Friday, June 24, 2022

Deadlock among eight-member Aerojet Rocketdyne board requires stockholder election to resolve

By R. Jason Howard, J.D.

In a case that the Delaware Chancery Court described as a cautionary tale about the perils that can befall a board with an even number of directors, in 2022, with a director nomination on the table, the eight-member board of Aerojet Rocketdyne Holdings, Inc., deadlocked on a company slate of nominees, leaving a pending acquisition of the company in limbo and resulting in litigation (In re Aerojet Rocketdyne Holdings, Inc., June 16, 2022, Will, L.).

Deadlock. The deadlock caused a rift between the company’s CEO and its Executive Chairman following a disagreement on how to approach the then-potential acquisition, with each claiming the other had ulterior motives or failed to undertake proper contingency planning, which led to differing outlooks on the company’s strategic direction.

The Executive Chairman initially proposed that seven of the eight incumbents be named as the company’s nominees in the event the merger failed as the eighth incumbent had decided not to seek reelection. The CEO objected and the FTC sued to block the acquisition of the company. The Executive Chairman then proposed an agreement between Steel Partners, a longtime Aerojet stockholder controlled by the Executive Chairman, but no agreement was reached.

With only days left until the deadline for the stockholder nomination, Steel nominated a slate of seven candidates that included the Executive Chairman and three of the incumbents. The CEO called upon the company’s executives and outside advisors to assist with a response to Steel’s nomination.

One aspect of that response took the form of a press release filed with the SEC and sent by the CEO to the company’s largest stockholders. The release purported to express the company’s disappointment in Steel’s nomination, attributed ulterior motives to the Executive Chairman, and disclosed an ongoing investigation. Another aspect involved the company’s longtime outside counsel threatening litigation against the incumbent directors nominated on Steel’s slate.

Litigation. The Executive Chairman and three incumbents (plaintiffs) brought claims against the CEO and the other three incumbents which concerned whether either half of the board was authorized to act for the company in connection with the election and whether the entity must stand neutral. The plaintiffs also sought a temporary restraining order (TRO) preventing either faction from using the company’s name or resources to advantage itself in the election. The TRO was granted, and a three-day trial followed.

The plaintiffs maintained that the purpose of the trial was to level the playing field and asked the court to declare that certain of the defendants’ actions were unauthorized and contrary to a principle of corporate neutrality in a control dispute. In addition, the plaintiffs were seeking final relief on their declaratory judgment claims, various forms of equitable relief, and argued that the defendants should be held in contempt.

For their part, the defendants argued that they acted in good faith and that their actions were authorized. They further contended that the Steel slate constituted a threat to the company and thus, the corporation was not required to stand neutral on that basis.

Findings. The court, being driven by the core tenants of Delaware law, found that the plaintiffs were entitled to a declaration that the approval of the press release and disclosures, the defendants’ threat of litigation, and the payment of the retainer to represent the defendants, were actions for which the defendants’ lacked authorization. With the board deadlocked, the court continued, the defendants could not deploy the company’s resources in support of their slate or to discredit the plaintiffs’ slate.

Stockholders, and not the court or either subset of directors, must decide which faction’s vision will become that of the company and, to preserve the ultimate goal of a fair and balanced election, neither half of the divided board has a superior claim to the company’s resources in the interim, the court stated.

Conclusion. The court's ruling was for the plaintiffs on their claims for declaratory judgment and it found that the plaintiffs are also entitled to certain additional equitable relief. The court also declined to make a finding of contempt. According to the memorandum and opinion, corrective disclosures shall issue by June 20, 2022.

The case is No. 2022-0127-LWW.