The Spirit of Blasius: Sandridge as an Antidote to the Poison Put

The poison put is a contractual innovation that grants debtholders an option to redeem their debt upon the occurrence of a predefined trigger. While certain poison puts can be justified in light of Delaware corporate law’s deference to directors, one particular class of poison puts is more troubling from a corporate governance perspective: those triggered by a turnover in a majority of a company’s board. These “continuing director” poison puts become problematic if a corporation with substantial outstanding debt subsequently faces a hostile challenge. In such a scenario, if the incumbent board chooses not to approve the new directors, the threat of financial distress effectively coerces shareholders to retain incumbent directors. Delaware courts have grappled with such provisions on two recent occasions: first in 2009 in San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals, Inc. and then again in 2013 in Kallick v. SandRidge Energy, Inc. Both cases were brought on narrow grounds, challenging a board’s failure to approve a dissident slate for the purposes of nullifying the poison put. As such, Delaware courts have yet to address whether directors breach fiduciary duties in the initial decision to agree to the inclusion of continuing director poison puts in debt agreements. This Note provides a background discussion of corporate law, before proceeding to an economic and legal analysis of continuing director poison puts. In concluding that such provisions have both the motive and effect of entrenching incumbent directors, this Note challenges Delaware courts’ adoption of the intermediate Unocal standard of review in the context of approving a dissident slate. This Note concludes by arguing that the strict Blasius standard of review should apply to a board’s initial decision to agree to the inclusion of continuing director poison puts in their debt agreements.