Settlement with an Activist Investor is not a Defensive Measure
A recent case decided by the Delaware Court of Chancery, In Re Ebix, Inc., held settlement with an activist investor, Barrington Capital Group, L.P. was not a defensive measure subject to scrutiny under Unocal. Ebix entered into a Director Nomination Agreement with Barrington that contemplated expanding Ebix’s six-member board to eight, filling the two new seats with Barrington designees, and renominating all six incumbents. It further obligated the Board to support the two Barrington designees and pay Barrington $140,000, and required Barrington to withdraw its prior nominees and vote its shares in favor of Ebix’s six renominated incumbents. Further, Barrington relinquished the ability to engage in certain forms of dissenting conduct during an extendable “standstill period.” During this period, Barrington must vote all of its stock for the Board’s nominees and in harmony with Board recommendations on matters that include advisory executive compensation votes, as well as refrain from soliciting proxies, presenting proposals, or initiating litigation. The standstill period lasted until the earlier of ninety days before Ebix’s 2015 annual meeting and ten days before any advance notice deadline for making director nominations. Ebix could extend this period to an equivalent time frame surrounding the 2016 annual meeting, however, by recommending or committing to recommend re-election of Barrington’s designees.
On a motion to dismiss, the Court held the Director Nomination Agreement was not subject to enhanced scrutiny under Unocal. The Court noted enhanced scrutiny under Unocal applies “whenever the record reflects that a board of directors took defensive measures in response to a perceived threat to corporate policy and effectiveness which touches on issues of control.” Unocal may also apply in contexts aside from a board’s adoption of a defensive measure in response to a hostile takeover attempt; Unocal has also “applied to a preemptive measure where the corporation was not under immediate ‘attack’” but nonetheless enacted a measure “in contemplation of an ephemeral threat that could somehow materialize in the future.”
The Court found the Director Nomination Agreement was not a defensive measure. According to the Court, the Director Nomination Agreement reflected mutual concessions presumably in line with each contracting party’s intent: Barrington principally received two board seats and thereby a say in managing the affairs of Ebix, and Ebix received a guarantee that Barrington would abate dissenting behavior during the standstill period. Applying Unocal to the Board’s agreement to give up board seats, though conceivable as entrenching insofar as that concession was part of a quid pro quo earning Ebix the extinction of Barrington’s not-yet-launched proxy contest, is counterintuitive. A corporate action with collateral effects including a tendency to preserve incumbent control is not per se subject to Unocal scrutiny; and applying Unocal under the specific facts of this case would sponsor the enigmatic idea that the Board’s decision to dilute its own control of the corporation by surrendering board seats to insurgents is best viewed as a defensive action.
However, the Court found a series of bylaw amendments were defensive measures subject to enhanced scrutiny under Unocal. The Court said the complaint established a factual chronology that, viewed in a light most favorable to plaintiffs, supported plaintiffs’ contention that the Board adopted the new bylaws to stave off Barrington. Three facts in particular support this inference. First, the bylaw amendments were prepared on November 17, 2014, six days after Barrington conveyed an intent to launch a proxy contest. The record before the Court provided no facts exposing this temporal proximity as coincidental—for example, nothing indicated the Board had been considering the bylaw amendments for some time before Barrington entered the picture. And although the Board did not adopt the bylaw amendments until December 19, 2014, by which time Barrington was contractually barred from running a slate, that sequence did not end the inquiry given the second fact: the Director Nomination Agreement’s standstill provision lasted, at most, roughly two years. Third and finally, although most of the bylaw amendments achieved little more than making shareholder action more cumbersome, one reform in particular had clear defensive value: the special meeting bylaw’s series of clauses that allow the Board, at the very least, to delay stockholder-initiated special meetings for 120 days and, at most, prevent elections from occurring at special meetings indefinitely. The Court noted bylaw amendments enacting shorter special meeting delay periods have received Unocal scrutiny in past cases.
The Court held those three facts, considered in concert, permitted the inference that the bylaw amendments were, in the aggregate, a forward-looking prophylactic designed with Barrington in mind, but holstered until the period of Barrington’s guaranteed complacency expired. The Court said Delaware law supports the imposition of Unocal scrutiny in this sort of scenario—that is, one where a board implements defensive measures in response to a threat to corporate control that is not immediate, but rather perceived as a future possibility.
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