Shareholder Activism and Proxy Contests as a “Proper Purpose” for Books and Records Demands

Gail Weinstein is senior counsel and Steven Epstein and Warren S. de Wied are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Mr. de Wied, Brian T. Mangino, David L. Shaw, and Randi Lally. Related research from the Program on Corporate Governance includes Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).

The Occidental-Anadarko merger closed in August 2019 after Occidental Petroleum Inc. outbid Chevron Corporation and broke up Chevron’s deal to acquire Anadarko Inc. Entities affiliated with shareholder activist Carl Icahn (the “Icahn Entities”) began to acquire stock in Occidental during the bidding war and then advocated against the Anadarko deal, contending that Occidental (i) was vastly overpaying and (ii) had agreed to expensive financing as a byproduct of restructuring the deal to avoid an Occidental stockholder vote (by limiting the number of Occidental shares to be issued in the merger and thus maximizing the portion of the merger consideration that had to be paid in cash). Given that there was no Occidental stockholder vote on the merger, the Icahn Entities are now planning a post-closing proxy contest to take control of Occidental’s board.

The Icahn Entities filed a lawsuit to compel Occidental to permit them, under DGCL Section 220, to inspect Occidental’s books and records for the purpose of obtaining information material to their communicating with the other stockholders in the proxy contest about the merger and the related financing. In High River Limited Partnership v. Occidental Petroleum Inc. (Nov. 14, 2019), the Delaware Court of Chancery rejected the demand and held that facilitating the prosecution of a proxy contest is not a “proper purpose” for a Section 220 demand where the stockholder simply “disagreed” with board decisions and is not alleging that the board engaged in legally actionable misconduct.

Key Points

  • The Occidental-Anadarko situation highlights that structuring a deal to eliminate the need for an acquirer stockholder vote will not necessarily deter activist involvement. When acquirer stockholder approval is required, an activist may surface to try to thwart the deal by soliciting the stockholders to vote against it. (Under stock exchange rules, acquirer stockholder approval is required if, in a merger, new shares representing more than 20% of the outstanding common or voting stock will be issued.) However, when—as in the Occidental-Anadarko situation—a merger is structured so that acquirer stockholder approval is not required (by limiting the amount of stock to be issued and increasing the cash component of the merger consideration), an activist may nonetheless surface to advocate against the deal, to criticize the lack of a stockholder vote and the more expensive financing required to fund the large cash need, and, post-closing, to seek to replace directors.
  • The Occidental-Anadarko situation involved a perfect storm of factors for attracting shareholder activism. The likelihood activist action in response to an M&A transaction increases when:
    • The perception is that the acquirer is overpaying—Occidental outbid Chevron by about 20% while Chevron’s offer itself represented an almost 40% premium to Anadarko’s unaffected market price.
    • The merger is structured to avoid the requirement of an acquirer stockholder vote—At Anadarko’s urging, to reduce transaction uncertainty, Occidental re-structured its original offer (by limiting the amount of stock to be issued) so that a vote of Occidental’s stockholders would not be required.
    • The acquirer arranges arguably “expensive” financing—In the context of the large amount of cash to be funded (due to the restructuring of the transaction to avoid a stockholder vote requirement) and the quick timetable required in the context of a bidding war, Occidental (i) agreed to sell to investor Berkshire Hathaway $10 billion of preferred stock with an 8% yield and to issue warrants to Berkshire (valued at roughly $1 billion) convertible into 80 million shares of common stock and (ii) pre-sold almost $9 billion of assets at allegedly “fire-sale” prices.
  • The acquirer’s stock price drops significantly on announcement of the deal—When Chevron announced it would acquire Anadarko and Occidental was reported to be considering making a rival bid, Occidental’s stock dropped 6%. From that time until the Occidental deal was announced, the stock dropped a total of 16%; and from that time until today, it has dropped a total of almost 40%.
  • The court rejected the Icahn Entities’ proposition that facilitation of the prosecution of a proxy contest (without more) should be considered a “proper purpose” for a Section 220 books and records demand. High River appears to be the first case in which the court has explicitly focused on whether a stockholder’s communicating with other stockholders in a proxy contest about board decisions with which the stockholder disagrees (but as to which it does not allege legally actionable board misconduct) is a “proper purpose” for a Section 220 demand. While characterizing the law in this area as “murky,” the court appears to reaffirm the existing law that, generally, a stockholder will have a “proper purpose” only if the stockholder has credibly alleged “actionable wrongdoing” by the board.


In early 2019, Occidental and Chevron each were engaged in discussions with Anadarko about acquiring the company. On April 12, Chevron announced it had reached an agreement to acquire Anadarko for approximately $65 per share in a stock-for-stock deal valued at about $33 billion. The acquisition did not require Chevron stockholder approval. Chevron’s market capitalization at the time was about $200 billion. Prior to Chevron’s bid, Anadarko stock was trading in the mid-$40’s. Chevron’s stock fell 5% on announcement of the deal. Occidental had previously made a higher bid for Anadarko, which had been rejected, reportedly over concerns that the proposal was too risky given Occidental’s smaller size relative to Chevron and that Occidental would pay primarily with its own stock which could decline in price once a deal was announced and also would necessitate an Occidental stockholder vote. Occidental’s market capitalization at the time was slightly larger than Anadarko’s.

On April 24, Occidental again proposed to acquire Anadarko, this time for $76 per share, with Anadarko stockholders to receive half of the merger consideration in cash ($38 per share) and half in shares of Occidental common stock (0.61 shares per share). The proposal represented an almost 20% premium over Chevron’s nominal offer price (while Chevron’s agreed price itself represented an almost 40% nominal premium over Anadarko’s unaffected market price). Chevron did not exercise the right it had (under its agreement with Anadarko) to match Occidental’s offer. On May 5, at Anadarko’s urging, Occidental revised its proposal so that the $76 per share notional value would be payable 82% in cash ($59) and 18% in Occidental stock (0.29 shares). As so structured, the revised transaction did not require Occidental stockholder approval. On May 9, Anadarko terminated its agreement with Chevron, paid Chevron a $1 billion termination fee, and entered into a merger agreement with Occidental. After announcement of the deal, Occidental’s stock price dropped and, when the merger closed in August, the final merger consideration, valued at $38 billion, reflected a $72.34 per share nominal value.

To fund the substantial cash portion of the merger consideration, Occidental sold to Berkshire Hathaway $10 billion of preferred stock carrying an annual dividend of 8% in cash (or, at Occidental’s option, 9% payable in additional preferred shares). At the time the sale of the preferred was announced, Occidental’s debt was yielding 3% to 4% and its common stock was yielding about 5%. Occidental also issued to Berkshire warrants (valued at roughly $1 billion) to purchase shares of Occidental common stock, with an exercise price of $62.50 per share (a slight premium to the then market price), convertible into 80 million shares (roughly $5 billion worth) of common stock. Shortly after the preferred stock sale, Occidental raised an additional $8.8 billion to fund the cash portion of the merger consideration through a pre-sale of Anadarko’s Africa assets to Total S.A. Later, as further financing for the Anadarko purchase, Occidental issued $13 billion of new debt yielding 3%.

In June, the Icahn Entities owned a $1.6 billion stake in Occidental (just under 5% of the outstanding shares). They have sold about a third of their shares and now own a stake worth about $900 million. At the end of June, they filed preliminary proxy materials seeking to obtain consents from the record holders of 20% of Occidental’s common stock (the bylaw threshold) to require the board to set a record date for a stockholder consent solicitation. They intend to solicit consents to replace as many as ten Occidental directors and to reduce the threshold required for stockholders to request a special meeting from 25% to 15%. Occidental has strongly opposed all of the Icahn Entities’ proposals.

In anticipation of the proxy contest, in May the Icahn Entities had sent a Section 220 demand to Occidental. The stated purpose was to aid their communication in the proxy contest with the other stockholders about the merger and the related financing (which they refer to as the “OxyDarko Disaster”). Seven days after receiving the demand, Occidental responded that it was considering it. Two days later, the Icahn Entities filed suit to compel Occidental to comply with the demand. Vice Chancellor Slights has denied the demand.

Observations on Shareholder Activism in Occidental-Anadarko

The Occidental-Anadarko situation underscores the risk of shareholder activism in reaction to large public M&A deals under certain circumstances. While an acquirer can outbid another bidder, can structure its deal to include a large cash component in order to eliminate the need for approval by its stockholders, and can arrange financing for the large cash component (through a preferred stock issuance, pre-sale of assets, or otherwise), an acquirer cannot avoid attracting a shareholder activist challenge to the transaction. If acquirer stockholder approval is required for the transaction, the activist challenge would occur pre-closing; if stockholder approval is not required, the activist challenge may occur, as in the Occidental-Anadarko situation, both pre- and post-closing. As noted above, the factors that attracted activist attention in this situation included (i) the perception that Occidental was significantly “overpaying” for Anadarko; (ii) Occidental’s restructuring its offer in order to eliminate the need for a vote of its stockholders; (iii) Occidental’s funding the cash portion of the merger consideration with an arguably expensive preferred stock (and warrants) issuance and a pre-sale of assets under circumstances where there was pressure to sell on a quick timeframe; and (iv) the steady and dramatic decline of Occidental’s stock price from the time its interest in Anadarko became publicly known. Other factors that heightened the likelihood of activist interest were that (i) the companies involved are in an industry (oil and gas) in which equity performance generally has been poor in recent years; (ii) Occidental is an underperformer compared to its peers (it is this year’s worst performer on the S&P 500 Energy Index); (iii) Occidental’s making itself larger reduced the universe of parties that potentially would be interested in acquiring it (which some viewed as Occidental’s real reason for doing the deal); and (iv) Occidental has a history of problematic corporate governance.

Could Chevron be the “winner” in the end? Given the Icahn Entities’ campaign to take control of Occidental’s board and the huge drop in Occidental’s stock price (resulting in its market capitalization having gone from about $60 billion before press reports about its possible interest in Anadarko down to $36 billion shortly after its combination with Anadarko), it is possible that, in response, Occidental may explore its strategic alternatives, including a sale of assets or even the entire company. Given the relatively limited universe of potential buyers for Occidental, Chevron possibly now could acquire the Anadarko assets (either directly from Occidental or through an acquisition of Occidental) for significantly less than it originally agreed to pay to acquire Anadarko.

Practice Points. Acquirers should consider the likelihood, and possible nature, of activist activity in connection with a potential M&A transaction and whether there are ways to reduce the types of concerns that activists might have.

  • Recognize that structuring a transaction to eliminate an acquirer stockholder vote requirement will not necessarily avoid an activist response. Structuring a more easily financeable transaction (i.e., with more stock and less cash), with a focus on successfully obtaining the required stockholder vote, should be considered. Critical to this approach would be a well thought out, aggressive public relations program, including frequent meetings with analysts and key stockholders, together with a clear articulation and the repeated presentation of a compelling business rationale for the transaction.
  • Articulate specific responses to potential concerns about a transaction. For example, Occidental could have more directly and specifically addressed the concern that the deal was essentially a huge “bet” on oil prices. In addition to emphasizing the cost advantage in buying Anadarko’s highly valuable assets at a time when oil prices are depressed, Occidental might have, for example: (i) crafted and publicized a post-closing plan for a reduction in (and/or off-balance sheet joint ventures for or off-balance sheet financing of) capital expenditures until oil prices improve; and/or (ii) committed to considering strategic alternatives after a specified period of time (say, 3 years after closing) if the results of the deal were disappointing (thus seeking to “preempt” the activist’s role by the company itself essentially undertaking to “act like an activist” if the promise of the deal were not realized).
  • Consider alternatives to expensive financing when there is a large cash component of the merger consideration. In the context of an 80%-cash/20%-stock deal—particularly in the case of a very large target company and/or an acquirer that is not much larger than the target—in lieu of financing the large cash portion through an expensive preferred stock issuance to an investor like Berkshire and/or a huge pre-sale of assets, possible alternative strategies could include:
    • Stop-gap bank financing. In addition to the conventional bank loan portion of the financing, seek to arrange additional bank financing that is more short-term and at a higher yield (but considerably lower than the yield on a preferred stock issuance to an investor) and which would provide a period of time post-closing (say, 12 to 18 months) for the acquirer to sell assets, do spinoffs, and/or issue preferred stock to its stockholders (on better terms than would be achievable on the more pressured timetable applicable pre-closing).
    • Preferred stock issuance to the target stockholders. In lieu of all or part of an issuance of preferred stock to an investor like Berkshire, issue preferred stock (at a market rate—i.e., that would trade at par) to the target stockholders. The stockholders might also be given an option to take, in lieu of cash, shares of an additional class of preferred stock with more favorable terms for them than the market-rate preferred (but still more favorable for the company than in an issuance to an investor). For any preferred issued to the stockholders, the acquirer might include a right, post-closing, to substitute common stock, at then market value, for all or a part of the preferred shares issued, subject to obtaining required stockholder approval at that time.
  • If asset sales or pre-sales are to be utilized for financing a deal, the acquirer should seek to explain how these sales fit into the company’s business plans or its divestiture plan to obtain regulatory approvals for the deal.
  • All possible steps should be taken to seek to avoid a stock price drop on announcement of a deal. Most importantly, the acquirer should articulate a clear, compelling rationale for the transaction and related issues (such as the financing or a divestiture of assets), and should meet with analysts and key stockholders to convey the rationale and respond to concerns.
  • As part of the planning for an M&A transaction, an acquirer should review its governance arrangements to determine its vulnerabilities to an activist attack—including with respect to the threshold for stockholders to call a meeting or act by written consent and their ability to make changes in the board.

The Court’s Ruling on the Books and Records Request

The Plaintiffs’ Section 220 demand. The Icahn Entities sought any documents that were provided to Occidental’s board about the Berkshire preferred stock transaction, the sale of Anadarko’s Africa assets, and the effect that fluctuating oil and gas prices would have on Occidental; documents relating to any consideration the board gave to selling Occidental’s assets or the company as a whole; and documents relating to whether the board intends to comply with the stockholder proposal, adopted at the annual meeting, which seeks a threshold of 15% (rather than 25%) stockholder approval to call special meetings.

The existing law on “proper purpose” for a Section 220 demand. Under DGCL Section 220, a stockholder is entitled to inspect books and records of the corporation if the stockholder has a “proper purpose”—a term that is undefined in the statute. The Delaware courts generally have held that, for a finding of a “proper purpose,” the stockholder must present some evidence to suggest a “credible basis” from which the court can infer that the board may have engaged in “wrongdoing or mismanagement.” In other words, Section 220 demands cannot be used for “fishing expeditions” to find wrongdoing by a board where none is validly alleged. If there is a “proper purpose,” the stockholder is entitled to inspect books and records that are “necessary and essential” to accomplish the purpose.

When is facilitation of a proxy contest a “proper purpose” under Section 220? In High River, the court reviewed that, based on existing precedent, it is clear that when a stockholder credibly alleges “wrongdoing or mismanagement” by the board and commences a proxy contest on that basis, communication with stockholders about those issues in the proxy contest will be a proper purpose for a Section 220 demand. Also, as established in Tactron (1985), a stockholder has a proper purpose if it seeks to obtain information to facilitate the mechanics of communicating with stockholders in a proxy contest (such as, in Tactron, a demand to obtain information to determine the applicable quorum requirements for voting). Also, obtaining information for use in a proxy contest will constitute a proper purpose in certain specific factual contexts—such as, in Forest Labs (2012, Transcript Opinion), where, in anticipation of waging a proxy contest, the stockholder sought to inspect books and records to determine whether the board had adopted governance reforms that were promised as part of a settlement of the proxy contest it had waged the prior year.

A stockholder’s desire to communicate with the other stockholders in a proxy contest about the board’s “substantive business decisions”—without allegations of actionable wrongdoing by the board—is not “proper purpose” for a Section 220 demand. The court described the current law on Section 220 demands in the context of proxy contests as “murky,” and as in need of “more clarity.” However, the court viewed this case as “not the right vehicle to provide that clarity.” The court did not specify in what respects it viewed clarity as lacking nor what kind of case would represent the “right vehicle” for providing that clarity. However, the court’s discussion appears to confirm that the existing law generally applies in the context of proxy contests—i.e., that, for a stockholder to have a proper purpose for a Section 220 demand, the stockholder must credibly allege legally actionable wrongdoing by the board.

The court noted that the Plaintiffs made only “a cursory argument about a need to investigate corporate wrongdoing or mismanagement”—and “freely admit their primary purpose…is to aid them in their proxy contest.” The court emphasized that the Plaintiffs simply “disagree” with the board’s decisions, believe the board made “bad decisions,” and question the board’s “deal-making prowess.” The court observed that the Plaintiffs “have not alleged, much less proven” that the board was “conflicted, disloyal or in some way interested in the transactions at issue” nor that the board acted in “bad faith.” The court stated: “Where, as here, the documents sought by Plaintiffs relate to a dispute…about substantive business decisions, pleading an imminent proxy contest is not enough to earn access to broad books and records relating to the details of the questionable transactions, particularly when the board’s decision-making is subject to the business judgment rule, and the facts of record reveals that Plaintiffs already have what they need to fulfill their stated purpose.”

The court also concluded that the books and records demanded were not “necessary or essential” for the Plaintiffs’ stated purpose. The court stated that the demand relates to “transactions that were widely publicized” and “Occidental stockholders know the transactions well.” The court wrote: “It is difficult to discern how a fishing expedition into the boardroom is necessary and essential to advance Plaintiffs’ purpose to raise concerns with their fellow stockholders about the wisdom of the Board’s decisions to engage in these transactions. Indeed, Plaintiffs have already made their assessment of the Board’s decision-making and have found it wanting,” and if the Plaintiffs believe the board should have considered a sale of the company, “they do not need records from the Company to make that case.” We note that the court so concluded notwithstanding that a proxy statement was not issued to the Occidental stockholders (given that their vote was not required)—although the proxy statement issued to the Anadarko stockholders was part of the available public record of the transaction.

In a context starkly different from that in High River, the court recently granted a Section 220 demand by a stockholder challenging the CBS-Viacom merger. In Buck Employees Retirement Fund v. CBS Corporation (Nov. 25, 2019), issued shortly after High River, Vice Chancellor Slights granted the Section 220 demand made by a CBS Corporation stockholder for inspection of books and records relating to the impending merger of CBS and Viacom Inc. Buck reflects a legal and factual context that is at the other end of the spectrum from High River. In Buck, the demand was made in the context of a pre-closing lawsuit challenging the board’s conduct in approving the merger (not, as in High River, a post-closing proxy contest seeking to remove directors because of bad decision-making). In Buck, the merger involved a conflicted controller (Shari Redstone, who, allegedly, “for years, has been seeking a bailout of the sinking Viacom ship, which she controls, with resources provided by CBS, which she also controls”); and therefore the merger was subject to the “entire fairness” standard of review (not, as in High River, the deferential business judgment standard). Most critically, in contrast with High River, the Vice Chancellor found that the Buck plaintiff “demonstrated a credible basis to suspect wrongdoing” by the CBS board in connection with its approval of the merger. The plaintiff credibly alleged that the directors breached their fiduciary duties by, among other things, not even asking for the merger to be conditioned on approval by the unaffiliated CBS stockholders, Moreover, the merger was not on terms materially different from the proposed merger that had been rejected a couple of years earlier by an independent CBS board (i.e., before Redstone’s nominees were installed on the board).

Both comments and trackbacks are currently closed.