Engaged shareholder voting is often perceived as the linchpin of sound corporate governance. That reputation is well deserved: Even as corporate governance has broadened its sights of late to accommodate a wider set of stakeholders, the pivotal role of shareholders in corporate decision making remains very much at the core of corporate law. Particularly within public companies, the shareholder voting franchise is a signature vehicle through which informed investors voice their approval, their concerns, and even their repudiation of managerial decisions. Highly diversified shareholders and institutional investors frequently engage the services of proxy advisers to help them become informed about impending votes.
Increasingly, however, shareholders are also being called upon to mediate conflicts in which boards themselves become irreconcilably split over important matters of corporate strategy. Just such an existential moment has recently descended on defense contractor Aerojet Rocketdyne, which finds itself in a pitched internal proxy battle between opposing camps led (respectively) by its incumbent CEO Eileen Drake and Board Chair Warren Lichtenstein.
Though previously allies, the two have become increasingly oppositional as a byproduct of Aerojet’s failed sale to Lockheed Martin – a tie-up that the FTC blocked earlier this year, concluding that it created excessive market power. The Lichtenstein faction accuses Drake of being overly solicitous in chasing after the Lockheed deal, ignoring (or downplaying) clear regulatory risks and harboring no real backup plan. The Drake faction accuses Lichtenstein of being excessively aggressive in attempting to wrest control of the negotiation process and giving insufficient deference to management. By early spring of this year, it was clear that these differences had become irreconcilable, and a proxy contest seemed likely between the two evenly split factions of the board. And indeed, each has put forward its own slate for election in the next shareholder meeting, scheduled for June 30. (There is no official company-endorsed slate, since the eight-person board is evenly divided and thus deadlocked.)
Peculiar as this scenario may be, it only scratches the surface of what makes the Aerojet imbroglio interesting to corporate governance researchers. Indeed, the dispute at Aerojet eventually became so heated that it landed in Delaware Chancery Court, where Vice Chancellor Lori Will has already issued multiple opinions. First, in February Will granted the Lichtenstein faction’s request for an emergency restraining order, finding that the Drake faction had “co-opt[ed] the company’s resources to further its campaign.” In March, the Court granted the Lichtenstein faction’s motion to enforce that order and required the company to retain neutral counsel. In early May, the vice chancellor castigated the Drake faction once again for systematically “freezing out” the Lichtenstein faction from company information and deliberation – all under the purported guise of attorney-client privilege – concluding that the Drake faction’s information blockade “def[ied] the principles” of Delaware law. Conjuring an earlier Delaware case that similarly involved warring board factions at WeWork, Vice Chancellor Will held that “[a] director’s right to information is ‘essentially unfettered in nature’ and includes ‘equal access’ to board information.” Finally, and most recently, Vice Chancellor Will issued a post-trial opinion siding with the Lichtenstein faction on the merits – granting declaratory and permanent injunctive relief against the Drake faction and requiring the company to issue corrective disclosures. To corporate law wonks, these opinions are particularly interesting in that they repeatedly reaffirm the centrality of board-centered governance, even overriding the (strongly held) preferences of the sitting CEO of a public company. Most importantly, the court reaffirmed a longstanding principle of corporate law that incumbent management cannot lawfully wrest control of bona fide board-level deliberation and disagreement: Management serves as the agent of the board (and not vice versa).
All the while, of course, the internal stare-down at Aerojet continues. As of this writing, Aerojet shareholders are set to vote on the competing slates in an upcoming meeting. While certainly a difficult (if not existential) moment for the company, this is exactly where engaged, thoughtful shareholder participation is most valuable and essential.
And this same need for engaged shareholder participation complicates the role of proxy advisers such as ISS and Glass Lewis, which have built a business on advising large institutional clients (such as pension funds and endowments) about how to vote on various governance matters. While proxy advisers often save institutional owners the tedious legwork of doing diligence on workaday matters, the role of proxy advice becomes more fraught during existential crises such as Aerojet’s. Here, the competing visions of the two warring factions are complex and foundational, and they are unlikely to produce an easy, one-size-fits-all prescription for all shareholders.
Yet, somewhat curiously, at least one major proxy adviser (ISS) has recently lent its support to the Drake faction, with scarcely a mention of the Chancery Court’s repeated censures of Aerojet management’s tactics. To those of us who study corporate governance, Aerojet’s litigation track record seems both relevant and worthy of investor attention: Indeed, the Delaware courts pride themselves on protecting the shareholder franchise – and a company’s credibility, integrity, and respect for corporate governance (or lapses therein) seem highly relevant as shareholders attempt to chart the best path forward.
The proxy contest at Aerojet is clearly heated and important. But unlike more conventional corporate kerfuffles, this one does not readily lend itself to predetermined winners and losers. In such cases, proxy advisers might best be advised to remain neutral, informing investors about the issues at play but otherwise staying on the sidelines. Failing that, a second-best outcome would be for shareholders to become fully active and thoughtful participants, personally engaging with the underlying issues, forming their own independent conclusions, and ultimately voting accordingly. Regardless of the outcome, that type of informed engagement is especially important in affirming the centrality and durability of good corporate governance.
This post comes to us from Eric Talley, Isidor & Seville Sulzbacher Professor and co-director of the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School. He is unaffiliated with any of the parties mentioned in the post.