Anticipating Proxy Put Litigation

In recent months, a number of companies have received stockholder demands or faced stockholder litigation attacking “proxy put” provisions in credit agreements—that is, provisions that allow a lender to put outstanding debt to the corporate borrower for immediate payment upon a change in board control, creating potential financial risk for the company. These “proxy put” provisions are typically triggered when a majority of the board is displaced in a contested election. Many forms of credit agreement include a proxy put that allows an incumbent board to approve prospective directors for change-in-control purposes, even candidates sponsored by a dissident stockholder. Credit agreements of this kind can give rise to complex fiduciary duty litigation in the event a board declines to approve the members of a dissident slate in the face of a live proxy contest, but they do not appear vulnerable to facial attack under prevailing law.

The recent spate of challenges concerns a different form of credit agreement, one containing a so-called “dead-hand” proxy put. Credit agreements with this feature do not provide an incumbent board the discretion to approve a dissident slate and have been targeted by the stockholder plaintiffs’ bar as presumptively illegal. Every public company with a dead-hand proxy put credit facility can expect to receive a stockholder challenge, whether in the form of a derivative lawsuit or a books-and-records demand, and sooner rather than later. Recent Delaware decisions indicate that such provisions are not per se invalid, and there is substantial reason to question the validity of a stockholder challenge based solely on the existence of a dead-hand put term. But irrespective of the ultimate merits, the mere receipt of a stockholder challenge gives rise to defense costs, pressure to seek an amendment to the credit agreement, and, more often than not, an obligation to pay plaintiffs’ attorneys’ fees. Accordingly, companies with dead-hand proxy put provisions in their credit agreements should consult with counsel and consider whether to seek to amend those provisions before the plaintiffs come calling.