COURT OF CHANCERY
OF THE
STATE OF DELAWARE
LORI W. WILL LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
Date Submitted: February 18, 2022
Date Decided: February 23, 2022
A. Thompson Bayliss, Esquire Raymond J. DiCamillo, Esquire
Michael A. Barlow, Esquire Kevin M. Gallagher, Esquire
Eliezer Y. Feinstein, Esquire Daniel E. Kaprow, Esquire
Samuel D. Cordle, Esquire Caroline M. McDonough, Esquire
Abrams & Bayliss LLP Richards, Layton & Finger, P.A.
20 Montchanin Road, Suite 200 920 North King Street
Wilmington, Delaware 19807 Wilmington, Delaware 19801
Peter J. Walsh, Jr., Esquire
Matthew F. Davis, Esquire
Patrick A. Lockwood, Esquire
Potter Anderson & Corroon LLP
Hercules Plaza, 6th Floor
Wilmington, Delaware 19801
RE: In re Aerojet Rocketdyne Holdings, Inc.,
C.A. No. 2022-0127-LWW
Dear Counsel:
I write regarding the parties’ competing forms of order and related
submissions in connection with the plaintiffs’ Motion for Temporary Restraining
Order (the “Motion”).1
As the parties are aware, I granted the Motion on February 15, 2022.2 In
brief, I concluded that the plaintiffs had satisfied the standard for a temporary
1
Dkt. 3.
C.A. No. 2022-0127-LWW
February 23, 2022
Page 2 of 9
restraining order and ordered that nominal party Aerojet Rocketdyne Holdings,
Inc. (the “Company”) remain neutral in the ongoing dispute about the nomination
of a Company-backed slate of directors for an upcoming election.
The Company’s eight-member board of directors (the “Board”) is evenly
divided on that issue. One faction of the Board includes the Company’s Chief
Executive Officer, Eileen Drake. The other faction includes Warren Lichtenstein,
the Company’s executive chair and founder of Steel Partners Holdings L.P.
(“Steel”), a significant stockholder of the Company.
On January 28, 2022, Steel delivered a letter to the Company nominating a
slate of seven director candidates for election, including four incumbent Board
members. Ms. Drake and the other three defendants (none of whom were
nominated by Steel) issued a press release—purportedly on behalf of the
Company—that questioned Mr. Lichtenstein’s decision to launch a proxy contest.3
2
Dkt. 33.
3
The press release stated that “the Company believes that Mr. Lichtenstein’s decision to
cause [Steel] to launch a disruptive proxy contest at this time may ultimately be driven by
his personal concerns and desire to secure his board position” and that “the Company is
disappointed that, at this critical time for the Company, Mr. Lichtenstein has decided to
take these actions to launch a proxy fight.” Verified Compl. for Declaratory J.
(“Compl.”) ¶¶ 32-33 (Dkt. 1).
C.A. No. 2022-0127-LWW
February 23, 2022
Page 3 of 9
These defendants also brought litigation—naming the Company as both a plaintiff
and a nominal defendant—seeking to, among other things, disqualify Steel’s slate.4
As I explained in my oral ruling on the Motion, the plaintiffs stated a
colorable claim that neither faction of the Board presently has the authority to
unilaterally act on the Company’s behalf or use its resources in the context of the
upcoming director election.5 I emphasized that my ruling was intended to maintain
the Company’s neutrality regarding the contested director election. I provided
specific guidance to the parties on the form of order that I would be willing to
enter. For example, I directed that the form of order should prevent persons or
entities purporting to act on behalf of the Company from issuing public statements
in the Company’s name or using Company resources in support of the election
efforts of any candidate for election at the Company’s annual meeting, absent
Board approval.6 I requested that the parties submit an implementing order. They
were unable to agree and competing proposed orders were filed.
The form of order proposed by the plaintiffs is appropriately tailored to the
court’s guidance.7 It temporarily prevents the use of the Company’s name or
4
See C.A. No. 2022-1046-LWW.
5
See Mot. for Temporary Restraining Order Hr’g Tr. Feb. 15, 2022 (Dkt. 38).
6
See id. at 66-85.
7
See Dkt. 34.
C.A. No. 2022-0127-LWW
February 23, 2022
Page 4 of 9
resources to support one slate over another without the approval of the Board while
ensuring that no individual is restrained from speaking on his or her own behalf.
That proposed order also memorializes the plaintiffs’ offer to waive the
Company’s advance notice bylaw deadline, allowing the defendants to run their
own slate if they choose.8 The plaintiffs’ order further provides that the Company
will be represented in the related lawsuits by independent counsel approved by a
majority of the Board. These additions advance the court’s goal of ensuring
corporate neutrality.9
The defendants’ proposed form of order, on the other hand, includes
provisions that are far afield from matters raised at the hearing on the Motion. To
start, it would require the Company to establish a $20 million “common fund” to
8
The parties have agreed on the extension of the nomination deadline. They disagree on
whether the order should exempt the defendants from the requirements of the advance
notice bylaw entirely, as the defendants’ proposal contemplates. The Board has not
granted any such exemption and I decline to determine on the limited record before me
whether certain of the bylaws’ requirements are inequitable. See Defs.’ Letter Regarding
Competing Forms of Order (“Defs.’ Letter”) at 5 (Dkt. 35).
9
See Pearl City Elevator, Inc. v. Gieseke, C.A. No. 2020-0419-JRS, at 93 (Del. Ch.
Sept. 11, 2020 (TRANSCRIPT) (“The company or entity is the neutral res in the
proceeding. Its interest is and should be that the entity be managed by those who are
authorized to serve in that role.”); In re Howard Midstream Energy P’rs, LLC, C.A. No.
2021-0487-LWW, at 68 (Del. Ch. July 22, 2021) (TRANSCRIPT) (ordering that the
company “remain neutral throughout the remainder of the action as to the outcome of
th[at] case” in a corporate control dispute).
C.A. No. 2022-0127-LWW
February 23, 2022
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cover each of the competing slates’ proxy solicitation expenses up to $10 million.
It is not clear why these amounts were chosen.
The defendants contend that this provision is necessary to level the playing
field because the Steel slate is supported by vast resources that the defendants say
they lack. They assert that the defendants should not be required to expend their
own funds “for the stockholders to have a choice among competing slates.”10 In
support of their position, they submit an expert report by Professor Guhan
Subramanian, which describes both the market standards for and socially optimal
approach to proxy solicitation reimbursement.
On the subject of market standards, Professor Subramanian states that
Delaware corporations larger than $50 million in market capitalization routinely
pay the proxy solicitation costs of an incumbent slate, “win or lose.”11 He observes
that he is not aware of any instance where the company did not pay the proxy
solicitation costs for an incumbent slate of directors in a proxy contest.12 The
10
Defs.’ Letter at 5.
11
Defs.’ Letter Ex. C at 9-10 (quoting William T. Allen, Reinier Kraakman, & Guhan
Subramanian, Commentaries & Cases on the Law of Business Organization 164 (4th ed.
2012)).
12
Id. at 10.
C.A. No. 2022-0127-LWW
February 23, 2022
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defendants add that it is “customary” for the company to provide resources to
directors for a proxy contest.13
That assumes, however, a traditional proxy contest, which “involve[s] a fight
between management and insurgent shareholders over the control of the
corporation in the annual election of directors.”14 In that scenario, incumbent
directors may access the corporate treasury to fund their proxy solicitation
expenses in a contested election.15 “[I]nsurgent shareholders” will generally
“finance their own bid and can hope for reimbursement only if that bid is
successful.”16
But that is not the situation here—at least based on the preliminary record
before me. There is not a single slate of incumbent directors seeking reelection
over insurgent candidates. Half of the Board supports one slate and half supports
another (yet to be nominated) slate. What the defendants describe as the
13
See Defs.’ Letter at 2.
14
Jana Master Fund, Ltd. v. CNET Networks, Ind., 954 A.2d 335, 341 (Del. Ch. 2008)
(quoting Harold D. Bloomenthal & Samuel Wolff, Securities & Federal Corporate Law
§ 24:39 (2d ed. 2007)).
15
See Hall v. Trans-Lux Daylight Picture Screen Corp., 171 A. 226, 227, 230 (Del. Ch.
1934).
16
Jana Master Fund, 954 A.2d at 341. Of course, a board could potentially choose to
reimburse the expenses of an insurgent slate. And Section 113 of the Delaware General
Corporation Law expressly permits Delaware corporations to adopt proxy expense
reimbursement bylaws. 8 Del. C. § 113(a).
C.A. No. 2022-0127-LWW
February 23, 2022
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“insurgent” slate includes four incumbent directors. The defendant’s slate would
not automatically become the “Company’s” simply because the CEO is in that
group.
Professor Subramanian’s second opinion addresses whether corporate
reimbursement of proxy solicitation costs for incumbent and dissident slates is
socially optimal. He states that although “there is no unambiguously optimal rule
for proxy contests overall . . . the tension between facilitating value-creating proxy
contests and deterring frivolous proxy contests can be evaluated in a particular
context.”17 Regarding the present dispute, Professor Subramanian opines that
reimbursing the expenses of both groups is “extremely likely” to be socially
optimal given the Company’s market cap and the proposed $10 million limit on
each side’s proxy solicitation costs.18
That may be true from a social welfare perspective. But it prompts a critical
question: where does the power to direct the use of the company’s resources for a
contested director election lie? In my view, that power does not lie with the court.
It is a core tenet of Delaware corporate law that “the board of directors has the
17
Defs.’ Letter Ex. C at 15.
18
Id. at 17.
C.A. No. 2022-0127-LWW
February 23, 2022
Page 8 of 9
ultimate responsibility for managing the business and affairs of a corporation.”19 If
the board is deadlocked, the court does not act as a tiebreaker that chooses whether
to open the corporate purse strings to fund the proxy contests of competing
incumbent slates.20
With the extension of the advance notice bylaw deadline, each side is free to
put forward a slate of candidates. The stockholders will be free to decide which
individuals to elect.21 The board that stockholders elect can then decide whether
proxy expenses should be reimbursed. The court, however, will not order the
Company to fund $10 million worth of proxy solicitation costs per side.
19
Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d 1281, 1291 (Del. 1998); see also
8 Del. C. § 141(a); Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (noting that a
“cardinal precept” of Delaware law is that directors manage the corporation); Hack v.
BMG Equities Corp., 1991 WL 101848, at *1 (Del. Ch. June 12, 1991) (granting
preliminary injunction to preserve status quo where one of two directors sought to act on
the corporation’s behalf, and noting that “an important and fundamental decision of
corporate governance[] must be made by the Board of Directors”).
20
In the related litigation filed by the defendants, alternative relief of a custodian to break
the deadlock is sought. C.A. No. 2022-0146-LWW, Dkt. 1 ¶ 115; see 8 Del. C. § 226.
The plaintiffs assert that there is no authority for the relief the defendants seek. That
question is not presently before me.
21
See In re Gulla, 115 A. 317, 318 (Del. Ch. 1921) (“The fitness or unfitness of
individuals to become directors of the corporation was a matter for the stockholders to
pass upon at the meeting, and it would be highly improper, in this proceeding, for the
court to pay any heed whatever to charges and countercharges concerning the fitness of
either one group or the other of the two factions.”).
C.A. No. 2022-0127-LWW
February 23, 2022
Page 9 of 9
I reach a similar conclusion regarding the use of Company resources to
reimburse the parties’ litigation costs.22 The defendants’ proposed form of order
would require the Company to “pay all fees and expenses” of both parties,
including for each side’s offensive litigation.23 The Company’s certificate of
incorporation and bylaws address when directors are entitled to advancement. The
court will not mandate that Company resources be used to fund offensive litigation
related to the election (including a claim to disqualify a competing slate) brought
by dueling factions of a divided board.
For these reasons, I will enter the form of order proposed by the plaintiffs.
While the Board remains split on the question of who should serve on the
Company’s slate of director nominees, the Company must continue to stand
neutral. The parties are invited to seek modifications of the order should
necessitating circumstances arise. Their debates on the merits will be taken up at a
later stage of this proceeding.
Sincerely yours,
/s/ Lori W. Will
Lori W. Will
Vice Chancellor
22
See Defs.’ Letter Ex. A ¶ 8.
23
Id.