CHANCERY COURT FINDS ORAL AGREEMENT TO SETTLE PROXY CONTEST BINDING AND ORDERS SPECIFIC PERFORMANCE OF THE SETTLEMENT AGREEMENT
By Josh Gaul and Caitlin Velasco
In Sarissa Capital Domestic Fund LP, et al. v. Innoviva, Inc., C.A. No. 2017-0309-JRS (Del. Ch. Dec. 8, 2017), the Delaware Court of Chancery ruled in favor of dissident stockholder plaintiffs, Sarissa Capital Domestic Fund LP, et al. (“Sarissa”) of Innoviva, Inc. (“Innoviva”), concluding that Sarissa and Innoviva entered into a binding, oral settlement agreement to resolve a proxy contest prior to Innoviva’s 2017 annual stockholder meeting and specific performance of the settlement agreement was warranted.
In February 2017, Sarissa commenced a proxy contest to elect three of its nominees to Innoviva’s seven-member board at Innoviva’s annual stockholder meeting scheduled for April 20, 2017. In the proxy materials, Sarissa charged that Innoviva’s incumbent directors were “grossly overpaid” given Innoviva’s poor stock performance and were failing certain of their duties.
In early April 2017, when three proxy advisory firms recommended that Innoviva stockholders vote for Sarissa’s director nominees, the parties began exploring a potential settlement to the proxy contest. By April 18, two days before the annual meeting, the vote was still too close to call, and the parties intensified their settlement negotiations. Sarissa offered to end its proxy campaign if Innoviva would (1) expand its board from seven to nine members; (2) appoint two of Sarissa’s board nominees; and (3) forgo a standstill agreement proposed by Innoviva. Innoviva remained adamant that any settlement would require a standstill.
On April 19, the results of the proxy contest remained in doubt as two of Innoviva’s largest stockholders, Vanguard and BlackRock, had yet to cast their votes. Shortly after noon that day, Innoviva learned that it had lost Vanguard’s vote. Expecting to lose BlackRock’s as well, Innoviva’s board orally conveyed to Sarissa its willingness to settle without a standstill and Sarissa promptly accepted. The parties’ orally agreed that (1) Innoviva would expand its board from seven to nine members, two of Sarissa’s nominees would be added as directors, and there would be no standstill; (2) Sarissa would terminate its proxy contest and dismiss its then-pending Section 220 action (Sarissa had commenced an action seeking certain corporate books and records to assist in the proxy contest); (3) Sarissa and Innoviva would announce the settlement in a mutually conciliatory joint press release; and (4) Innoviva would issue new proxy materials with the two Sarissa nominees included on the board’s slate and Innoviva’s 2017 annual meeting would be adjourned so that the new materials could be prepared and issued. Following the oral agreement, the parties’ attorneys worked to memorialize the settlement in writing and finalize the language of the joint press release.
Shortly after orally agreeing to the terms of the settlement, Innoviva learned that BlackRock would actually vote in favor of the board’s slate–ensuring none of the Sarissa nominees would have been elected. Innoviva then ceased discussions with Sarissa and proceeded with the stockholder vote at the annual meeting the following day.
Sarissa filed this action under Section 225 of the Delaware General Corporation Law on the day of the annual meeting seeking a declaration that the parties had entered into a binding settlement agreement the afternoon of April 19, 2017 and asking the Court to specifically enforce the terms of the settlement. Innoviva moved to dismiss the complaint pursuant to Court of Chancery Rule 12(b)(6). Sarissa amended its complaint on May 12, 2017, expressly alleging that although the parties had agreed to issue a joint press release, the content of the press release was neither a material term nor a condition to the settlement agreement. However, the legal gravamen of Sarissa’s amended complaint remained the same. Innoviva then moved for summary judgment on the amended complaint. The Court denied that motion, determining genuine disputes of material fact remained, and a trial was held.
The Court, in finding in favor of Sarissa, held that Sarissa and Innoviva’s oral agreement was a binding settlement agreement. The Court granted specific performance of the settlement agreement, explaining the terms of the oral agreement were clear and definite, no sum of money damages would fully compensate Sarissa for its loss of opportunity to secure representation on Innoviva’s board, and Sarissa was ready, able, and willing to perform its obligations under the settlement agreement. In so holding, the Court rejected Innoviva’s arguments that (a) Innoviva’s Chairman of the Board, who negotiated on behalf of Innoviva, lacked actual and apparent authority to bind Innoviva, (b) Innoviva’s settlement offer was contingent on the two parties executing a written agreement, and (c) the parties’ issuance of a joint press release was condition precedent to the settlement agreement.
Sarissa Capital et al. Domestic Fund LP v. Innoviva, Inc., memorandum opinion 171208