Texas Pacific Land Corporation v. Horizon Kinetics LLC ( 2023 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
TEXAS PACIFIC LAND CORPORATION, )
)
Plaintiff, )
)
v. ) C.A. No. 2022-1066-JTL
)
HORIZON KINETICS LLC, HORIZON )
KINETICS ASSET MANAGEMENT LLC, )
SOFTVEST ADVISORS, LLC, and )
SOFTVEST, L.P., )
)
Defendants. )
POST-TRIAL OPINION
Date Submitted: July 10, 2023
Date Decided: December 1, 2023
A. Thompson Bayliss, Adam K. Schulman, Peter C. Cirka, G. Mason Thomson,
ABRAMS & BAYLISS LLP, Wilmington, Delaware; Yolanda C. Garcia, Tayler G.
Bragg, SIDLEY AUSTIN LLP, Dallas, Texas; Alex J. Kaplan, Charlotte K. Newell,
Robert M. Garsson, Cassandra Liu, Deborah Sands, SIDLEY AUSTIN LLP, New
York, New York; Elizabeth Y. Austin, SIDLEY AUSTIN LLP, Chicago, Illinois; Robin
Wechkin, SIDLEY AUSTIN LLP, Issaquah, Washington; Counsel for Plaintiff Texas
Pacific Land Corporation.
Rolin P. Bissell, James M. Yoch, Jr., Alberto E. Chávez, Michael A. Carbonara, Jr.,
YOUNG CONAWAY STARGATT & TAYLOR LLP, Wilmington, Delaware;
Christopher E. Duffy, John Goodwin, VINSON & ELKINS LLP, New York, New
York; Robert Ritchie, K. Virginia Burke DeBeer, VINSON & ELKINS LLP, Dallas,
Texas; Counsel for Defendants Horizon Kinetics LLC, Horizon Kinetics Asset
Management LLC, SoftVest Advisors, LLC, and SoftVest, L.P.
LASTER, V.C.
A board of directors recommended that stockholders vote for a charter
amendment to increase the corporation’s authorized shares. The defendants voted
against the amendment. The corporation asserts that a stockholders agreement
bound the defendants to follow the board’s recommendation. The defendants respond
that exceptions to the voting commitment enabled them to vote against the
amendment. They also say that the doctrine of unclean hands bars the corporation
from relying on the voting commitment because the directors breached their duty of
disclosure when soliciting stockholder approval.
This post-trial decision holds that the defendants breached the voting
commitment. The exceptions are ambiguous, but the extrinsic evidence establishes
that the commitment bound the defendants to vote with the board. The disclosure
violations do not negate the defendants’ contractual obligation. Plus, the defendants
were guilty of worse misconduct.
As a remedy, the court applies the equitable maxim that treats as done what
ought to have been done. The defendants’ shares are deemed voted in favor of the
amendment. Accordingly, the amendment is declared to have been approved.
I. FACTUAL BACKGROUND
The facts are drawn from the post-trial record. Having evaluated the credibility
of witnesses and weighed the evidence, the court makes the following findings.1
1The parties agreed to fifty-eight stipulations of fact, cited as PTO ¶ —. Six fact
witnesses and three expert witnesses testified during a one day trial. The parties introduced
1,091 exhibits, including deposition transcripts from fifteen individuals. Citations in the form
“[Name] Tr.” refer to witness testimony from the trial transcript. Citations in the form
“[Name] Dep.” refer to witness testimony from a deposition transcript. Citations in the form
A. The Company
Texas Pacific Land Corporation (the “Company”) is one of the largest
landowners in Texas. The Company’s predecessor—the Texas Pacific Land Trust (the
“Trust”)—was formed in 1888 to hold land previously owned by the bankrupt Texas
and Pacific Railway Company. The railroad had mortgaged its real estate to secure
bond issuances. When the railroad defaulted, the Trust was formed for the benefit of
the bondholders, and the bondholders received trust certificates representing their
proportionate economic interest in the Trust. The declaration of trust prevented the
Trust from issuing more trust certificates.
Three trustees governed the Trust’s affairs. Once elected, each served until
resignation, disqualification, or death.
B. The Proxy Contest And Settlement Agreement
In February 2019, one of the trustees resigned, creating a vacancy. The two
remaining trustees—John R. Norris and David E. Barry—nominated Donald G.
Cook, a retired four-star general, to fill the vacancy.
A group of investors owning approximately 25% of the Trust certificates
opposed Cook’s nomination, The investors nominated Eric Oliver, the founder and
president of SoftVest Advisors, LLC (“SoftVest”), an investment advisor with a fund
that held a significant number of Trust certificates.
“JX — at —” reference trial exhibits and use original pagination when available. If more
convenient, trial exhibit citations reference internal paragraphs or sections.
2
A proxy contest ensued. As part of that fight, the Trust sued Oliver in federal
court.
In July 2019, the parties reached a settlement that included the Trust’s
agreement to form a committee that would evaluate the possibility of converting into
a corporation (the “Conversion Committee”). The members of the Conversion
Committee included Norris and Oliver. The other members were Murray Stahl of
Horizon Kinetics Asset Management (“Horizon”); Craig Hodges of Hodges Capital;
and Dana McGinnis of Mission Advisors. All controlled investment advisors with
funds that owned significant numbers of Trust certificates. Each was part of the
group that opposed Cook’s nomination.
C. The Conversion Committee Recommends A Conversion.
In January 2020, the Conversion Committee reviewed draft resolutions
recommending that the Trust convert into a Delaware corporation. They also
reviewed a plan of conversion for accomplishing it (the “Conversion Plan”). Sidley
Austin LLP presented the Conversion Plan. JX 71.
After the presentation, the committee members “engaged in a discussion
among themselves and with Sidley regarding the number of shares of common stock
of the Potential Corporation to be authorized under the certificate of incorporation.”
Id. at 2. Oliver, Stahl, and Hodges opposed the issuance of additional shares. They
wanted the corporation to operate as the Trust had historically by not issuing
additional equity. Stahl Tr. 192–93; Oliver Tr. 245–46. No decision was reached, and
the resolutions were amended to state that the Trustees would “continue to consult
with the Committee on … the number of authorized common shares.” JX 71 at 2.
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The Conversion Committee unanimously adopted the revised resolutions and
recommended that that the Trustees approve the Conversion Plan. The plan
documentation had two parts. Annex A described the steps involved in the conversion.
It noted that the Trust would form the Company as a wholly owned subsidiary and
then spin it off, “distributing all shares of its common stock to holders of sub-share
certificates of the Trust.” Id. at 9. An organization chart reflected that the Trusts’
existing certificate holders would “receive 100% of the shares of common stock of [the
Company] as a distribution in liquidation of [the Trust].” Id. at 12. That was an
accurate description of what happened. It did not memorialize an agreement on
whether the Company could issue additional equity.
Annex B provided “an overview of key governance terms” for the Company. Id.
at 14. The annex identified fifteen items:
(1) stockholder representation on the board of directors (the “Board”), “[s]ubject
to negotiations of a shareholder agreement containing customary standstill
provisions.”;
(2) a classified board structure;
(3) majority voting for director elections;
(4) the ability of stockholders to act by written consent only if requested by the
Board;
(5) director removal for cause by at least a majority of the outstanding shares;
(6) a 90-120 day advance notice requirement for director nominations and
stockholder proposals;
(7) giving the Board the exclusive right to fix its size at between seven and
eleven members;
(8) giving the Board the exclusive power to fill director vacancies;
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(9) requiring the affirmative vote of a majority of the outstanding shares for
adopting, amending, or repealing bylaws;
(10) an exclusive forum provision in the charter designating the courts of
Delaware and Texas;
(11) authority to issue blank check preferred stock;
(12) indemnification;
(13) directors and officer insurance;
(14) advancement; and
(15) director exculpation.
Id. at 14–18. The list of key governance terms did not identify an agreement on the
corporation’s authority to issue new shares. That point had been left open.
D. The Stockholders Agreement
Over the following months, the Trust negotiated a stockholders agreement
with the investors who wanted representation on the Board. SoftVest, Horizon, and
Mission Advisors executed the final agreement. JX 116 (the “Stockholders
Agreement” or “SA”). SoftVest designated Oliver as its director representative;
Horizon designated Stahl; and Mission Advisors designated McGinnis. In each case,
the investment advisor and the fund that held Trust certificates and would hold
Company shares after the conversion signed the Stockholders Agreement.2 Hodges
and his firm did not sign.
2 For Horizon and SoftVest, the signatory entities are (i) Horizon Kinetics LLC and
Horizon Kinetics Asset Management LLC and (ii) SoftVest Advisors, LLC and SoftVest, L.P.
The Mission Advisor entities are not relevant to this action.
5
Section 2 of the Stockholders Agreement, titled “Voting Commitments and
Restrictions,” stated that the signatory stockholders must
vote all shares of Common Stock beneficially owned by such Stockholder
and over which such Stockholder has voting authority at each
Stockholder Meeting in accordance with the Board’s recommendations
as such recommendations of the Board are set forth in the applicable
definitive proxy statement filed with the SEC (the “Board
Recommendations”).
SA § 2(a) (the “Voting Commitment”).
The Voting Commitment was subject to two exceptions:
Notwithstanding [the Voting Commitment], the Stockholders shall not
be required to vote in accordance with the Board Recommendation for
any proposals
(i) related to an Extraordinary Transaction or
(ii) related to governance, environmental or social matters; provided,
however, that the Stockholders shall be required to vote in accordance
with the Board Recommendation for any proposal relating to any
corporate governance terms that would have the effect of changing any
of the corporate governance terms set forth in the plan of conversion
recommended by the Conversion Exploration Committee of the Trust on
January 21, 2020.
Id. § 2(b) (formatting added). The first exception is the “Transaction Exception.” The
second exception is the “Subject Matter Exception.” The Subject Matter Exception
contains an exclusion, i.e., an exception to the exception, that restores the obligation
to comply with the Voting Commitment “for any proposal … that would have the
effect of changing any of the corporate governance terms set forth in the [Conversion
Plan]” Id. (the “Conversion Plan Exclusion”).
Section 3 of the Stockholders Agreement imposed a standstill (the “Standstill”).
The Standstill stated: “Except as otherwise provided in this Agreement, without the
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prior written consent of … the Board[], the [signatory stockholders] shall not, and
shall cause their Affiliates and controlled Associates not to, directly or indirectly (in
each case, except as permitted by this Agreement)” engage in a series of acts. Id. § 3.
Five of the acts prohibited the signatory stockholders from taking any action to
(i) … nominate, recommend for nomination or give notice of an intent to
nominate or recommend for nomination a person for election at any
Stockholder Meeting at which directors are to be elected;
(ii) initiate, encourage or participate in any solicitation of proxies in
respect of any election contest or removal contest with respect to
directors;
(iii) submit, initiate, make or be a proponent of any stockholder proposal
for consideration at, or bring any other business before, any Stockholder
Meeting;
(iv) initiate, encourage or participate in any solicitation of proxies in
respect of any stockholder proposal for consideration at, or other
business brought before, any Stockholder Meeting; or
(v) initiate, encourage or participate in any “withhold” or similar
campaign with respect to any Stockholder Meeting ….
Id. § 3(a).
A sixth prohibition prevented the signatory stockholders from taking any
action to “seek publicly, or alone or in concert with others, to amend any provision of
the Governance Documents.” Id. § 3(e). The Stockholder Agreement defined
“Governance Documents” as “the Charter, the Bylaws …, committee charters,
corporate governance guidelines or similar publicly-disclosed governance
documents[.]” Id. § 1(d).
A seventh prohibition barred the signatory stockholders from (i) making any
public or private proposals (other than to the Trustees or the Board) or (ii) making
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any public statements or otherwise seeking to encourage, advise or assist any person,
in each case with respect to:
(A) any change in the number or term of directors serving on the Board
or the filling of any vacancies on the Board,
(B) any change in the capitalization, dividend or share repurchase policy
of [the Company],
(C) any other change in the Trust’s or [the Company’s] business,
operations, strategy, management, governance, corporate structure, or
other affairs or policies,
(D) any Extraordinary Transaction,
(E) causing a class of securities of the Trust or [the Company] to be
delisted from, or to cease to be authorized to be quoted on, any securities
exchange or
(F) causing a class of equity securities of [the Company] to become
eligible for termination of registration pursuant to Section 12(g)(4) of the
Exchange Act[.]
Id. § 3(g).
E. The Debate Over Authorizing More Shares
On January 11, 2021, the Trust converted into the Company. The Company’s
amended and restated certificate of incorporation (the “Charter”) fixed the total
number of the authorized shares of common stock at 7,756,156, all of which were
distributed to the former holders of Trust certificates. That meant that the Company
lacked the authority to issue additional shares of common stock.
Soon afterward, the Board and management began considering whether to
seek authority to issue more shares. During a meeting on February 17, 2021, the
Board “discussed the possibility of implementing a stock split but did not reach a
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decision to do so and instead asked for an updated analysis on this topic from Credit
Suisse for consideration at a future meeting.” JX 154 at 367.
During a Board meeting on May 3, 2021, Credit Suisse gave a presentation on
a potential stock split. JX 172 at 85, 94–97. Credit Suisse commented that it “is
unusual for a public company to have no authorized but unissued shares available
for use with M&A transactions and compensation.” Id. at 85. Credit Suisse also noted
that the Company’s “[r]ecent outsized share performance … creates an opportunity
for stock focused mergers … that will be highly accretive on a per share basis on all
metrics[.]” Id. at 94. Credit Suisse concluded that “[a]n increase in the amount of
shares authorized will provide [the Company] flexibility to investigate these potential
opportunistic transactions[.]” Id. The directors discussed the Company’s “unusual
situation with respect to the negotiated reorganization from a trust to a corporation,
including the concern about dilution.” Id. at 85.
The Board revisited the topic of increasing the authorized shares during a
meeting on August 11, 2021. Credit Suisse gave a presentation about “the advantages
of having authorized shares available for issuance in connection with acquisitions,
and recommended authorizing additional shares even if no specific use is known or
planned for them yet.” JX 183 at 145. After the presentation, the “Board held a long
discussion about these topics.” Id. Norris and Barry, the Board’s Co-Chairs, proposed
an increase of 585,000 shares, with 85,000 shares set aside to fund equity incentive
plans for management and 500,000 shares for unspecified uses. Id. at 152. No
consensus was reached, and the Board tabled the discussion. Id.
9
On September 10, 2021, the Board held a special meeting to consider
increasing the authorized shares. Management “led a discussion regarding
management’s growth strategy, and in particular relating to the use of capital and
acquisitions.” JX 194 at 59. Stahl and Oliver argued against authorizing more shares,
and the Board could not reach consensus. Id. The Board tabled the issue again. Id.
F. Stahl And Oliver Discuss The Voting Commitment.
Three day after the September 10 meeting, Oliver emailed with his son about
the Board’s interest in authorizing more shares. Demonstrating his understanding
that the Voting Commitment bound Horizon to vote in favor of a Board-endorsed
proposal to increase the authorized shares, Oliver stated: “We are also lobbying for
our ability to vote against if the Board does move forward.” JX 196 at 8. His son
responded “Right, I get that. It’s an uphill battle.” Id.
On October 7, 2021, Stahl discussed the same issue with two other
stockholders. One was Lawrence Goldstein, who took notes that state:
Next meeting ... They wanted to increase shares outstanding and
How did analyst report know the o [sic] was planning to increase shares
As long as Murray is[ ]ON THE BOARD HE Must [sic] vote with them
JX 210. Goldstein’s notes reflect Stahl’s contemporaneous understanding that
Horizon had to comply with the Voting Commitment for purposes of a Board-endorsed
proposal to increase the authorized shares. By contrast, Stahl understood that he did
not have to comply with the Voting Agreement for a spinoff, presumably under the
Transaction Exception. Id. (“Plan was to spin off the water business. They can only
sell more shares with Murray voting against that. Free to vote For [sic] spin of [sic].”).
Goldstein’s notes summarize the Voting Commitment as follows: “DOES NOT HAVE
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TO VOTE WITH THEM ON NON PEDESTRIAN THINGS HE CAN VOT[E] ON BIG
THINGS[.]” Id.3
G. The Company Pursues Acquisitions.
One of the reasons why management wanted to increase the Company’s
authorized shares was to facilitate acquisitions. In November 2021, the Company
began exploring a purchase of assets from Occidental Petroleum (“Oxy”). In February
2022, the Board formed a special committee to consider potential acquisitions (the
“Strategic Acquisitions Committee”). Over the next ten months, management and the
Strategic Acquisitions Committee considered eighteen different transactions, none of
which resulted in a binding offer or signed agreement. JX 598 at 6–11. The two largest
transactions were the potential asset purchase from Oxy and a potential merger with
Brigham Minerals, Inc. (“Brigham”).
The Oxy transaction fell apart over price. In April 2022, Oxy signaled a
purchase price in the range of 12x EBITDA, above the Company’s range of 8x to 10x
EBITDA. The Strategic Acquisitions Committee and management discussed Oxy’s
ask. Management reported that Oxy was interested in consideration that included
stock and asked for a premium because of “perceived execution risk on the part of the
Corporation to be able to get necessary approvals and consummate the transaction
….” JX 360 at 3. The potential transaction died shortly thereafter.
3 Stahl claimed the call never took place. Stahl Tr. 227–28. That testimony was not
credible.
11
Contemporaneously, management internally expressed its desire to increase
the number authorized shares to facilitate acquisitions. An internal management
presentation from April 2022, flagged that the Company’s “access to capital (i.e.,
authorized shares) has become a primary barrier to progressing transactions to
formal decision points.” JX 318 at 8.
The Brigham transaction suffered a similar fate. In July 2022, the Company
submitted a non-binding offer to acquire Brigham for stock worth $1.746 billion. JX
1034 at 2–3. In September, Brigham announced a transaction with a competing
bidder. JX 420. Barry told the directors other than Oliver and Stahl that the
Company’s bid was “on target” but failed because the Company was not authorized
to issue stock. JX 422. He asked whether it was “worth considering a competing bid
for Brigham if we get the stock authorization?” Id. The consensus was that the “ship
has sailed” and the deal was lost. Id.
H. The August 31, 2022 Board Meeting
During a meeting on August 31, 2022, after losing the Oxy deal and the
Brigham deal, the Board revisited the idea of increasing the authorized shares. JX
462. Management proposed an increase of 38,780,780 shares to an aggregate of
47,536,936 shares, sufficient to permit a 3-for-l stock split that would take the form
of a stock dividend with additional shares “for future as-of-yet undetermined uses.”
Id. at 9. Management explained that the additional shares “would give the
Corporation flexibility with respect to future uses of shares, including as
consideration for acquisitions, equity compensation, and other possible uses.” Id.
12
Stahl and Oliver opposed the proposal. Stahl was willing to support the shares
necessary to effectuate the stock split, but would not support a higher number. Oliver
agreed. The other directors believed that the increased share authorization “was in
the best interest of stockholders and was in line with the majority of other public
companies.” Id.
Over Stahl and Oliver’s opposition, the Board approved a proposed charter
amendment to increase the authorized number of shares. They resolved to submit it
to the stockholders at the Company’s 2022 annual meeting. The Board scheduled the
meeting for November 16, 2022, with a record date of September 22, 2022.
I. The Proxy Statement
On October 7, 2022, the Company filed its definitive proxy statement for the
annual meeting. JX 431 (the “Proxy Statement”). The Proxy Statement listed the
proposed increase in the authorized shares as Proposal Four, explaining that “[i]f
stockholders approve the Authorized Shares Amendment, it would permit the Board
to effect a potential 3-for-1 split of the Company’s Common Stock in the form of a
stock dividend of 2 shares per outstanding share totaling 15,421,864 based on the
number of shares outstanding on September 22, 2022 [.]” Id. at 23. The Company did
not commit to implement the stock split.
The Proxy Statement reported that the Board recommended a vote in favor of
Proposal Four. The Proxy Statement did not disclose that Stahl and Oliver dissented
from the Board vote.
The Proxy Statement explained that in addition to the stock split, the
Company could “use its ability to issue additional Common Stock for other purposes
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in the future, including: the sale of securities to raise capital; payment of
consideration for acquisitions; payment of stock dividends; grants made to employees
under new or expanded existing compensation plans or arrangements; and other
corporate purposes.” Id.
The explanation for the Board’s recommendation elaborated on the Company’s
ability to use the additional shares for acquisitions:
An increase in the number of authorized shares of Common Stock would
also provide the Company with flexibility with respect to future
transactions, including acquisitions of additional assets where the
Company would have the option to use its Common Stock (or securities
convertible into or exercisable or exchangeable for Common Stock) as
consideration (rather than cash), financing future growth, financing
transactions and other general corporate purposes. Any of such
transactions, facilitated by the issuance of additional shares of Common
Stock, could have the potential to benefit the Company and stockholders
by, among other things, growing the Company’s business or assets,
increasing stockholder value, or increasing the marketability and
liquidity of the Common Stock.
Id. Later in the Proxy Statement, the Company reiterated that “the Company desires
to have the flexibility to use Common Stock as consideration for the acquisition of
additional assets.” Id. at 24. In the same paragraph, the Proxy Statement warned
that the lack of authorized shares could interfere with the Company’s ability to
pursue transactions:
The Board believes that, in the future, occasions may arise where the
time required to obtain stockholder approval might adversely delay or
prohibit the Company’s ability to enter into a desirable transaction or
deny it the flexibility to facilitate the effective use of its securities.
Therefore, failure to approve this Proposal Four, in addition to
prohibiting the Stock Split, could, in effect, prevent the Company from
pursing strategic acquisitions.
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Id. Although discussing potential acquisitions, the Proxy Statement stopped short of
disclosing the existence of the Strategic Acquisitions Committee.
Despite providing these disclosures, the Proxy Statement cautioned that
“[o]ther than with respect to the Stock Split and under the Incentive Plans, the
Company does not have any present intention to issue Common Stock in the
immediate future.” Id. The Company further cautioned that “[t]he submission of this
Proposal Four is not part of any other existing plan of the Board to engage in any
transaction that would require the proposed increase.” Id.
J. Horizon And SoftVest Oppose Proposal Four.
Horizon and SoftVest mobilized against Proposal Four. On October 10, 2022,
Horizon’s general counsel emailed a representative working at the New York Stock
Exchange asking for clarification on whether Proposal Four was properly deemed a
routine matter under NYSE Rule 452. He wrote:
In previous public fillings and conference calls, the company has
indicated that the purpose of increasing shares is to effectuate mergers
and/or acquisitions.
While I understand that generally amendments to a certificate of
incorporation can be deemed routine matters, my understanding is that
matters relating to mergers and acquisitions are non-routine. As such,
can you kindly confirm that this mater [sic] has been properly coded as
routine and provide the basis for the same?
JX 440. The New York Stock Exchange answered that Proposal Four was “routine,”
explaining “[i]f there was a definitive agreement for an M&A transaction (that
required shareholder approval) and they needed shares to fund that transaction, we
would then deem it non-routine but just providing indications of interest would not
cause the proposal to be non-routine.” Id.
15
A few days later, Horizon and SoftVest expanded their efforts. On October 12,
2022, Oliver texted Company stockholder, Minor Alexander stating “Hope all is well
with you and the family! Let me know a good time to go over the TPL proxy.” JX 437.
Alexander responded the same day, stating “That would be great. How about
tomorrow morning 10 AM?” Id. At trial, Oliver admitted to having “some influence”
over Alexander. Oliver Tr. 280.
On October 15, 2022, a Company stockholder texted Oliver, stating “I wanted
to vote TPL the way that helps you the most. Can you direct me?” JX 444. Oliver
responded, “Y[es] Call me when you want to discuss.” Id.4
On October 17, 2022, a Company investor posted a sample ballot on his blog
that voted against Proposal Four. JX 450 at 3. That same day, Oliver forwarded the
ballot to other stockholders with the message “Do this!” JX 448, JX 449, JX 453. The
recipients understood that Oliver was instructing them to vote against Proposal Four.
E.g., JX 453.
One of the recipients was Alexander, whom Oliver reached out to regarding
the proxy days earlier. JX 449. Alexander responded: “Will Do! I’ve sent this out and
spreading the word! Keep up the great work Eric!” Id. At Oliver’s direction, Alexander
lobbied other stockholders by forwarding the ballot and including messages like “I
caught up with [Oliver] recently and he said there is another crucial TPL proxy vote
4 At trial, Oliver refused to admit that the “Y” at the beginning of his response to the
stockholder’s request meant yes. Oliver Tr. 281–82. Given the context, that testimony was
not credible.
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coming up soon. He suggested voting as attached. I can better explain in person if you
have any questions.” JX 451 at 3–7. In other correspondence, Alexander noted that
Oliver “asked If I would help spread the word to other shareholders.” Id. at 4.5.
Oliver had other conversations in which he advocated against Proposal Four.
On November 3, 2022, Mark Clift, an investment advisor, texted Oliver asking, “What
are your thoughts on how I should encourage my investors to vote on the TPL Proxy?”
JX 482. Oliver responded, “Call me[.]” Id. On November 8, in a text conversation with
Alexander, Clift confirmed that “I talked to [Oliver]. I encourage all my investor [sic]
vote no on issuance of more shares and yes on all other.” JX 502.
On November 9, 2022, a stockholder reached out to Oliver regarding Proposal
Four. JX 509. The stockholder wrote, “Wanted to get your take on the TPL vote for a
split and additional share issuance. Any guidance would be great.” Id. Oliver
responded by stating: “There is a blog I’ll send you a link. He has a recommended
ballot.” Id.
K. The Company’s Fight Letter
The Company campaigned in favor of Proposal Four. On November 8, 2022,
the Company issued a letter to the stockholders advocating that they approve
Proposal Four. JX 511 at 2–7 (the “Fight Letter”).
The Fight Letter touted in bold font that “all three proxy advisory firms – ISS,
Glass Lewis and Egan Jones – have recommended that stockholders vote FOR
5 At trial, Oliver could not recall whether he asked Alexander to spread the word.
Oliver Tr. 286. Given Oliver’s recall of other events, his failure of memory seemed selective.
17
Proposal 4.” Id. at 2 (emphasis removed). The Company then quoted from each report,
including the following passage from Glass Lewis:
The Company currently does not currently have sufficient shares
available for issuance to meet its existing obligations. We are concerned
that the Company is unable to meet its current and potential obligations
and believe it is important that the Company obtain additional common
shares available for issuance in the future.
Id.
On cross-examination at trial, Company director Karl F. Kurz was asked about
the accuracy of the statement that the Company “does not currently have sufficient
shares available for issuance to meet its existing obligations.” Kurz Tr. 68. He
testified that the Company could meet its existing obligations and admitted that the
statement appeared false. Id.
L. Horizon and SoftVest Vote Against Proposal Four.
Horizon and SoftVest (the “Investor Group”) voted their shares against
Proposal Four. On November 15, 2022, the Company disclosed their votes.
On the morning of November 16, 2022—the date of the annual meeting—the
Company announced its intent to keep the polls open and adjourn the 2022 annual
meeting “only with respect to [Proposal Four] … if [Proposal Four] does not receive
the requisite number of votes at the Annual Meeting and the failure of [the Investor
Group] to vote in support of [Proposal Four] is determinative of such outcome.” PTO
¶ 64; JX 533 at 2.
Proposal Four did not receive sufficient votes to pass at the meeting. If the
Investor Group had voted in favor of Proposal Four, then it would have passed. The
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Company announced that the polls were closed as to all items other than Proposal
Four and adjourned the meeting as to Proposal Four. PTO ¶ 65.
M. The Company Files Suit.
To enforce the Voting Commitment, the Company filed this action under
Section 225 of the Delaware General Corporation Law (“DGCL”). On February 14,
2023, the Company reconvened the annual meeting and adjourned it again until May
18, 2023, shortly after the scheduled trial.
After a one-day trial on April 17, 2023, the Company issued supplemental
disclosures designed to address issues that the Investor Group had focused on at
trial.6 Those disclosures came seven months after the issuance of the Proxy
Statement and six months after the annual meeting. Technically, however, the polls
remained open on Proposal Four.
First, the Company sought to address the Proxy Statement’s failure to disclose
that Stahl and Oliver had dissented from the Board’s recommendation in favor of
Proposal Four. The supplemental disclosure stated:
In its proxy materials, the Company disclosed that the Board approved
the adoption of the Authorized Shares Amendment. As the Investor
Group stated publicly during the above-referenced trial, the Board’s
adoption of the resolution recommending that stockholders consider and
vote in favor of the adoption of the Authorized Shares Amendment was
not unanimous. The resolution was adopted by an 8-to-2 Board vote,
with Messrs. Stahl and Oliver dissenting. The Board acts as a governing
body and as a matter of policy, the Company does not disclose specific
votes by members of its Board or Board votes in general, unless required
6 Texas Pacific Land Corporation, Schedule 14A (Apr. 25, 2023),
https://www.sec.gov/Archives/edgar/data/1811074/000110465923049181/tm2313614-
1_defa14a.htm.
19
by [the federal securities laws] or other applicable law, and expects to
continue that practice in the future.7
Next, the Company sought to address the quotation from the Glass Lewis
report in the Fight Letter, which Kurz had testified at trial was false. The
supplemental disclosure stated:
As of today, the Company does not, and at the time of the Stockholder
Letter, the Company did not, have sufficient shares available for
issuance to meet its potential obligations with respect to all awards that
could potentially be issued under its stockholder-approved incentive
plans. However, the Company does have, and at the time of the
Stockholder Letter did have, sufficient shares available for issuance
from stock held in treasury to meet current and then-existing
obligations for awards issued under the incentive plans. Furthermore,
the Board of Directors of the Company (the “Board”) and Compensation
Committee has no current intention of issuing any awards under the
incentive plans for which the Company would not be able to meets its
obligations to deliver common stock. Moreover, further to disclosures by
the Company in its Annual Reports on Form 10-K for the period ended
December 31, 2021 and for the period ended December 31, 2022, the
Company continues to believe that cash from operations, together with
its cash and cash equivalents balances, will be sufficient to meet ongoing
capital expenditures, working capital requirements and other cash
needs for the foreseeable future.8
Finally, the Company sought to address the Proxy Statement’s failure to reveal
the existence of the Strategic Acquisitions Committee. The supplemental disclosure
stated:
As the Investor Group also stated publicly during the above-referenced
trial, the Company has an ad hoc special committee (the “Ad Hoc
Strategic Acquisitions Committee”). On February 11, 2022, the Board
unanimously approved the formation of the Ad Hoc Strategic
Acquisitions Committee. The Committee has no power to approve any
7 Id.
8 Id.
20
potential transaction, and instead was created to review, analyze and
assess potential acquisitions and make one or more recommendations to
the Board regarding any such potential acquisitions. Directors
Duganier, Epps, Kurz and Best serve on the Ad Hoc Strategic
Acquisitions Committee; each Board member has attended at least one
meeting of the Committee; and any member of the Board may attend
any meetings of the Ad Hoc Strategic Acquisitions Committee or any
other committee of the Board, absent any potential conflicts. Since its
formation, the Ad Hoc Strategic Acquisitions Committee has not
recommended any potential acquisitions that would involve the issuance
or use of stock to the Board for approval. As a matter of policy, the
Company does not disclose ad hoc committees of its Board, unless
required by [the federal securities laws] or other applicable law, and
expects to continue that practice in the future. 9
The voting totals changed insignificantly after the issuance of the supplemental
disclosure.
The Company planned to reconvene the meeting on May 18, 2023, and possibly
adjourn it again if the court had not issued a decision. The Company believed that
keeping the polls open could be necessary so that the court could grant specific
enforcement of the Voting Commitment. But the Company had not updated the
record date for the meeting, and there was a serious risk that the record date already
had become stale.
To avoid the need for an expedited decision and to head off a potential fight
over the validity of a vote based on a stale record date, the court indicated that the
effectiveness of the vote on Proposal Four would rise or fall based on the vote count
for Proposal Four as it existed when the polls closed on the other proposals in
November 2022, plus the Investor Group’s votes if the Company proved that the
9 Id.
21
Voting Commitment required a favorable vote. On May 18, 2023, the Company
reconvened the annual meeting and closed the polls on Proposal Four, subject to this
court’s decision.
II. LEGAL ANALYSIS
The Company asserts that the Investor Group breached the Voting
Commitment by failing to vote in favor of Proposal Four. The Investor Group contends
that exceptions to the Voting Commitment permitted them to vote against Proposal
Four. The Investor Group also contends that the Company has unclean hands
because the Board did not disclose all material information when soliciting votes on
Proposal Four. The Company disputes that it has unclean hands and responds that
the Investor Group cannot raise an unclean hands defense because of the Investor
Group’s own inequitable acts, including campaigning against Proposal Four in
violation of the Standstill.
A. Governing Principles of Contract Law
The claim for breach of the Voting Agreement is a claim for breach of contract.
That claim is governed by Delaware law. SA § 13.
Under Delaware law, a breach of contract claim requires “(i) a contractual
obligation, (ii) a breach of that obligation by the defendant, and (iii) a causally related
injury that warrants a remedy, such as damages or in an appropriate case, specific
performance.” AB Stable VIII LLC v. Maps Hotels & Resorts One LLC, 2020 WL
7024929, at *47 (Del. Ch. Nov. 30, 2020), aff’d, 268 A.3d 198 (Del. 2021) (citation
omitted). No one disputes that the Voting Commitment is a binding obligation.
22
When determining the scope of a contractual obligation, “the role of a court is
to effectuate the parties’ intent.” Lorillard Tobacco Co. v. Am. Legacy Found., 903
A.2d 728, 739 (Del. 2006). The “parties’ intent” is a term of art. Rather than referring
to what the parties’ subjectively believed, it refers to the parties’ shared intent as
“would be understood by an objective, reasonable third party.” Salamone v. Gorman,
106 A.3d 354, 367–68 (Del. 2014) (cleaned up).
If the contractual language is clear, the court “will give priority to the parties’
intentions as reflected in the four corners of the agreement, construing the agreement
as a whole and giving effect to all its provisions.” In re Viking Pump, Inc., 148 A.3d
633, 648 (Del. 2016) (internal quotations omitted). “[T]he meaning which arises from
a particular portion of an agreement cannot control the meaning of the entire
agreement where such inference runs counter to the agreement’s overall scheme or
plan.” E.I. du Pont de Nemours & Co. v. Shell Oil Co., 498 A.2d 1108, 1113 (Del. 1985).
A writing is clear “[w]hen the plain, common, and ordinary meaning of the words
lends itself to only one reasonable interpretation.” Sassano v. CIBC World Mkts.
Corp., 948 A.2d 453, 462 (Del. Ch. 2008).
By contrast, if a writing is ambiguous, then a court must look to other sources
to determine what any objectively reasonable third party would have understood the
parties’ intent to be. United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810, 834–35
(Del. Ch. 2007). “[A] contract is ambiguous only when the provisions in controversy
are reasonably or fairly susceptible of different interpretations or may have two or
more different meanings.” Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co.,
23
616 A.2d 1192, 1196 (Del. 1992). “A contract is not rendered ambiguous simply
because the parties do not agree upon its proper construction.” Id. Nor is a contract
unambiguous simply because both sides contend that its meaning is plain. See
Sunline Com. Carriers, Inc. v. CITGO Petroleum Corp., 206 A.3d 836, 847 n.68. (Del.
2019).
If the ambiguity appears “in a negotiated bilateral agreement, extrinsic
evidence should be considered if it would tend to help the court interpret such a
provision.” SI Mgmt. L.P. v. Wininger, 707 A.2d 37, 43 (Del. 1998). But if one party
has drafted a contract unilaterally and presented it on a take-it-or-leave-it basis, then
any ambiguities “must be construed against [the party] drafting and presenting” the
agreement. Id. at 42. That interpretive rule applies because a court looks to extrinsic
evidence with the expectation that the evidence can provide insight into the parties’
shared understanding. See id. at 43 “Therefore, unless extrinsic evidence can speak
to the intent of all parties to a contract, it provides an incomplete guide with which
to interpret contractual language.” Id. The interpretative principle in which
ambiguities are construed against the drafter is known as the doctrine of contra
preferentem. See, e.g., Bank of N. Y. Mellon v. Commerzbank Cap. Funding Tr. II, 65
A.3d 539, 551–52 (Del. 2013).
When looking to extrinsic evidence, a court may consider “any admissible
extrinsic evidence that may shed light on the expectations of the parties at the time
they entered into the [a]greement.” Eagle Indus., Inc. v. DeVilbiss Health Care, Inc.,
702 A.2d 1228, 1233 (Del. 1997). Possible sources include “correspondence between
24
the parties, drafts of the [a]greement[,] and drafting session notes.” Id. Other possible
sources include “overt statements and acts of the parties, the business context, prior
dealings between the parties, and business custom and usage in the industry.”
Salamone, 106 A.3d at 374 (cleaned up). In addition, “[w]hen construing ambiguous
contractual provisions, Delaware courts are permitted to consider the parties’ course
of dealing.” Viking Pump, 148 A.3d at 648. Some sources of extrinsic evidence,
however, are not admissible. For example, “the private, subjective feelings of the
negotiators are irrelevant and unhelpful to the Court’s consideration of a contract’s
meaning.” United Rentals, 937 A.2d at 835.
“After examining the relevant extrinsic evidence, a court may conclude that,
given the extrinsic evidence, only one meaning is objectively reasonable.” Salamone,
106 A.3d at 374 (citation omitted). In a heavily negotiated agreement, that
interpretation generally will be what the court regards as “‘the most reasonable
meaning of the words used, when interpreted in the particular setting, including the
course of negotiation and relevant commercial practices. Harrah’s Ent., Inc. v. JCC
Hldg. Co., 802 A.2d 294, 313 (Del. Ch. 2002) (citation omitted).
These principles apply to cases—like this one—that involve stockholder voting
rights. If management has drafted an ambiguous provision addressing voting
rights—or a related subject like nomination rights—and presented it on a take-it-or-
leave-it basis to investors, then the court does not look to extrinsic evidence to resolve
the ambiguity but rather applies the principle of contra proferentem to reach a result
consistent with the traditional expectations. Id. at 311–12; accord Centaur P’rs, IV v.
25
Nat’l Intergroup, Inc., 582 A.2d 923, 927 (Del. 1990) (requiring that limitations on
voting rights be “clear and unambiguous”). But when parties have negotiated over
the restriction, then a court will consider extrinsic evidence. Harrah’s, 802 A.2d at
313. In that setting, however, it remains “important to give substantial weight to the
important public policy interest against disenfranchisement.” Id. Delaware law
promotes that interest by requiring that any restriction on voting rights “be
manifested in clear and convincing evidence.” Id.; accord Salmone, 106 A.3d at 370–
71 (adopting the logic of Harrah’s).
For the Stockholders Agreement, there is one remaining twist, because the
parties agreed on the following provision:
Interpretation and Construction. Each of the parties acknowledges that
it has been represented by counsel of its choice throughout all
negotiations that have preceded the execution of this Agreement, and
that it has executed this Agreement with the advice of such counsel.
Each party and its counsel cooperated and participated in the drafting
and preparation of this Agreement, and any and all drafts relating
thereto exchanged among the parties will be deemed the work product
of all of the parties and may not be construed against any party by
reason of its drafting or preparation. Accordingly, any rule of law or any
legal decision that would require interpretation of any ambiguities in
this Agreement against any party that drafted or prepared it is of no
application and is hereby expressly waived by each of the parties, and
any controversy over interpretations of this Agreement will be decided
without regard to events of drafting or preparation.
SA § 17(g) (emphasis added). Until the last seventeen words, that provision operates
as a standard disclaimer of contra proferentem, which is common and unobjectionable
in in bilateral agreements between similarly situated parties. J. Travis Laster &
Kenneth A. Adams, Nice Try, 101 Judicature 32, 34 (2017) (“[C]ourts shouldn’t object
26
if contract parties who negotiate a transaction from a position of comparative equality
elect to make it explicit that contra proferentem doesn’t apply.”).
The last seventeen words, however, are different. There, the parties agree to
forego presenting evidence on the “events of drafting or preparation” (the “No
Drafting History Clause”). Both sides agree that the No Drafting History Clause
means what it says, but the Company argues that the provision is unenforceable.
Courts “will generally uphold the right of the parties to prescribe certain []
rules of evidence in the event of a lawsuit arising from an alleged breach of their
contract, so long as it does not unduly interfere with the inherent power and ability
of the court to consider relevant evidence.” 7 Williston on Contracts § 15:13 (4th ed.),
Westlaw (database updated May 2023) (footnotes omitted). A standard integration
clause is one such provision. See id. The question, therefore, is whether the No
Drafting History Clause goes so far that it unduly interferes with the ability of the
court to consider relevant evidence.
A realistic answer to that question must acknowledge that parties agree all the
time to limit the sources of evidence that a court will consider. They do so when
agreeing on who will serve as document custodians, the time period to use for
collecting documents, and what search terms to use. They do so when agreeing on
what witnesses to depose and how long depositions will last. They do so when
agreeing to procedural caps on the number of document requests, interrogatories, and
requests for admissions. And they do so when agreeing on the length of trial, the
witnesses who will appear, and the exhibits that will be admitted. Parties can even
27
stipulate to a decision on a written record, thereby foregoing live testimony. E.g. Ch.
Ct. R. 56(h).
At times, a court might determine that good cause exists to relieve a party of
its agreement or reject party agreements that interfere with the court’s inherent
authority to control its docket, but the vast majority of party agreements are
respected and enforced.10
10 Indeed, the Delaware Supreme Court has made clear that some party agreements
on the presentation of evidence must be respected by the trial court. Holifield v. XRI Inv.
Hldgs. LLC, --- A.3d ---, --- 2023 WL 5761367, at *31–34 (Del. Sept. 7, 2023). In Holifield, the
parties did not ask to bifurcate the proceedings into a liability phase and a damages phase
before trial, and I held what I thought was a single trial on all issues. The plaintiff did not
present any evidence on damages, but in its post-trial brief, the plaintiff mentioned in four
places that it had the right to recover damages. At the conclusion of a post-trial decision that
was intended to address the case as a whole, I asked the parties to submit a final order or to
agree on the issues that needed to be addressed before a final order could be entered. That
request was intended to smoke out any lingering issues that needed to be resolved before the
case could be wrapped up, not to open the door to new trials on issues that could have been
part of the original trial. The parties, however, submitted a stipulation for entry of a partial
final judgment under Rule 54(b) that contemplated a second trial to address damages and to
litigate five other issues.
Whether to bifurcate a case is an issue for the trial court’s discretion. Ch. Ct. R. 42;
cf. Younce v. Glaxosmithkline, LLC, 2023 WL 7158056, at *1 (Del. Super. Oct. 30, 2023)
(interpreting analogous Superior Court rule); Wallace v. Keystone Ins. Gp., 2007 WL 884755,
at *1 (Del. Super. Mar. 22, 2007) (same). Whether to permit a party to supplement the record
is an issue for the trial court’s discretion. Rappa v. Hanson, 209 A.2d 163, 165 (Del. 1965).
Whether to enter a judgment under Rule 54(b) is an issue for the trial court’s discretion. E.g.,
Stein v. Orloff, 504 A.2d 572 (Del. 1986). Docket control generally is an issue for the trial
court’s discretion. See Sammons v. Drs. for Emergency Servs., P.A., 913 A.2d 519, 528 (Del.
2006) (TABLE) (“The trial court has discretion to resolve scheduling issues and to control its
own docket.” (cleaned up)); accord Valentine v. Mark, 873 A.2d 1099 (Del. 2005) (TABLE).
Believing for at least four reasons that the issues of post-trial bifurcation and
supplementing the record were within my discretion, I rejected the stipulated partial final
judgment and, in an abbreviated ruling, explained that those issues had not been sufficiently
preserved to warrant further litigation. The plaintiff appealed that decision, and the
defendant who had agreed to the stipulation was hardly in a position to argue against it. The
Delaware Supreme Court ruled that rejecting the parties’ stipulation constituted reversible
error as a matter of law. Holifield, 2023 WL 5761367, at *31–32. The high court directed me,
28
Each of those agreements affects the nature of the evidence that a court
receives. Those agreements do not violate any principle of law; they are essential to
the orderly conduct of litigation.
The only difference between those agreements and the No Drafting History
Clause is that the former are made after litigation arises, while the latter was reached
on a clear day, before any dispute. Parties likely could agree to a no-drafting history
arrangement after litigation arises, and there does not seem to be any reason why
they should not be able to agree to the No Drafting History Clause in advance.11 When
parties reach such an agreement when contracting, they do not know whose ox the
provision will gore, so it is more likely that the arrangement is efficient.12
on remand, to consider the issues that were the subject of the parties’ stipulated order and
nominally left it “to [my] discretion as to whether and how the record might need to be
supplemented.” Id. at *34. Because the parties presented no evidence on damages at the first
trial, and because the Delaware Supreme Court ordered me to address that issue on remand,
the parties’ stipulation means that I must hold a second trial and receive evidence on
damages. For present purposes, the Holifield decision demonstrates that parties can reach
agreements that bind the court as to what evidence it must consider.
11 In other contexts, Delaware courts generally favor decisions made on a clear day
over decisions made in the heat of a conflict. Cf. BlackRock Credit Allocation Income Tr. v.
Saba Cap. Master Fund, Ltd., 224 A.3d 964, 980 (Del. 2020) (upholding advanced notice
bylaw adopted on a clear day); Openwave Sys., Inc. v. Harbinger Capital P’rs Master Fund I,
Ltd., 924 A.2d 228, 242–44 (Del. Ch. 2007) (applying business judgment rule to decision to
reduce size of board to eliminate vacant seats where directors acted on a clear day with no
proxy contest imminent).
12 Cf. John Rawls, A Theory of Justice: Revised Edition 120–21 (1999) (“No one knows
his situation in society nor his natural assets, and therefore no one is in a position to tailor
principles to his advantage. We might imagine that one of the contractees threatens to hold
out unless the others agree to principles favorable to him. But how does he know which
principles are especially in his interests?”).
29
A Delaware court’s answer to whether the No Drafting History Clause unduly
limits the court’s consideration of relevant evidence also must account for the
contractarian paradigm that has come to dominate Delaware jurisprudence. “To say
that Delaware prides itself on the contractarian nature of its law risks
understatement.” New Enter. Assocs. 14, L.P. v. Rich, 295 A.3d 520, 565 (Del. Ch.
2023). Sophisticated parties can and should “make their own judgments about the
risk they should bear,” and Delaware courts are “especially chary about relieving
sophisticated business entities of the burden of freely negotiated contracts.” Abry P’rs
V, L.P. v. F & W Acq. LLC, 891 A.2d 1032, 1061–62 (Del. Ch. 2006).
The No Drafting History Clause is a rational way for parties to address known
risks. One known risk is the impossibility of contracting completely and perfectly by
both anticipating every possible future state of the world and addressing what should
happen in each future state through clear language. “No contract, regardless of how
tightly or precisely drafted it may be, can wholly account for every possible
contingency.” Amirsaleh v. Bd. of Trade of City of N.Y., Inc., 2008 WL 4182998, at *1
(Del. Ch. Sept. 11, 2008). “In only a moderately complex or extend[ed] contractual
relationship, the cost of attempting to catalog and negotiate with respect to all
possible future states of the world would be prohibitive, if it were cognitively
possible.” Credit Lyonnais Bank Nederland, N.V. v. Pathe Commc’ns Corp., 1991 WL
277613, at *23 (Del. Ch. Dec. 30, 1991) (Allen, C.). And language is an inherently
imprecise medium that is invariably subject to interpretation (albeit often within a
30
sufficiently tight range that the meaning can be regarded as clear). 13 Ambiguity is a
known risk, and parties can contract to address that risk.
Litigation expense is another known risk. Legal scholars generally posit that
if the outcome a court will reach is tolerably certain, then parties will anticipate that
outcome and act accordingly.14 A corollary of that principle is that the cases a court
sees involve outcomes that are difficult to predict.15 For contracting parties, that
means that the cases they can expect to litigate should be more likely to involve
ambiguities, survive motions to dismiss, result in discovery, be unsuitable for
summary judgment, and reach trial.16 Faced with such a prospect, parties could
rationally seek to constrain the topics for discovery and trial. Parties might believe
that exploring the drafting history and course of negotiations will be expensive, or at
13 For a discussion of these issues in the context of constitutional interpretation, see
Paul E. McGreal, There Is No Such Thing As Textualism: A Case Study in Constitutional
Method, 69 Fordham L. Rev. 2393, 2436–48 (2001). See also FEDERALIST NO. 37, at 229
(James Madison) (Clinton Rossiter ed., 1961) (“The use of words is to express ideas.... But no
language is so copious as to supply words and phrases for every complex idea, or so correct
as not to include many equivocally denoting different ideas.”).
14 See Lynn A. Stout, Type I Error, Type II Error, and the Private Securities Litigation
Reform Act, 38 Ariz. L. Rev. 711, 714 (1996) (discussing George Priest & Benjamin Klein, The
Selection of Disputes for Litigation, 13 J. Legal Stud. 1 (1984)).
15See id. Or at least that should hold true for parties with comparable access to
resources and similar expectations. One can posit exceptions due to asymmetric information,
disparate resources, or other factors. See generally Keith N. Hylton, An Asymmetric-
Information Model of Litigation, 22 Int’l Rev. L. & Econ. 153, 154 (2002).
16 I say “should” because judges are fallible. A judge could prematurely dispose of a
case as a matter of law by erroneously determining that an ambiguous provision has a clear
meaning (a Type I error, or a false positive). A judge might also erroneously determine that
an unambiguous provision is ambiguous (a Type II error or false negative).
31
least more trouble than it is worth. The No Drafting History Clause is a rational
response.
Other rational reasons for excluding drafting history also exist. Parties might
believe that for a court to consider drafting history makes the outcome less
predictable. If parties want a more predictable result, then they would opt for the No
Drafting History Clause. Or parties might believe that considering drafting history
helps a court get it right, while also believing that greater uncertainty is a virtue if it
makes parties less likely to sue and more likely to settle. On that view, parties again
would opt for the No Drafting History Clause, albeit as a check on litigation.
The fact that the parties could have a variety of sound reasons for agreeing to
the No Drafting History Clause supports its enforcement. The clause could be serving
a number of valid purposes, and it is not necessary to determine which might apply.
Enforcing the clause also seems warranted because it does not unduly burden
the court’s ability to consider relevant evidence. It allows the parties to agree on what
evidence is relevant. That agreement is no different than other agreements that
parties reach in the course of litigating a case.
The No Drafting History Clause also does not mean that the court cannot
consider any extrinsic evidence. It only forecloses consideration of drafting history.
Other sources of extrinsic evidence remain pertinent, such as trade usage, custom
and practice, and the parties’ post-contracting course of conduct.
32
The court will therefore enforce the No Drafting History Clause and resolve
the case without giving weight to “the events of drafting or preparation.”17
B. The Clear Meaning Of The Voting Commitment
The parties agree that the Voting Commitment, standing alone, obligated the
Investor Group to vote in favor of Proposal Four. The clear meaning of the Investor
Group’s obligation therefore turns on the Transaction Exception, the Subject Matter
Exception, and the Conversion Plan Exclusion.
1. The Transaction Exception
The Investor Group first relies on the Transaction Exception, which applies to
any stockholder vote “related to an Extraordinary Transaction.” SA § 2(b)(i). The
Stockholders Agreement defines an Extraordinary Transaction as “any tender offer,
exchange offer, share exchange, merger, consolidation, acquisition, business
combination, sale, recapitalization, restructuring, or other matters involving a
corporate transaction that require a stockholder vote.” Id. § 16(a)(v).
Because the parties defined Extraordinary Transaction, determining the scope
of the Transaction Exception turns on what it means to be “related to” one of the list
17 The Company separately argues that the Investor Group waived its ability to invoke
the No Drafting History Clause by introducing evidence about the parties’ negotiations and
intentions. The Company cites Delaware Rule of Evidence Rule 105, which states, “[i]f the
court admits evidence that is admissible against a party or for a purpose--but not against
another party or for another purpose--the court, on timely request, must restrict the evidence
to its proper scope and instruct the jury accordingly.” D.R.E. 105. This is a bench trial, so the
court does not have to instruct a jury. The court can and will decide the case without relying
on drafting history.
33
of nouns and nominative phrases that appear in the definition. The court’s task does
not involve asking in the abstract whether a particular transaction is “extraordinary.”
The court also need not evaluate every noun and nominative phrases in the
definition. The Investor Group only relies on four: (i) merger, (ii) acquisition, (iii)
recapitalization, and (iv) “other matter involving a corporate transaction that require
a stockholder vote.”
a. Is Proposal Four Related To A Merger or Acquisition?
The Investor Group first argues that Proposal Four is “related to” a merger or
acquisition. Proposal Four clearly is not part of merger or an acquisition, but it still
could be “related to” a merger or an acquisition. The difficult question is how closely
related must it be.
The Company argues that to be sufficiently related to the transaction
triggering the Transaction Exception, the stockholder vote must be a component part
of an overarching transaction. In support of that view, the Company cites how the
New York Stock Exchange interprets Rule 452, which governs when brokers may vote
stock without instructions from its beneficial owner. Under that rule, a broker can
vote without instructions if the broker “has no knowledge of any contest as to the
action to be taken at the meeting and provided such action is adequately disclosed to
stockholders and does not include authorization for a merger, consolidation or any
other matter which may affect substantially the rights or privileges of such stock.”
NYSE Rule 452. Industry professionals colloquially refer to the kinds of proxy
proposals for which NYSE Rule 452 permits brokers to vote without instruction as
“routine” proposals. E.g., JX 701. An acquisition is not a routine proposal. Id.
34
As discussed in the Factual Background, Horizon’s general counsel asked the
New York Stock Exchange to address whether Proposal Four was routine in light of
the discussion in the Proxy Statement about potential acquisitions. JX 440. The New
York Stock Exchange confirmed that the vote on Proposal Four was routine,
explaining “[i]f there was a definitive agreement for an M&A transaction (that
required shareholder approval) and they needed shares to fund that transaction, we
would then deem it non-routine but just providing indications of interest would not
cause the proposal to be non-routine.” Id.
Under this interpretation, the Transaction Exception applies if the Company
proposes to acquire an asset using stock and conditions the transaction on a vote to
increase the Company’s authorized shares. The Transaction Exception also applies if
the acquisition is not conditioned on the vote, but there is a signed agreement to
acquire the asset and closing depends on increasing the authorized shares. Under
this interpretation, the Transaction Exception does not apply if the Company
proposes to increase its authorized shares before an agreement is reached.
The New York Stock Exchange interpretation is not binding, but the Company
contends that it reflects how transactional attorneys would expect the Transaction
Exception to operate. An obvious problem is that Rule 452 does not use the phrase
“related to.” It uses a different standard: whether the transaction “may affect
substantially the rights or privileges of such stock.” NYSE Rule 452. But it is
plausible that transactional attorneys negotiating the Transaction Exception might
still think in terms of familiar paradigms like Rule 452.
35
The Investor Group argues for a more flexible interpretation that turns on
whether there is a factual nexus between the vote and the transaction. Delaware
decisions generally interpret “related to” and its variants as permitting relatively
attenuated connections. When interpreting a forum selection provision, the Delaware
Supreme Court has held that “relating to” is a phrase that “sweeps broadly” and noted
that Delaware decisions have described it is a “paradigmatically broad term.” City of
Newark v. Donald M. Durkin Contracting, Inc., --- A.3d ---, ---, 2023 WL 5517793, at
*5 (Del. Aug. 28, 2023) (cleaned up). One of the decisions that the high court cited in
Durkin concerned indemnification and advancement rights, where this court
described the phrases “relating to,” “connecting with,” and “arising out of” as
“unquestionably broad in reach.” Lillis v. AT & T Corp., 904 A.2d 325, 331 (Del. Ch.
2006). Another decision from this court described the prepositional phrase “relating
to” as one of the “far-reaching terms often used by lawyers when they wish to capture
the broadest possible universe.” DeLucca v. KKAT Mgmt., L.L.C., 2006 WL 224058,
at *10 (Del. Ch. Jan. 23, 2006).
Using those definitions and pointing to the factual context from which Proposal
Four emerged, the Investor Group observes that the Company had been trying to
pursue a strategy of growth by acquisition, wanted to use stock to make acquisitions,
and had failed to secure the asset deal with Oxy or the merger with Brigham because
the Company lacked stock to use as currency. For the Investor Group, that is enough
to cause Proposal Four to be “related to” a merger or acquisition.
36
Most tellingly, the Investor Group points to the Proxy Statement, where the
Company explained that it could use the additional shares authorized by Proposal
Four “as consideration for the acquisition of additional assets.” JX 431 at 24. Later in
the Proxy Statement, the Company explained that it “desires to have the flexibility
to use Common Stock as consideration for the acquisition of additional assets” and
that “[a]uthorized but unissued shares of Common Stock may be used by the
Company from time to time as appropriate and opportune situations arise.” Id. And
at trial, the Company’s co-chairman acknowledged that “once [the shares] go into
authorized but unissued there’s multiple purposes for it. Of those purposes the
primary – the main one would be acquisitions.” Barry Tr. 314. The Investor Group
maintains that while in some cases it might be difficult to determine if a vote is
sufficiently “related to” a triggering event, this is an easy case because the Company
has acknowledged the linkage.
The Company responds to the factual nexus argument by arguing that even if
“related to” could accommodate a looser factual nexus, the clear language of the
Voting Commitment requires a specific transaction. The Company points out that the
Transaction Exception applies when a proposal is “related to an Extraordinary
Transaction.” SA § 2(b)(i) (emphasis added). The Transaction Exception does not use
alternative formulations that would accommodate prospective Extraordinary
Transactions or transactions generally, such as “is related to potential Extraordinary
Transactions” or “could lead to an Extraordinary Transaction.”
37
To that, the Investor Group answers with a basic point of grammar: English
speakers use the indefinite article “an” when they are not contemplating a specific
referent. “An indefinite article points to a nonspecific object, thing, or person that is
not distinguished from the other members of a class. The thing may be singular {a
student at Princeton}, or unaccountable {a multitude}, or generalized {an idea
inspired by Milton’s Paradise Lost}.” The Chicago Manual of Style § 5.72 (17th ed.
2017) (emphasis removed); see also Bryan A. Garner, The Redbook: A Manual on
Legal Style § 11.39 at 229 (4th ed. 2018) (“Use the definite article the to signal a
specific person, place, or thing; use the indefinite article a or an to signal a generic
reference.”).
Both sides have advanced reasonable interpretations of this aspect of the
Transaction Exception. I personally think the Investor Group has the relatively
stronger reading of “related to,” but I cannot conclude that the Company’s
interpretation is unreasonable. The combination of the Voting Commitment and the
exception based on whether the proposal is related to a merger or acquisition is
therefore ambiguous as applied to Proposal Four.
b. Is Proposal Four A Recapitalization?
The Investor Group next argues that Proposal Four is a “recapitalization.” This
argument bypasses the ambiguity inherent in “related to,” because if an increase in
the number of authorized shares is a recapitalization, then the Transaction Exception
applies.
The Delaware Supreme Court has held that “recapitalization” is a term that
“has no generally accepted meaning in law or accounting.” Wood v. Coastal States Gas
38
Corp. (Wood II), 401 A.2d 932, 939 (Del. 1979). Its meaning is “dependent on the
context in which it is used.” Wood v. Coastal States Gas Corp (Wood I), 1978 WL 2514,
at *7 (Del. Ch. Nov. 9, 1978), aff’d, 401 A.2d 932 (Del. 1979). Read in isolation, the
term is ambiguous.
Parties to an agreement can define the term “recapitalization,” but the
Stockholders Agreement does not. A court can also use context to give meaning to the
term. In the Transaction Exception, “recapitalization” is one enumerated example
within the following list: “any tender offer, exchange offer, share exchange, merger,
consolidation, acquisition, business combination, sale, recapitalization,
restructuring, or other matters involving a corporate transaction that require a
stockholder vote[.]” SA § 16(a)(v) (emphasis added). By including a recapitalization,
the parties seemingly thought they were adding something beyond what the other
terms covered, so it seems logical that a recapitalization means something other than
a tender offer, exchange offer, share exchange, merger, consolidation, acquisition,
business combination, sale, restructuring, or other matter involving a stockholder
vote. The context suggests that the meaning of recapitalization is broad and could
encompass an increase in a corporation’s authorized shares.
The Investor Group’s argument regarding the meaning of recapitalization is
all the stronger given the Company’s history. For 135 years, the Company and its
predecessor have not had any authorized but unissued shares. JX 51 at 15–16. The
Conversion Plan initially preserved that status quo. JX 144 at 3; JX 71 at 12. The
Investor Group argues that because increasing the authorized shares is a significant
39
departure from the Company’s historical practices, Proposal Four should be regarded
as a recapitalization.
Dictionary definitions provide another source of meaning.18 Meriam-Webster
defines “recapitalization” as “a revision of the capital structure of a corporation,”19
and it defines “capital structure” as “the makeup of the capitalization of a business
in terms of the amounts and kinds of equity and debt securities: the equity and debt
securities of a business together with its surplus and reserves.”20 An increase in the
number of authorized shares could fit within this definition as an increase in the
amount of the equity securities of a business.
Black’s Law Dictionary similarly defines “recapitalization” as
[a]n adjustment or recasting of a corporation’s capital structure—that
is, its stocks, bonds, or other securities—through amendment of the
articles of incorporation or merger with a parent or subsidiary. An
example of recapitalization is the elimination of unpaid preferred
dividends and the creation of a new class of senior securities.
Recapitalization, Black’s Law Dictionary (11th ed. 2019). Black’s Law Dictionary
defines “capital structure” as “[t]he mix of debt and equity by which a business
18 See, e.g., In re Solera Ins. Coverage Appeals, 240 A.3d 1121, 1132 (Del. 2020) (“This
Court often looks to dictionaries to ascertain a term’s plain meaning.”); Lorillard Tobacco
Co., 903 A.2d at 738. (“Under well-settled case law, Delaware courts look to dictionaries for
assistance in determining the plain meaning of terms which are not defined in a contract.”);
USA Cable v. World Wrestling Fed’n Ent. Inc., 766 A.2d 462, 474 (Del. 2000) (explaining that
a term generally should be “construed in accordance with its ordinary dictionary meaning.”).
19 Recapitalization, Merriam-Webster Dictionary, https://www.merriam-
webster.com/dictionary/recapitalization (last visited Nov. 30, 2023).
20 Capital Structure, Merriam-Webster Dictionary, https://www.merriam-
webster.com/dictionary/capital%20structure (last visited Nov. 30, 2023).
40
finances its operations; the relative proportions of short-term debt, long-term debt,
and capital stock.” Id., Capital Structure. And Black’s Law Dictionary defines “capital
stock” as “[t]he total number of shares of stock that a corporation may issue under its
charter or articles of incorporation, including both common stock and preferred
stock.” Id., Stock.
Chaining these definitions together, an increase in the number of authorized
shares changes the Company’s capital stock. A change in the Company’s capital stock
changes its capital structure. And a change in the Company’s capital structure is a
recapitalization. These dictionary definitions also favor the Investor Group.
But dictionary definitions are not a be all and end all. Words appear in
sentences, and their meaning depends on context. See U.S. v. Costello, 666 F.3d 1040,
1044 (7th Cir. 2012) (Posner, J.). Dictionaries present menus of meanings shorn of
context, leading one distinguished jurist to call them “museum[s] of words”21 and
another commentator to call them “word zoos.”22
The Company points to the Standstill under the principle that “[i]n n upholding
the intentions of the parties, a court must construe the agreement as a whole, giving
effect to all provisions therein.” E.I. du Pont de Nemours & Co., 498 A.2d at 1113. The
Standstill prevents the Investor Group from proposing
21 Frank H. Easterbrook, Text, History, and Structure in Statutory Interpretation, 17
Harv. J.L. & Pub. Pol’y 61, 67 (1994).
22 A. Raymond Randolph, Dictionaries, Plain Meaning, and Context in Statutory
Interpretation, 17 Harv. J.L. & Pub. Pol’y 71, 74 (1994).
41
(A) any change in the number or term of directors serving on the Board
or the filling of any vacancies on the Board,
(B) any change in the capitalization, dividend or share repurchase policy
of [the Company],
(C) any other change in the Trust’s or [the Company’s] business,
operations, strategy, management, governance, corporate structure, or
other affairs or policies,
(D) any Extraordinary Transaction,
(E) causing a class of securities of the Trust or TPL Corp to be delisted
from, or to cease to be authorized to be quoted on, any securities
exchange or
(F) causing a class of equity securities of TPL Corp to become eligible for
termination of registration pursuant to Section 12(g)(4) of the Exchange
Act;
SA § 3(g) (formatting and emphasis added). The Company concludes that this series
of terms demonstrates that “any change in the capitalization” of the Company must
mean something different than “any Extraordinary Transaction”; otherwise, the
refence to “any change in the capitalization” of the Company would be surplusage.
That is a strong argument, and it relies on “the assumption that the parties
never include superfluous verbiage in their agreement, and that each word should be
given meaning and effect by the court.” NAMA Hldgs., LLC v. World Mkt. Ctr.
Venture, LLC, 948 A.2d 411, 419 (Del. Ch. 2007), aff’d, 945 A.2d 594 (Del. 2008). But
as anyone who has spent time with legal documents knows, drafters are not perfect,
and parties often include redundancies and inconsistencies in their agreements,
whether strategically or unwittingly. The contrast between the Standstill and the
Transaction Exception weighs in favor of the Company’s interpretation and against
42
the Investor Group’s reliance on context and dictionary definitions, but it is not a
strong enough signal to establish the provision’s clear meaning.
Having served as judge on the Court of Chancery for over fourteen years and
as a corporate practitioner for a similar period before that, I have an admittedly
subjective sense of what constitutes a recapitalization. My sense is that a
recapitalization requires more than increasing the authorized shares. It generally
involves bringing in capital, as in “re” (again) capitalizing the entity. The new capital
could be equity or debt, but there is new money coming from somewhere. Consistent
with my subjective sense, The Oxford Learner’s Dictionary defines a “recapitalization”
as “the act of providing a company, etc. with more money, especially by replacing its
debt with stock (= shares in the business).”23
When recapitalization does not involve new money, my sense is that it
generally involves changing an element of the capital structure, either by converting
a class of equity into something else or by refinancing debt. Consistent with that
aspect of my subjective sense, some decisions have described a recapitalization as
involving “a reshuffling of a capital structure within the framework of an existing
corporation.” See Wood I, 1978 WL 2514, at *5; accord Bernstein v. Canet, 1996 WL
342096, at *5 (Del. Ch. June 11, 1996). My gut tells me that an increase in the number
of authorized shares should not be enough.
23 Recapitalization, The Oxford Learner’s Dictionary,
https://www.oxfordlearnersdictionaries.com/us/definition/english/recapitalization (last
visited Nov. 30, 2023).
43
Ultimately, both sides have advanced reasonable readings of the term
“recapitalization” as used in the Transaction Exception. On this aspect, I am inclined
to favor the Company’s interpretation, but I cannot conclude that the Investor
Group’s interpretation is unreasonable, particularly when the Company currently
has no ability to issue additional shares, and when Proposal Four will change that.
The reference to “recapitalization” in the Transaction Exception is ambiguous.
c. Is Proposal Four An “Other Matter[] Involving A
Corporate Transaction That Require[s] A Stockholder
Vote?”
Finally, the Investor Group argues that Proposal Four falls within the
Transaction Exception because it requires a charter amendment, which necessitates
a stockholder vote under the DGCL. See 8 Del. C. § 242. The Investor Group reasons
that Proposal Four is therefore a “matter[] involving a corporate transaction that
require[s] a stockholder vote.’” SA § 16(a)(b) (the “Catchall”). This argument also
sidesteps the “related to” problem, because if Proposal Four qualifies under the
Catchall, then the Transaction Exception applies.
Whether the Catchall has a clear meaning turns on the phrase “involving a
corporate transaction.” If the Catchall applied to “matters that require a stockholder
vote,” then any charter amendment would meet the test. But the Catchall includes
the concept of “a corporate transaction,” which indicates that not all matters
requiring a stockholder vote qualify.
To interpret the Catchall, the Company invokes the canon of ejusdem generis
provides, which teaches that
44
where general language follows an enumeration of persons or things, by
words of a particular and specific meaning, such general words are not
to be construed in their widest extent, but are to be held as applying only
to persons or things of the same general kind or class as those
specifically mentioned.
Aspen Advisors LLC v. United Artists Theatre Co., 861 A.2d 1251, 1265 (Del.
2004) (quoting Petition of State, 708 A.2d 983, 988 (Del. 1998)). In effect, the canon of
ejusdem generis “implies the addition of the word similar after the word other” in the
catchall language. Antonin Scalia & Bryan A. Garner, Reading Law: The
Interpretation of Legal Texts 199 (2012).
Using ejusdem generis, “a corporate transaction” means a transaction similar
to a “tender offer, exchange offer, share exchange, merger, consolidation, acquisition,
business combination, sale, recapitalization, [or] restructuring.” Those transactions
typically involve a counterparty other than the corporation and fundamentally
change the corporate form. In the abstract, increasing the number of authorized
shares of common stock would not qualify.
The Investor Group responds by citing cases in which courts have used the
word “transaction” to refer to a charter amendment, albeit without having had to
parse the term closely.24 The Investor Group also argues that an agreement must be
24 E.g., SI Mgmt., 707 A.2d at 43 n.14 (Del. 1998) (“[W]e express no opinion on the
admissibility of a proxy statement to supplement or explain the effect of a corporate
transaction (such as a merger or amendment to a certificate of incorporation) on which
stockholders are being asked to vote.”) (emphasis added); In re Wayport, Inc. Litig., 76 A.3d
296, 314 (Del. Ch. 2013) (discussing the duty of disclosure that applies “[w]hen directors
submit to the stockholders a transaction that requires stockholder approval (such as a
merger, sale of assets, or charter amendment) ….” (emphasis added)).
45
“read in full and situated in the commercial context between the parties” and that
“the basic business relationship between the parties [] be understood to give sensible
life to any contract.” Chi. Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166
A.3d 912, 926–27 (Del. 2017). The Investor Group asserts that for an entity that has
never had access to authorized but unissued shares in its 135-year history, an
increase in the authorized number of shares is transformative. In support of this
argument, the Investor Group cites testimony from Tyler Glover, the Company’s
CEO, who agreed that “the passage of Proposal 4 would be, in—in some senses, a—a
transformative moment for the Company in having that kind of currency for
acquisitions going forward.” Glover Dep. 121.
The Company responds by invoking another interpretive canon—expresio
unius est exclusio alterius. It means that “to express or include one thing implies the
exclusion of the other.” Fortis Advisors LLC v. Shire US Hldgs., Inc., 2017 WL
3420751, at *8 (Del. Ch. Aug. 9, 2017). The Company again cites the Standstill, which
specifically prohibits the Investor Group from seeking “to amend any provision of the
Governance Documents,” defined to include the Charter. SA § 3(e). The Company
asserts that because the Standstill specifically refers to charter amendments, the
omission of similar language from the Catchall demonstrates an intent to exclude
charter amendments from its scope. As with the reference to a recapitalization, that
is a strong argument, but it is not dispositive.
Each side has again offered a reasonable interpretation. This time I am
inclined to favor the Company’s position, particularly when considering the language
46
in the abstract. Yet in the context of an entity that has not issued equity in 135 years,
and where the parties left open the issue of whether the Company would be able to
issue additional equity after the conversion, the Investor Group’s argument cannot
be ruled out.
d. Summing Up
As applied to Proposal Four, the Transaction Exception is ambiguous. The
combination of the Voting Commitment and the Transaction Exception is therefore
ambiguous. Put differently, it is not possible to determine as a matter of clear
meaning whether the Transaction Exception applies to Proposal Four. It is therefore
not possible to determine as a matter of clear meaning whether the Voting
Commitment applies to Proposal Four.
2. The Subject Matter Exception
The Investor Group next turns to the Subject Matter Exception, which provides
that the Investor Group “shall not be required to vote in accordance with the Board
Recommendation for any proposals … (ii) related to governance, environmental or
social matters[.]” SA § 2(b)(ii). Just as determining the clear meaning of the Voting
Commitment requires considering the clear meaning of its exceptions, so too
determining the clear meaning of the Subject Matter Exception requires considering
the exception to the exception. That exception is the Conversion Plan Exclusion,
which restores the Voting Commitment “for any proposal relating to any corporate
governance terms that would have the effect of changing any of the corporate
governance terms set forth in the plan of conversion.” Id.
47
The Company argues that by using the phrase “governance, environmental or
social matters,” the parties only meant for the Subject Matter Exception to cover what
governance professionals would understand as falling within the concept of “ESG,”
such as the types of proposals that stockholders frequently advance under SEC Rule
14a-8 and which relate to subjects like climate change, human rights, and board
diversity. The Company argues that an increase in the number of authorized shares
does not fall within that concept of ESG.
The problem with this argument is that ESG has no settled meaning. As
Professor Elizabeth Pollman explains, “ESG as an acronym for ‘environmental, social,
governance’ is a common denominator of the discourse using the term, but a deeper
examination reveals that little beyond that understanding is fixed.”25 She identifies
the following four principal uses of ESG since the phrase originated in 2004.26
• In its original version, ESG was “a way of referring to a set of issues that should
be integrated into investment analysis.” Id at 21. In this modality, “ESG is
often broken into component parts of E, S, and G, and explained by reference
to underlying content that would be relevant to investor decision-making. In
this framing, ESG is not synonymous with ethical investing, but rather viewed
as integral to mainstream investment strategy.” Id.
• A second version uses ESG as a tool for managing risks that stakeholders
identify. Id. at 22–24. In this modality, “the values that ESG promotes do not
originate from an abstract moralistic philosophy of ‘doing the right thing,’ nor
25 Elizabeth Pollman, The Making and Meaning of ESG 3 (October 31, 2022), U of
Penn. Inst. for L. & Econ. Rsch. Paper No. 22-23, Eur. Corp. Governance Inst. - Law Working
Paper No. 659/2022, SSRN: https://ssrn.com/abstract=4219857.
26 Id. at 10 (citing The Global Compact, Who Cares Wins: Connection Financial
Markets To A Changing World (2004),
https://www.unepfi.org/fileadmin/events/2004/stocks/who_cares_wins_global_compact_2004.
pdf).
48
are they dictated by a central standard setter rather, they arise following a
wide-ranging consultation with stakeholders, who are better positioned to take
notice of potentially catastrophic company operations.” Id. at 23 (cleaned up).
• A third version equates ESG with “Corporate Social Responsibility” or
sustainability. Id. at 24. “In this understanding of ESG as a synonym for CSR,
it encompasses notions of moralistic or ethical value.” Id. at 25.
• A fourth version associates ESG with a set of ideological preferences. Id. In
this most controversial understanding, “investors and a wide range of
stakeholders seek to align their activities with an expression of their values,
whether political, ethical, or social, and ESG is a label vaguely signifying some
level of attention to issues beyond the purely financial.” Id. at 25–26.
Ultimately, Pollman explains that while “ESG” has a specific origin, it “is not a fixed
concept beyond the combination of three categories of issues that comprise the
acronym.” Id. at 46. Pollman concludes that “[t]he ambiguity of ESG and varying
usages … have facilitated buy-in from a great variety of market actors.”27
The same ambiguity that has been a strength in generating support for ESG
makes it difficult to use ESG as a concept with a clear meaning for purposes of
contract interpretation. It is likely possible to identify core ESG issues that would be
widely accepted as falling within its scope. It also likely possible to identify core ESG
issues for the Company, such as declassifying the Board, such as drilling on Company
land, committing to carbon neutral operations, or board refreshment. Beyond that
27 Id.; see Jennifer O’Hare, Don’t Forget the “G” In ESG: The SEC and Corporate
Governance Disclosure, 64 Ariz. L. Rev. 417, 422 (2022) (including chart providing examples
of relevant ESG criteria); Amanda M. Rose, A Response to Calls for SEC-Mandated ESG
Disclosure, 98 Wash. U.L. Rev. 1821, 1822 (2021) (explaining that “‘ESG’ is used as shorthand
for a dizzyingly broad array of ‘environmental,’ ‘social,’ and ‘governance’ topics affecting
businesses [including] climate change, human capital management, supply chain
management, human rights, cybersecurity, diversity and inclusion, corporate tax policy,
corporate political spending, executive compensation practices, and more.”) (footnote
omitted).
49
core, however, the concept becomes ambiguous. In the abstract, some governance
professionals might agree that increasing a corporation’s authorized shares is a
governance issue. Others might not. The Company has never had authorized but
unissued shares, meaning that increasing the authorized shares will give the board
the freedom to take action without seeking stockholder approval beyond anything the
Company could have done before. In that context, more governance professionals
might agree that the issue touches on governance, while others doubtless still would
not.
The Investor Group argues that for purposes of contractual analysis, each
individual term—“governance, environmental, or social matters”—must be given
independent meaning. The Investor Group contends that is all the more true for an
entity that has not had the ability to tap authorized but unissued shares at any point
in its 135-year history, and where the question of whether it could issue additional
shares was left off of the list of agreed-upon governance issues to be decided later.
When advancing this interpretation, the Investor Group starts with grammar.
They assert that by using the phrase “governance, environmental, or social matters”
the drafters of the Subject Matter Exception intended to afford separate meaning to
the terms. To use an analogy, the category of fuel-efficient, American-made, and
sporty vehicles differs from the categories of fuel-efficient, American-made, or sporty
vehicles. If we imagine a conceptual space of all possible vehicles, the categories of
fuel-efficient, American-made, or sporty vehicles could be three non-overlapping
50
subspaces. If, however, there is any area of overlap, then the reference to fuel-
efficient, American-made, and sporty vehicles captures it.
The Investor Group also observes that the terms “governance, environmental,
or social matters” appear in a different order than the familiar “environmental, social,
and governance” sequence that gives rise to the abbreviation ESG. To use a different
analogy, if the Navy routinely refers to its SEAL teams and everyone knows that
SEAL is an abbreviation for Sea, Air, and Land, a listener might think that a Navy
officer meant something different by referring to land, sea, or air teams. A listener
might infer that the officer meant the concept of land teams, the concept of sea teams,
or the concept of air teams. If a memo stated that consultation with the Naval Special
Warfare Command was not required for new “land, sea, or air teams,” a reader would
not likely think that the phrase referred to SEAL teams.
The Investor Group’s grammatical argument therefore makes some sense. But
the Company has responded by locating a mix of sources that vary the order of
“environmental,” “social,” and “governance” and which sometimes use “or” rather
than “and.” The Company found two examples in the Delaware code.28 It found others
28 See 12 Del. C. § 4703 (as amended Aug. 6, 2020) (“To the extent that sustainable
investment strategies align with the charitable purposes of the institution, an institution
managing and investing an institutional fund may take into account social, environmental
or governance values.”); 12 Del. C. § 3302 (“When investing … for the benefit of another …
the fiduciary may take into account the financial needs of the beneficiaries as well as the
beneficiaries’ personal values, including the beneficiaries’ desire to engage in sustainable
investing strategies that align with the beneficiaries’ social, environmental, governance or
other values or beliefs of the beneficiaries.”) (emphasis added).
51
in academic works,29 ISS publications,30 a corporate governance blog post,31 a law
firm client memo,32 and Horizon’s own prospectus.33 Some of those examples seem to
29 See Virginia Harper Ho, Risk-Related Activism: The Business Case for Monitoring
Nonfinancial Risk, 41 J. Corp. L. 647, 688 (2016) (finding that, “[c]onsistent with prior trends,
hedge funds sponsored no proposals related to corporate governance, environmental and
social, or executive compensation in the 2014 proxy season”) (second emphasis added); Yaron
Nili & Cathy Hwang, Shadow Governance, 108 Cal. L. Rev. 1097, 1128 n.170 (2020) (noting
that ISS “uses a numeric, decile-based score that indicates a company’s governance risk
across Governance, Environmental & Social pillars”) (emphasis added); Susan N. Gary,
Values and Value: University Endowments, Fiduciary Duties, and ESG Investing, 42 J.C. &
U.L. 247, 298 n.302 (2016) (explaining that a study of corporate social responsibility ratings
that was “based on policies and practices adopted by corporations with respect to corporate
governance, environmental and social issues”); see also Randall S. Thomas & Christoph Van
der Elst, Say on Pay Around the World, 92 Wash. U.L. Rev. 653, 704 n.298 (2015) (discussing
reports by an investment manager whose “major goals are to enhance corporate governance,
environmental and social performance and strategy”); Bernard S. Sharfman, The Conflict
Between Blackrock’s Shareholder Activism and ERISA’s Fiduciary Duties, 71 Case W. Res.
L. Rev. 1241, 1254 (2021) (describing how BlackRock “has ramped up its shareholder
activism” and divided its management engagement “into three themes: governance,
environmental, and social”).
30 JX 751 at 1 (Excerpt of ISS website describing tool for “ESG assessment of risk” and
stating “QualityScore uses a numeric, decile-based score that indicates a company’s
governance risk across Governance, Environmental & Social categories.”) (emphasis added);
JX 102 at 1 (2020 ISS press release announcing enhancements to its ISS ESG Country Rating
and stating “The ISS ESG Country Rating provides more than 100 quantitative and
qualitative rating factors for more than 120 countries. It includes industry leading coverage
of corporate governance, environmental and social issues ….”); JX 703 at 2–3 (2018 ISS press
release referring interchangeably to “environmental, social, and governance,” and
“governance, environmental, and social”); JX 705 at 1 (ISS blog post on Harvard Law School
Forum on Corporate Governance stating “mindful investors both strive and struggle to
monitor governance, environmental, and social issues”).
31 See JX 734 at 1 (blog post on Harvard Law School Forum on Corporate Governance
by Morrow Sodali stating “Governance, social and environmental proposals all increased in
volume in 2022.”).
32 JX 874 at 1 (Vinson & Elkins publication discussing current trends in ESG activism
and referring to activist investors “pursuing environmental, social, or governance (ESG)
goals ….”).
33See JX 1108 at 8 (Horizon prospectus referring to “environmental, social or
governance event or condition …;”).
52
envision ESG as a unitary concept. Others seem to refer to social matters,
environmental matters, and governance matters as distinct albeit related concepts.
The grammatical arguments are not sufficiently strong to establish a clear
meaning. That is particularly so when ESG itself lacks a clear meaning.
The Investor Group next turns to the Conversion Plan Exclusion, which
restores the Voting Commitment “for any proposal relating to any corporate
governance terms that would have the effect of changing any of the corporate
governance terms set forth in the [Conversion Plan].” SA § 2(b)(ii). Annex B lists
fifteen governance terms. Some of them fall within a common understanding of core
ESG issues, but others are more peripheral. The Investor Group points out that if the
concept of “governance” in the Subject Matter Exception only reached a narrow set of
core ESG issues, then there would be no reason for the Conversion Plan Exclusion.
The fact that the parties included the Conversion Plan Exclusion suggests that
otherwise, the reference to “governance” could sweep broadly. That is also a decent
argument.
The Company answers by again pointing to the Standstill. That provision bars
the Investor Group from proposing “any other change in the Trust’s or [the
Company’s] business, operations, strategy, management, governance, corporate
structure, or other affairs or policies.” SA § 3(g)(ii)(C) (emphasis added). The
Company argues that by only using the term “governance” in the Standstill, then
including the terms “social” and “environmental” in the Subject Matter Exception,
53
the drafters must have meant for the three terms to mean something different and
unique when used in combination.
That is one possibility. Concepts like “peanut butter and jelly” and “rock paper
scissors” have independent meaning. Someone who dislikes peanut butter and jelly
sandwiches might not dislike peanuts, butter, jelly, or sandwiches generally. But
putting words in a familiar order also does not mean that separate concepts
necessarily take on the meaning associated with that word order. If my spouse asks
me to pick up chocolate, ice, and cream, I should not grab chocolate ice cream.
If anything, the fact that “governance” appears in the Standstill as an
independent, standalone concept, then appears with “social” and “environmental” as
a series of terms joined by commas and modifying “matters,” makes it more likely
that the three terms are being used as standalone concepts. A court strives to
interpret words similarly when the same is term used in different places in the same
document.34 It therefore makes somewhat more sense that if “governance … policies”
stands alone, then “governance … matters” stands alone. The reference to
“governance … policies” in the Standstill thus marginally favors the Investor Group’s
interpretation.
34 JJS, Ltd. v. Steelpoint CP Hldgs., LLC, 2019 WL 5092896, at *6 (Del. Ch. Oct. 11,
2019) (listing contextual cannons of interpretation and including “the presumption of
consistent usage, which provides that ‘absent anything indicating a contrary intent, the same
phrase should be given the same meaning when it is used in different places in the same
contract.’”) (quoting Comerica Bank v. Glob. Payments Direct, Inc., 2014 WL 3567610, at *11
(Del. Ch. July 21, 2014)); see also Williston on Contracts, supra, § 32:6 (“Generally, a word
used by the parties in one sense will be given the same meaning throughout the contract in
the absence of countervailing reasons.”).
54
The Company’s more credible response notes that under the Investor Group’s
interpretation, the Subject Matter Exception would largely swallow the Voting
Commitment. The Investor Group’s witnesses asserted that the term “governance”
was so broad that they did not even need to vote with the Board on director elections.35
Yet it seems obvious that if the Voting Commitment means anything, it forces the
Investor Group to vote with the Board on director elections.
As applied to Proposal Four, the Subject Matter Exception is ambiguous. Each
side has offered a reasonable interpretation that could support the outcome it favors.
Based solely on the language of the Stockholders Agreement, the court cannot decide
between them. The combination of the Voting Commitment and the Subject Matter
Exception is therefore ambiguous as it applies to Proposal Four. Put differently, it is
not possible to determine as a matter of clear meaning whether the Subject Matter
Exception applies to Proposal Four, and it is therefore not possible to determine as a
matter of clear meaning whether the Voting Commitment applies to Proposal Four.
35 JX 577 at 4 (Investor Group’s verified interrogatory responses stating “Proposal 1
sought the election of Dana McGinnis. Horizon Kinetics is not bound to vote for the Board’s
recommendations on proposals ‘related to governance.’ Stockholders’ Agreement § 2(b).”); id.
at 10 (“Proposal 1 sought the election of Dana McGinnis. SoftVest is not bound to vote for the
Board’s recommendations on proposals ‘related to governance.’ Stockholders’ Agreement §
2(b).”); Oliver Dep. 63 (Q. And what under the Stockholders’ Agreement permitted you to vote
in a way that was not recommended by the Board? A. To me, a board of director is the ultimate
governance issues. And governance, environmental and social matters are excluded – are
carve-outs – for my obligation to vote … with the Board.”); Kesslen Dep. 216–17 (“director
elections are governance matters, to which Horizon retained authority to vote otherwise.”);
Kesslen Tr. 165 (“Q. … It’s your position that based on the governance, environmental or
social matters carve-out, that Horizon Kinetics can vote how it wishes on any director
election. We established that. Right? A. I think so.”).
55
3. The Conversion Plan Exclusion
The Company still can prevail as a matter of clear meaning if Proposal Four
plainly falls within the Conversion Plan Exclusion. That proviso ensures that the
Investor Group must comply with the Voting Commitment if a proposal would have
the effect of changing any of the corporate governance terms in the Conversion Plan.
The Company argues that Proposal Four conflicts with a term of the
Conversion Plan because, when the conversion was complete, the Company did not
have authority to issue more shares. That is descriptively accurate, but it was not an
agreed-upon governance term. To the contrary, the record demonstrates that the
Conversion Committee and the Trustees did not agree on whether the Company
would have authority to issue additional shares and tabled that issue. The
Conversion Plan left it open.
The Company points to Annex A, which notes that all of the Company’s shares
will be distributed to holders of Trust certificates. Annex A described the steps
involved in the Conversion Plan. Because there was no agreement on the Company
having authorized but unissued shares, Annex A described all of the shares as being
distributed at closing. That did not reflect an agreed-upon governance term in the
Conversion Plan. The agreed-upon governance terms were listed in Annex B. The
number of authorized shares was not one of them. That is precisely why debate
continued after the conversion was complete, ultimately giving rise to this case.
The clear language of the Conversion Plan Exclusion therefore does not cause
the Voting Commitment to apply to Proposal Four. That means that the application
of the Voting Commitment is ambiguous because the Transaction Exception and the
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Subject Matter Exception lack a clear meaning, which makes it impossible to
determine as a matter of clear meaning whether the Voting Commitment applies to
Proposal Four.
4. Extrinsic Evidence
Having found the Transaction Exception and the Subject Matter Exception are
ambiguous, the court must look to extrinsic evidence. Under Harrah’s, the Company
bore the burden of establishing a limitation on voting rights by clear and convincing
evidence, but no one disputes that the Voting Agreement limits the Investor Group’s
voting rights. Because the Investor Group seeks to establish an exception to the
Voting Commitment, the Investor Group has the burden of proving that the extrinsic
evidence supports the existence of an exception.36
For reasons already discussed, the No Drafting History Clause prevents the
court from considering drafts of the Stockholders Agreement or the negotiating
history. But there are other sources of extrinsic evidence that remain available. One
source is trade usage. Eagle Indus., 702 A.2d at 1232. To establish a trade usage, a
party must prove that the usage is
36 See, e.g., Menn v. ConMed Corp., 2022 WL 2387802, at *25 (Del. Ch. June 30,
2022) (holding that where the plaintiff proved that the defendants breached their obligation
under a stock purchase agreement, the defendants bore “the burden of proving the existence
of [an] exception”); Snow Phipps Gp., LLC v. Kcake Acq., Inc., 2021 WL 1714202, at *29 (Del.
Ch. Apr. 30, 2021) (“Kohlberg bore the initial, heavy burden of proving that an event had
occurred that had or would reasonably be expected to have a material adverse effect on
DecoPac. If Kohlberg met that burden, then Plaintiffs bear the burden of proving that the
relevant event fell within the exception ....” (cleaned up)); AB Stable VIII, 2020 WL 7024929,
at *51 (“Buyer had the burden to prove that Seller suffered an effect that was material and
adverse. After that, Seller had the burden to prove that the source of the effect fell within an
exception”).
57
certain, uniform, reasonable and general, and of long standing, or, at
least, of such long standing as to have become so generally known,
recognized and acted on by the trade, as to raise a fair presumption that
the parties in entering into their engagements, did so with a silent
reference to the usage, and a tacit agreement that their rights and
responsibilities should be determined by it.
Paciaroni v. Crane, 408 A.2d 946, 954 (Del. Ch. 1979) (cleaned up). The Company
relied on Stephen M. Haas, a respected transactional attorney, for expert testimony
about whether the Transaction Exception applied. Haas conducted a survey of 276
agreements settling director election contests between from 2017 and 2023. JX 601
¶¶ 28–29. He identified eighteen that “specifically excluded either (i) amendments to
organizational documents or (ii) authorizations or issuances of additional stock from
the voting commitment.” Id. at ¶ 40. He opined that because the Transaction
Exception did not include that type of language, the Transaction Exception cannot
apply to Proposal Four. For purposes of this case, the examples that Haas identified
are too few to establish a trade usage.
The Investor Group relied on the testimony of Professor Guhan Subramanian,
a distinguished academic, to assert that both the Transaction Exception and the
Subject Matter Exception applied. Subramanian’s reasoning seems like a form of
trade usage in the sense that he sought to articulate what he believes everyone
understands about governance. He suggested that corporate governance “is
fundamentally about the ‘rules of the game’ among the various constituencies that
the corporate form brings together.” JX 593 ¶ 35. He also noted that “[c]orporate law
… carefully constructs the contours of the shareholder vote requirement to provide a
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vote in order to change the rules of the game between management and shareholders,
i.e., corporate governance.” Id at ¶ 37.
Starting from these premises, Subramanian reasoned that “when corporate
law provides such a shareholder vote, we should infer, at least presumptively, that
corporate law perceives that the contemplated change affects corporate governance.”
Id. He opined that “the fact that increasing the number of authorized shares requires
a shareholder vote creates at least a presumption that such an increase reflects a
change to the rules of the game, or, in other words, a change in corporate governance.”
Id. at ¶ 39. He also argued that a share authorization relates to ESG because shares
can be used to “grant stock and stock options to executives.” Id. at ¶ 66.
Subramanian also opined on the common usage of the term “recapitalization.”
He conducted an analysis of the historical usage of the term “recapitalization” in the
Wall Street Journal dating back to 1892. Id. at ¶¶ 26–30. Subramanian’s survey
identified 80 articles that “used ‘recapitalization’ to refer to an authorization of new
shares.” Id. at ¶ 29. Subramanian further observed that there was at least one usage
of “recapitalization” to refer to an authorization of new shares “in each decade
through 2000, and then one more usage in 2013.” Id. at ¶ 30. Based on this analysis,
Subramanian concluded that “the term ‘recapitalization’ has been regularly used in
the business press over the past century to refer to an authorization of new shares.”
Id.
Subramanian’s analysis was insufficient to establish a trade usage.
Subramanian reasoned to a logical result regarding what governance means, but he
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did not show that everyone has that implicit understanding. His analysis of the
historical uses of recapitalization showed that the term is used in a variety of
contexts, providing additional evidence that it is ambiguous.
In response to Subramanian’s testimony, the Company offered expert
testimony from Marc Weingarten, an attorney with over twenty-five years of
experience in activist campaigns. Weingarten described what he believed a
stockholder activist’s rationale would be for agreeing to certain provisions in a
settlement agreement. Weingarten opined that no one would expect the Transaction
Exception or Subject Matter Exception to apply to a proposal to increase the number
of authorized shares. JX 600 ¶¶ 54–56, 71–73. He asserted that the Transaction
Exception was intended to permit an activist to “oppose a transaction at a price the
activist considers inadequate, or so they can oppose the issuance of a material number
of shares to complete an acquisition which the activist thinks is ill-advised.” Id. at
¶ 54.
Weingarten also opined that in his experience “sophisticated investors and
their counsel understand a ‘recapitalization’ to refer to a transaction that will change
a company’s capital structure through the issuance of new securities or the exchange
of outstanding securities for new securities, typically to improve its financial
performance or to satisfy the demands of its stockholders.” Id. at ¶ 59. He then argued
that Proposal Four is not a “recapitalization” because it “does not change the capital
structure of the Company in a manner that will affect the balance sheet or the rights
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of stockholders.” Id. at ¶ 63. Weingarten’s experience-based opinion regarding the
meaning of recapitalization generally tracks my own sense.
Both Subramanian and Weingarten made interesting points. Neither offered
testimony that was sufficiently persuasive to carry the day.
That leaves a final and ultimately dispositive source of extrinsic evidence.
“[A]ny course of performance accepted or acquiesced in without objection” is “given
great weight in the interpretation of the agreement.” Restatement (Second) of
Contracts § 202 (1981), quoted in Sun-Times Media Gp., Inc. v. Black, 954 A.2d 380,
398 n.71 (Del. Ch. 2008). “[W]hen a contract is ambiguous, a construction given to it
by the acts and conduct of the parties with knowledge of its terms, before any
controversy has arisen as to its meaning, is entitled to great weight, and will, when
reasonable, be adopted and enforced by the courts.” Dweck v. Nasser, 2012 WL
161590, at *16 (Del. Ch. Jan. 18, 2012) (quoting Radio Corp. of Am. v. Phila. Storage
Battery Co., 6 A.2d 329, 340 (Del. 1939)).
Before the litigation began, Stahl and Oliver acknowledged that they were
bound to vote in favor of a proposal to increase the number of authorized shares. As
discussed in the Factual Background, after the Board discussed a proposal to increase
the Company’s authorized shares in September 2021, Oliver explained to his son that
he was “lobbying for our ability to vote against if the Board does move forward.” JX
196 at 8. Oliver would not have needed to lobby in favor of the Investor Group’s ability
to vote against Proposal Four if the Voting Commitment did not apply.
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Stahl made similar statements in October 2021 when discussing the possibility
of a proposal to increase the authorized shares with fellow stockholders. Goldstein’s
notes of the call reflect Stahl’s understanding that as long as he served on the Board,
he had to vote with the Board’s recommendation. JX 210. The Investor Group argued
Lawrence’s notes were inadmissible hearsay, but Lawrence testified in his deposition
regarding the notes, which were a recorded recollection. D.R.E. 801(5). The Company
used the deposition properly at trial. Ch. Ct. R. 32(a). The content of Stahl’s
statements was non-hearsay. D.R.E. 801(d). Evidencing the weakness of the hearsay
argument, the Investor Group only mentioned it in passing in their post-trial reply
brief and did not mention it at post-trial argument. See Emerald P’rs v. Berlin, 726
A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”).
The extrinsic evidence regarding what Stahl and Oliver believed before
litigation began is persuasive. The Investor Group has not offered any contrary
extrinsic evidence that is more persuasive. The Investor Group therefore failed to
prove by a preponderance of the evidence that either the Transaction Exception or
Subject Matter Exception applied to Proposal Four. The Investor Group breached the
Voting Commitment by failing to vote with the Board’s recommendation.
C. The Remedy
The Company seeks an order deeming that the Investor Group’s shares were
voted in favor of Proposal Four such that Proposal Four was approved by holders of
a majority of the Company’s outstanding voting power. A court of equity has the
power to treat as done that “which in good conscience ought to be done.” Monroe Park
v. Metro. Life Ins. Co., 457 A.2d 734, 737 (Del. 1983). “Pursuant to this maxim, acts
62
that were agreed to be done and that should have been done will be treated as if the
acts contemplated by the parties had been done at the beginning of the transaction,
so as to promote substance over form.” 27 Am. Jur. 2d Equity § 10.
Here, what ought to have been done is for the Investor Group to have voted its
shares in accordance with the Board’s recommendation on Proposal Four. Deeming
those shares voted in favor of Proposal Four is outcome determinative. With those
shares deemed in favor of Proposal Four, the proposal received enough affirmative
votes to pass. Subject to the Investor Group’s affirmative defense, the Company is
entitled to a judgment declaring that Proposal Four was approved by the Company’s
stockholders.
D. Unclean Hands
As a last line of defense, the Investor Group argues that the Court should
refuse to grant relief to the Company under the doctrine of unclean hands. “[A]
defense of unclean hands is generally unavailable to defeat a legal claim, but becomes
available if the plaintiff seeks equitable relief.” Am. Healthcare Admin. Servs., Inc. v.
Aizen, 285 A.3d 461, 493 (Del. Ch. 2022). The Company’s request that the court deem
the Investor Group’s shares voted in favor of Proposal Four is an equitable remedy,
so unclean hands is available. But the Investor Group did not make a convincing case
for applying unclean hands.
“The doctrine of unclean hands provides that a litigant who engages in
reprehensible conduct in relation to the matter in controversy forfeits his right to
have the court hear his claim, regardless of its merit.” Portnoy v. Cryo-Cell Int’l, Inc.,
940 A.2d 43, 81 (Del. Ch. 2008) (cleaned up). “[F]or the unclean hands doctrine to
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apply, the inequitable conduct must have an ‘immediate and necessary’ relation to
the claims under which relief is sought.” In re Rural/Metro Corp. S’holders Litig.,
102 A.3d 205, 237–38 (Del. Ch. 2014) (cleaned up). The court has broad authority to
consider unclean hands; it is “not bound by formula or restrained by any limitation
that tends to trammel the free and just exercise of discretion.” Nakahara v. NS 1991
Am. Tr., 718 A.2d 518, 522–23 (Del. Ch. 1998).
The Investor Group argues that the Company’s hands are unclean because the
Company made two misrepresentations in its stockholder solicitation materials.
First, the Investor Group relies on the statement in the Fight Letter about the
Company being “unable to meet its current and potential obligations.” JX 511 at 2.
Second, the Investor Group asserts that the Company omitting that Stahl and Oliver
voted against recommending Proposal Four was a material omission.
Assuming for the sake of analysis that these two misrepresentations were
material, the assumed disclosure violations do not amount to unclean hands for
purposes of a claim to enforce the Voting Commitment. That provision obligated the
Investor Group to vote as the Board recommended. The commitment was contractual,
and this court has held that the duty of disclosure does not apply in connection with
a contractual obligation.37 The disclosure violation therefore does not relate
immediately and necessarily to the Voting Commitment. The Investor Group is also
37 Latesco, L.P. v. Wayport, Inc., 2009 WL 2246793, at *5–6 (Del. Ch. July 24, 2009)
(contractual right of first refusal); Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs.
Inc., 854 A.2d 121, 158 (Del. Ch. 2004) (obligation to fulfill a capital call).
64
not well positioned to rely on the assumed disclosure violations because their
representatives—Stahl and Oliver—knew all of the pertinent information from
having participated in the discussions on Proposal Four as directors.
Separately and independently, the Investor Group cannot rely on the assumed
disclosure violations because of its own inequitable conduct. When determining
whether to apply the doctrine of unclean hands, the court can consider the conduct of
the party asserting the defense.38 In this case, as described in the Factual
Background, the Investor Group violated the Standstill by actively campaigning
against Proposal Four.
Determining whether the Investor Group’s own misconduct prevents them
from invoking the doctrine of unclean hands requires a weighing of both sides’
actions. Intuitively, the Investor Group’s misconduct should be at least equal to or
worse than the Company’s misconduct to block the unclean hands defense. I approach
the requisite balancing with apprehension because in the recent Holifield case, I
engaged in a similar balancing after presiding over the trial firsthand, evaluating the
credibility of the witnesses, and weighing the witness testimony in the context of the
evaluating the evidence as a whole. As my colleagues and I regularly do, I spent a lot
of time pondering the record and lost sleep over how to weigh the evidence. Each side
told a story that made its actions look justified and cast blame on the other side. Over
38 Gener8, LLC v. Castanon, 2023 WL 6381635, at *31 (Del. Ch. Sept. 29, 2023)
(declining to apply unclean hands because, among other reasons, “[the defendant’s] attempt
to invoke equity unravels in light of his own misconduct.”).
65
the course of thirty-four pages of Factual Background, I made findings that described
what I found had happened based on a preponderance of the evidence. Under my
weighing of the evidence, one side’s actions seemed willful and strategic, while the
other side’s actions seemed to have resulted from misinterpreting the signals that the
counterparty was giving and reliance on the advice of counsel.
No one challenged my factual findings on appeal. Holifield, 2023 WL 5761367,
at *34. The Delaware Supreme Court nevertheless offered a series of devil’s-advocate
observations and rhetorical questions before concluding that “based on the record as
we view it, the questionable conduct is not tilting so heavily in either side’s favor, and
we are not convinced that the result in [the plaintiff’s] favor is ‘disquieting’ and
‘inequitable.’” Id. The references to “not tilting so heavily” and “not [being] convinced”
sound like a court making a factual finding based on a preponderance standard. On
appeal, of course, reversing a finding of fact requires clear error, yet the justices
expressly stated that they were not “suggesting, by these comments, that [the factual
findings] are clearly erroneous, particularly as some of them are based upon
credibility determinations.” Id. Instead, the high court concluded that the factual
findings were “incomplete” and remanded for further determinations. Id.I will try to do a better job spelling out why, in this case, I regard the Investor
Group’s actions as more serious than the Company’s. No one disputes that the clear
language of the Standstill barred the Investor Group from opposing Proposal Four.
Stahl and Oliver knew that. Yet as described in the Factual Background, they
violated the Standstill in multiple ways and over a prolonged period of time. Not only
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that, but they sought to conceal their conduct by avoiding a document trail.39 At trial,
their witnesses did not come clean about their breaches but rather offered less than
credible testimony on several points.40
By contrast, the two disclosure issues in the Company’s solicitation materials
look like breaches of the duty of care. In the Fight Letter, the Company quoted a
statement from the Glass Lewis report about being unable to meet its stock-based
obligations. Although it is true that one of the Company’s directors testified at trial
that this statement was false, he did not seem to be using this term in the sense of a
statement made with scienter. It also seemed that he was surprised by the content of
the statement and believed that the Company would not have undertaken obligations
that it could not fulfill. I give him credit for testifying candidly that he thought the
39 During his campaign against Proposal Four, Oliver responded to outreach about
how stockholders should vote by asking that they “call him.” E.g., JX 444 (Oliver responding
“Y[es] Call me when you want to discuss” to text from a Company stockholder stating “I
wanted to vote TPL the way that helps you most. Can you direct me?”); JX 482 (Oliver
responding “Call me” to outreach from Clift, an investment advisor, regarding “how I should
encourage my investors to vote on the TPL proxy”). Oliver also strategically used a
recommended ballot posted by a Company stockholder on his blog to instruct stockholders to
vote against Proposal Four with out expressly stating so. E.g., JX 448, JX 449, JX 453; see
also JX 509 (Oliver responding to request from stockholder regarding Oliver’s take on
Proposal Four by stating “There is a blog I’ll send you a link. He has a recommended ballot.”).
40 For example, the record reflects that Oliver instructed Company stockholder
Alexander to “spread the word” against Proposal Four. JX 451 at 4 (Alexander discussing
blogger’s recommended ballot and stating “[Oliver] asked if I would help spread the word to
shareholders.”). When confronted with Alexander’s emails at trial, Oliver did not admit to his
subterfuge and instead had what appears to be a selective loss of memory. Oliver Tr. 286.
Similarly, Oliver refused to admit at trial that he had suggested to Alexander or others how
to vote. Id. at 285 (“Q. Is it your testimony you never suggested to Minor Alexander or others
how to vote? A. I pointed people to a public website, that TPL blog, and did not represent how
I was voting. Q. So I guess the answer is no, you never suggested to Minor Alexander or
others how to vote? A. Correct.”).
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statement was wrong, even though it appeared in one of the Company’s disclosure
documents. In its supplemental disclosures issued after trial, the Company explained
why that quotation in the Glass Lewis letter was correct. Without accepting the
contents of the supplemental disclosure for its truth, it is still possible to understand
how the Glass Lewis quotation in the Fight Letter could have been true, even if it
was something that one director later thought was untrue. An inaccurate disclosure
in that setting seems more likely to have resulted from a breach of the duty of care.
The failure to disclose that Stahl and Oliver voted against recommending
Proposal Four also seems like a breach of the duty of care. Delaware law supports
viewing that omission as material. 41 Under the federal securities laws, however, it is
not clear that disclosure is required. Here again, the Company addressed the issue in
its supplemental disclosures, stating that the Company followed a policy of not
disclosing dissenting votes. Without accepting the contents of the supplemental
disclosure for its truth, it is easy to imagine that directors relied on counsel and did
not act disloyally.
Persistent, willful breaches of a clear contractual provision are more serious
than two, temporally isolated disclosure violations that do not appear to have been
41 See Appel v. Berkman, 180 A.3d 1055, 1061–62 (Del. 2018) (holding chairman’s
reasons for abstaining from voting in favor of transaction recommended to stockholders were
material, as were chairman’s reasons for abstaining; rejecting argument that “a director's
reasons for dissenting or abstaining from a decision of the board can never be material in the
sense that they require disclosure”).
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willful. In my judgment, the Investor Group’s more serious misconduct prevents them
from invoking the defense of unclean hands.
E. The Company’s Relief Is Conditioned On The Stock Split.
On its face, Proposal Four calls for increasing the authorized common stock
from 7,756,156 shares to 46,536,936 shares—a sextupling of the authorized common
stock. To minimize the significance of that increase, the Company repeatedly stressed
during this litigation that the bulk of the shares will be used for a 3-for-1 stock split.
But the Company never committed to the split. Having relied on the split for purposes
of this case, the Company cannot now walk away from it. Consequently, the final
order will condition the increase in the authorized shares on the Company completing
the split. If the Company does not complete the split, then the additional authorized
shares will be void.
III. CONCLUSION
The Investor Group breached the Voting Commitment by failing to vote with
the Board’s recommendation in favor of Proposal Four. The Investor Group’s shares
are deemed voted in favor of Proposal Four, which is deemed approved by holders of
a majority of the Company’s common stock. The Company is entitled to an award of
costs as the prevailing party. Within thirty days, the parties will submit a joint letter
that either attaches an agreed-upon form of final order or identifies any issues that
remain to be addressed and proposes a procedure for resolving them. The invitation
to identify issues is not intended to provide an opportunity for a full or partial do-
over. It is designed to enable the parties to ensure that the court has addressed all of
the matters that the parties have fairly put at issue.
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