Monday, November 18, 2019

Icahn loses ‘novel’ bid to inspect books and records to aid proxy contest

By Mark S. Nelson, J.D.

A post-trial opinion by a Delaware vice chancellor rejected as not the "right case" Carl Icahn’s attempt to invoke Delaware’s books and records statute to demand that Icahn be allowed to inspect a company’s books and records for "questionable, but not actionable" board deliberations that could then be communicated to other shareholders regarding a potential Icahn-led proxy contest. The case arose out of the proposed merger of Occidental Petroleum Corporation and Anadarko Petroleum Corporation. Icahn-affiliated entities were large investors in Occidental, which Icahn suspects of having arranged merger financing that was too costly (High River Limited Partnership v. Occidental Petroleum Corporation, November 14, 2019, Slights, J.).

On-again, off-again merger takes hold. Occidental and non-party Chevron each wanted the same thing: Anadarko. An early bid by Occidental was rejected and, for a while, replaced by a mostly stock deal offered by Chevron. As bidding progressed, Anadarko was initially cool to a renewed offer by Occidental, but a revised Occidental offer with more cash and less stock resulted in an agreement to merge the roughly equal Occidental and Anadarko.

Icahn, the well-known activist investor, had taken a sizeable stake in Occidental soon after the Occidental-Anadarko merger was announced. But Icahn was unhappy with the structure of the merger and sought to bring a proxy contest to oust the Occidental board, alleging that Occidental had entered into one bad deal after another in order to finance the merger. Icahn also sought to invoke Delaware’s books and records law to obtain merger documents that he believed would aid his impending proxy contest.

Not the "right case." Vice Chancellor Slights began his analysis by rejecting Icahn’s back-up theory for inspecting Occidental’s books and records, concluding that the trial record did not show a credible basis that Occidental’s board engaged in mismanagement or wrongdoing. Specifically, the court said Icahn failed to allege that Occidental’s board was conflicted, disloyal, or acted in bad faith. Rather, the court said Icahn’s theory was more akin to a disagreement with the Occidental board’s exercise of business judgment, a theory that, by itself, Delaware books and records cases find insufficient to justify a demand.

The court then turned to Icahn’s "novel" theory that an activist investor should be able to obtain a company’s books and records for the purpose of communicating with other shareholders about a proxy contest. The court distinguished both precedents cited by Icahn. First, the court explained that in Tactron, Inc. v. KDI Corporation (Del. Ch. 1985), a judge concluded that the shareholder could inspect books and records for the purpose of obtaining "logistical" information that would allow the shareholder making the demand to contact other shareholders, a purpose that was analogized to the inspection of a shareholder list. The demand in Tactron, however, was denied regarding less logistical items such as board minutes. The court here found there was nothing logistical about Icahn’s demand.

Icahn also argued that High River Ltd. Partnership v. Forest Labs., Inc. (Del. Ch. July 27, 2012), a bench ruling by then-Master in Chancery (now Superior Court Judge) LeGrow, suggested that a books and records demand can be proper in the context of an impending proxy contest. That case involved an Icahn affiliate seeking books and records regarding whether a company had implemented previously negotiated governance changes in advance of a renewed Icahn proxy contest.

Vice Chancellor Slights observed that Master Legrow had limited her bench ruling to the facts of the case, but she nevertheless suggested that documents "necessary, essential and sufficient" to an imminent proxy contest could justify a books and records demand. Vice Chancellor Slights also echoed Master Legrow’s concern that clarification was needed in this corner of Delaware’s books and records law. But the vice chancellor concluded that Icahn’s latest attempt to use a books and records demand in the proxy setting was not the "right case" by which to deliver that clarity because the documents Icahn requested regarding Occidental concerned information that was widely publicized and, thus, were not "necessary and essential."

Still, Vice Chancellor Slights hinted in the introductory portion of his opinion that such a "right case" might exist: "It may well be that, in the right case, this court might endorse a rule that would allow a stockholder to receive books and records relating to questionable, but not actionable, board-level decisions so that he can communicate with other stockholders in aid of a potential proxy contest."

What is a proper purpose? Delaware books and records litigation under DGCL Section 220 can seem rather simple on the surface, but it often branches into more esoteric subtopics. To provide examples of proper purposes, Vice Chancellor Slights repeated a citation to a treatise noted by Icahn’s briefing in the case (see footnote 62 in the opinion). Specifically, the court cited Edward P. Welch, Robert S. Saunders, Allison L. Land, and Jennifer C. Voss, co-authors of Folk on the Delaware General Corporation Law Sixth Edition (2019), a Wolters Kluwer Legal & Regulatory U.S. publication, which lists nearly 20 purposes credited by Delaware courts.

The Folk treatise begins its lists of proper and improper purposes by noting that DGCL Section 220 defines "proper purpose" to mean " a purpose reasonably related to such person's interest as a stockholder." The treatise also explains that the right belongs to the stockholder plaintiff and often depends on the facts and circumstances. Moreover, the treatise quotes at length from a case positing that the proxy setting is especially ripe for abuse of DGCL Section 220 because of the compressed time frame of "an impending or ongoing proxy contest" and that any demand must be "narrow."

The case is No. 2019-0403-JRS.