In the recent decision of Sarissa Capital Domestic Fund LP v. Innoviva, Inc., C.A. No. 2017-0309-JRS (Del. Ch. Dec. 8, 2017), a disputed oral settlement agreement was specifically enforced by the Delaware Court of Chancery in a proxy contest between Innoviva, Inc. and Sarissa Capital Management resulting in two dissident directors being seated on the board of directors of Innoviva. Vice Chancellor Slights held that the principals of Innoviva and Sarissa had entered into a valid, binding oral agreement that required Sarissa to cease its proxy solicitation in exchange for two seats on the Innoviva board. Given what the Court found to be “opportunistic maneuvers” by Innoviva in reneging on the agreement after it became clear that it would unexpectedly win the proxy contest, the Court awarded Sarissa specific performance of the settlement agreement.
Earlier in 2017, Sarissa launched a proxy contest to replace three of Innoviva’s seven directors at the company’s April 2017 annual meeting. Sarissa and Innoviva reached an oral agreement that in exchange for Sarissa ending its proxy campaign and related litigation, Innoviva would expand its board from seven to nine members and appoint two Sarissa nominees to the board. The Court found that representatives of each party orally confirmed that they “had a deal” and that it would be left to other team members to “prepare the ‘paperwork . . . to get it done.’” Notably, the deal was not contingent on execution of the paperwork, or subject to further board approval.
After Innoviva attempted to back out of the deal, upon learning that it would have sufficient votes to maintain its current representatives on the board, Sarissa commenced this action. The lawsuit was commenced as an action under Section 225 of the Delaware General Corporation Law (“DGCL”), a statute that allows the Court of Chancery to hear and determine the validity of any election, of any director or officer of any corporation, and the right of any person to hold or continue to hold such office. [For a prior post discussing Section 225 in detail, click here.]
In granting specific performance, Vice Chancellor Slights found that each element of an award of specific performance was satisfied with clear and convincing evidence. The elements included: (1) a valid, enforceable settlement agreement existed, (2) the “essential elements” of that agreement were satisfied; and (3) the absence of an adequate legal remedy, because monetary damages could not compensate Sarissa for the loss of its ability to appoint representatives to the board of Innoviva.
This decision is notable in that a oral agreements are difficult to prove, especially ones that change the composition of a board of a Delaware corporation. Prior to executing a formal agreement, parties should take care to document the terms of a deal through writing, and make clear that a deal is contingent upon the execution of a final settlement agreement.