Directors of a Delaware corporation that enters into a financing agreement with a lender may breach their fiduciary duties if the financing agreement contains a common provision allowing the lender to accelerate and demand full payment of the indebtedness upon a substantial change in the composition of the board of directors. Moreover, the lender may be liable for aiding and abetting the directors’ breach of fiduciary duty. Vice Chancellor J. Travis Laster’s transcript ruling in Pontiac General Employees Retirement Fund v. Healthways, C.A. No. 9789-VCL transcript (Del. Ch. Nov. 3, 2014), denied the motions of the defendant directors and the lender to dismiss claims based on similar facts and allowed the action to proceed. The ruling and accompanying reasoning severely constrict the permissible use of the so-called “proxy put” often contained in corporate financing agreements.
A “proxy put” is a term used to refer to a change-of-control covenant contained in a financing contract that provides upon a triggering event, usually a change in control of the board, for some action to occur, typically accelerated debt repayment. As a result, these provisions have an entrenchment effect.
