F. William Reindel is partner and member of the Corporate Department at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Reindel, Stuart H. Gelfond, Daniel J. Bursky, and Gail Weinstein. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.
There has been much recent concern and confusion over the inclusion of “dead hand proxy puts” (and even proxy puts without a “dead hand” feature) in debt agreements. Dead hand proxy puts (sometimes called “poison puts” or “board change of control provisions”) provide a type of change of control protection that banks, as well as parties to many types of non-debt commercial agreements, have frequently utilized, without controversy. Nonetheless, dead hand proxy puts are now under attack. While proxy puts without a dead hand feature are generally not being challenged, based on recent case law, these provisions in most cases will not permit a bank to accelerate the debt on a change of control of the borrower’s board (as explained below).
Dead hand proxy puts. A proxy put permits the lender to accelerate debt if a majority of the borrower’s board becomes comprised of “non-continuing directors” over a short period of time (usually one or two years). “Continuing directors” are persons who were on the board when the debt contract was entered into or replacement directors who were approved by a majority of those directors or their approved replacements. The “dead hand” feature provides that any director elected as a result of an actual or threatened proxy contest will be considered a non-continuing director for purposes of the proxy put.
