On June 16, 2022, the Vice Chancellor of the Delaware Court of Chancery, Lori W. Will, entered a declaratory judgment in favor of the plaintiff – Aerojet Rocketdyne Holdings, Inc. Four members of the (“Company’s”) board of directors, including its CEO – against the defendants – the other four members of the company’s board of directors, including its CEO – after an eight-member board in connection with the company’s upcoming board election. Rea Aerojet Rocketdyne Holdings Inc., No. CV 2022-0127-LWW (Del. Ch. 16 June 2022). The matter came to the fore as each faction proposed its own list of nominees for the Executive Committee. The plaintiffs challenged certain actions the company allegedly took at the behest of the defendants, such as issuing the company’s press release to express the company’s dismay at the plaintiffs’ proposed list and hiring legal counsel on the company’s behalf . to take legal action against it. Plaintiffs After a court hearing, the court ruled that such action was unauthorized and contrary to the principle of corporate neutrality. The court stated that a Delaware corporation “must remain neutral when there is a legitimate question as to who has authority to speak or act on its behalf” and when a board of directors cannot lawfully exercise its ultimate decision-making authority. , nor does the faction have any greater claim to the company’s name or resources.”
Specifically, the court found that the defendants “were not permitted to act on behalf of the company in an election campaign involving competing sections of the board.” Therefore, the court concluded, the defendants “must not use company resources in support of their list or discredit the plaintiffs’ list.”
The court ruled that the “default standard under Delaware law” – as also confirmed in the company’s articles of incorporation – is that a board cannot act without the approval of a majority of the directors present at a quorum. or unanimous written consent (and five directors were required by the articles of association for a quorum). According to the court, the defendants “did not dispute” that the impugned action was taken without authorization, but argued that they acted in “good faith,” which was perceived as a “threat” to the defendants. [C]Omni.” However, the court found that the defendants’ good faith did not grant them “legal authority to act” on behalf of the company without the necessary authorization. The court also emphasized that “[c]Practicing democracy is not an attack.”
In addition, the court rejected the argument that the CEO’s authority to conduct the company’s affairs allowed for avoidance actions because they were not “ordinary operations”. To the extent that certain actions, including the use of outside counsel by company employees and CEOs to respond to opposing board nominations, “required the use of company resources to assist the defendants or to incapacitate the plaintiffs.” , they were inconsistent with corporate neutrality.” The court stated:
The two halves of the board have different — but equally valid — positions for shareholders. The company, which is essentially run by the board of directors, cannot (and cannot) take sides until the outcome of the election. To suggest that a shareholder-nominated list consisting of half the current directors can itself benefit from access to company names, funds and employees because it includes management unfairly tips the scales in favor of that list. Will tip.
Therefore, the court found that the plaintiffs were entitled to state that the principle of corporate neutrality was applied to the upcoming election and violated. The court also issued a permanent injunction to enforce neutrality and prevent company employees, consultants and agents from acting on the company’s behalf in support of a candidate’s election efforts to the board. The court also ordered the release of certain “corrective disclosures,” including retracting the contested press release and “clarifying that the company is not commenting on the outcome of the upcoming director election.”
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Rea Aerojet Rocketdyne Holdings Inc.