## Facts

- SandRidge Energy, Inc. had a seven-member board with staggered terms created by bylaw, making destaggering possible through stockholder bylaw amendment.
- A stockholder group, TPG-Axon, initiated a consent solicitation to (1) destagger the board, (2) remove incumbent directors, and (3) elect a dissident slate.
- SandRidge’s debt instruments included “proxy put” provisions: if a majority of directors changed without approval of at least two-thirds of the incumbent board, a change of control would be deemed to occur, requiring SandRidge to offer to repurchase outstanding debt.
- The incumbent board opposed the solicitation and warned stockholders that electing the dissident slate without board approval could trigger the proxy put and create significant liquidity and refinancing risk.
- A SandRidge stockholder, Gerald Kallick, sued, alleging the board breached fiduciary duties by refusing to approve the dissident slate for proxy-put purposes and by using the put’s threatened consequences to pressure stockholder voting.
- After the dispute began, SandRidge disclosed that noteholders were unlikely to exercise the put because the notes traded above the repurchase price, and that backup financing was available if needed; the board still declined to approve the dissident slate for proxy-put purposes.

## Issues

1. What standard of review applies when directors refuse to approve a dissident slate under a proxy put in a way that affects the stockholder vote—business judgment or enhanced scrutiny focused on interference with the stockholder franchise?
2. Whether the directors breached fiduciary duties by refusing, without adequate justification, to approve the dissident slate for purposes of the proxy put while invoking the put’s threat in the consent contest.

## Decision

- The Court of Chancery applied enhanced scrutiny because the board’s conduct functioned as a defensive measure with a direct effect on the stockholder franchise.
- The court found the board lacked a rational, good-faith basis to withhold approval of the dissident slate as “continuing directors” for purposes of the proxy put.
- The court granted injunctive relief, enjoining the board from soliciting consent revocations or otherwise impeding the consent solicitation unless and until it approved the dissident slate solely to neutralize the change-of-control trigger.

## Legal Principles

- Delaware courts apply enhanced scrutiny when directors take actions that operate as defensive measures and materially affect stockholders’ ability to choose directors in an uncoerced manner.
- Proxy puts may be permissible credit terms, but directors must administer discretionary “approval” provisions consistent with fiduciary duties and may not use the threatened trigger as an entrenchment device.
- When a board can approve dissident nominees to prevent a debt-triggered penalty, it must have a well-supported, good-faith justification for refusing approval; unsupported claims about nominee unfitness or speculative financing consequences are insufficient.
- Equity may require injunctive relief to prevent coercive distortion of the electoral process where board communications and conduct condition the stockholder vote on avoiding company harm that lacks a credible evidentiary basis.

## Conclusion

The court required the board to stop using a proxy put as leverage in a consent solicitation because the refusal to approve the dissident slate for proxy-put purposes was not supported by a rational, good-faith justification and threatened stockholders’ ability to vote free from coercion.


Kallick v. SandRidge Energy, Inc., 68 A.3d 242 (Del. Ch. 2013)