In Pontiac General Employees Retirement System v. Ballantine, et al., the Delaware Chancery Court refused to dismiss a claim against a lender for aiding and abetting a breach of fiduciary duty by the borrower’s directors. The claim was based on a “dead hand proxy put” provision in the credit agreement, which defined “continuing directors” – for purposes of determining whether there had been “change in control” – to exclude any director nominated in connection with, or as a result of, a dissident-proxy challenge (actual or threatened), even if the then-current directors ultimately approved their appointment.

The court rejected the Lender’s argument that it did not “knowingly participate” in the alleged breach because the credit agreement was negotiated at “arm’s-length”. The court stated that:

[W]hen you are an arm’s-length contractual counterparty, you are permitted, and the law allows you, to negotiate for the best deal that you can get. What it doesn’t allow you to do is to propose terms, insist on terms, demand terms, contemplate terms, incorporate terms that take advantage of a conflict of interest that the fiduciary counterparts on the other side of the negotiating table face.

The court also stated its prior opinions were sufficient to put the lender “on notice” that such provisions were “highly suspect and could potentially lead to a breach of duty on the part of” a borrower’s directors.

In light of this recent development, administrative agents and lenders need to reconsider the legal risk in incorporating these types of change of control provisions in new facilities and when amending, modifying or joining any existing facility.