By Amy Leisinger, J.D.
The Delaware Chancery Court has ordered specific performance of an oral agreement between shareholder funds and a company to settle a proxy contest by expanding the company’s board and appointing two of the shareholder nominees. According to the court, the shareholder funds demonstrated that the oral settlement agreement constituted a binding contract regardless of documentation, and the individual negotiating on behalf of the company had actual and apparent authority to bind the firm (Sarissa Capital Domestic Fund LP v. Innoviva, Inc., December 8, 2017, Slights, J.).
Proxy contest and settlement. Dissident shareholders of Innoviva, Inc. mounted a proxy contest in February 2017 to elect three nominees to the company’s seven-member board of directors. The shareholder funds’ proxy materials contended that Innoviva’s incumbent directors were overpaid in comparison to performance and failed to properly execute their oversight responsibilities and that the company was not being run for the benefit of shareholders. Three proxy advisory firms recommended votes in favor of the shareholders’ nominees.
When these recommendations came out, the parties began discussing a potential settlement of the proxy contest. During several calls, the founder of the shareholder funds and the vice chairman of Innoviva’s board negotiated terms, which were discussed with and approved by Innoviva’s board throughout the process. Upon learning of the likelihood that large Innoviva shareholders would vote in favor of the funds’ nominees, Innoviva agreed to expand its board from seven members to nine members, to appoint two of the shareholder funds’ nominees to the board, and to forgo a standstill in exchange for dismissal of the shareholders’ pending action and discontinuation of the proxy contest. The parties also agreed to issue a conciliatory joint press release announcing the settlement. The vice chairman and the funds’ founder confirmed they “had a deal” and would leave the paperwork to others.
As the parties were working to finalize the written agreement and the press release, Innoviva learned that BlackRock had voted in favor of the board’s slate of directors and backed out of the deal.
The shareholder funds filed an action seeking declaration that the parties entered into a binding settlement agreement during the telephone call and asked for specific performance of the contract. Innoviva argued that the parties never reached a meeting of the minds on material terms and understood that any contract would have to be memorialized in an executed written agreement. In addition, Innoviva contended that the vice chairman did not have actual or apparent authority to bind the company to the alleged oral contract.
Actual and apparent authority. The court found that Innoviva’s vice chairman had authority to bind the company to an oral settlement agreement. Innoviva’s board had appointed him to act as its “lead negotiator” in settlement discussions, and he agreed to do so, creating a specific agency relationship and actual authority, the court stated. Moreover, if the board thought it needed to “reapprove” the agreed-upon terms, it would have done so quickly (before learning about BlackRock’s decisive vote) to protect the company from losing face with regard to the proxy contest, the court noted. “The board well understood that the deal had been struck,” the court stated.
The evidence also clearly demonstrated that the vice chairman had apparent authority to bind Innoviva because the shareholders’ principal reasonably believed that he was speaking on behalf of Innoviva’s board and thus was authorized to enter into a settlement agreement, the court found. This reasonable belief was traceable to Innoviva’s own manifestations, particularly with regard to its appointment of the vice chairman as the “lead negotiator,” according to the court.
Valid contract. The court noted that a valid contract exists when the parties have made a bargain with “sufficiently definite” terms and manifested mutual assent to be bound and found that the parties’ representatives formed a binding contract during their phone call. During the call, they reached agreement on the essential terms of the settlement and confirmed that they “had a deal,” the court stated. Neither party indicated that the settlement was contingent upon the execution of a written agreement or the finalization of the press release, the court explained.
Concluding that the shareholder funds lack an adequate legal remedy, the court decreed specific performance, ordering Innoviva to perform its obligations under the settlement agreement, and declared the two shareholder nominees rightful members of Innoviva’s board.
The case is No. 2017-0309-JRS.