Activist Shareholders Must Stick To Their Proxy Contest Agreements

Activist shareholders make a deal when they settle proxy contests. They surrender their stockholder-level influence in exchange for board-level influence. Normally they also agree to standstill periods during which they won’t oppose board decisions.

The Delaware Court of Chancery recently considered such an agreement. In December 2023, it ruled that two activist stockholders who jointly held 22 percent of a company’s common stock must vote as they’d agreed, and therefore a contested stockholder vote had passed. After an expedited appeal, the Delaware Supreme Court affirmed, in February 2024.

The case was Texas Pacific Land Corp. v. Horizon Kinetics LLC. It was complicated by the unusual history of Texas Pacific, but in a post, the Sidley firm says that, “the two rulings provide certainty that companies may enforce voting agreements against stockholders.  Even in the case of ambiguous voting provisions, Delaware’s policy in favor of the stockholder franchise does not in itself block enforcement.”

Sidley, who represented Texas Pacific in both the Chancery and Supreme Court proceedings, says that the Delaware pro-stockholder franchise policy still can play a role in interpreting ambiguous voting provisions. Companies that want to enforce stockholder agreements “may bear the burden of proving by clear and convincing evidence that their interpretation of the provision is the correct one.”

The firm suggests including any other claim for breach of the voting agreement that can be connected to the challenged vote when contesting it. A claim for an applicable standstill breach, for example, could have strategic value in litigation which is not necessarily foreseeable at the time of filing.

In Texas Pacific Land Corp. v. Horizon Kinetics, there was evidence that the activist shareholders had solicited votes in opposition to the proposal at issue.  By doing so, the court ruled that they had violated the Standstill in multiple ways over a period of time.