRidge's stockholders to replace SandRidge's incumbent board without triggering a Proxy Put. The stockholder also argued that the incumbent board had no proper basis for failing to approve TPG's slate of directors.
In this case, the Court analyzed the directors' behavior under the Unocal standard and the more recent Amylin case, in which the Court held that a board must focus on the best interests of the corporation and its stockholders in the context of a Proxy Put during contentious board elections. The Court found that SandRidge's board did not justify its actions as reasonable in relationship to the threat faced by the corporation. The Court stated that the duty of loyalty requires an incumbent board to exercise its contractual discretion with the best interests of the corporation and its stockholders firmly in mind, without breaching the obligations the corporation owes to its creditors. The Court found that SandRidge's board likely acted with an absence of good faith and reasonableness inconsistent with its fiduciary duties when it refused to approve TPG's director slate, which would have allowed the corporation to avoid the Proxy Put altogether. Accordingly, the Court enjoined the board from soliciting further consent revocations, relying on previously received revocations or otherwise resisting TPG's consent solicitation efforts unless the board approved TPG's directors. Moreover, the Court noted that generally a corporation's board should only accept a Proxy Put after hard negotiation with a lender, perhaps signifying that the Court disfavors such techniques because of their potential impact on board elections.
Kallick v. SandRidge Energy, Inc., C.A. No. 8182-CS (Del. Ch. Mar. 8, 2013).