Delaware Chancery Court Rules on Amylin “Poison Put” Provision; Finds No Violation on Duty of Care Issue; and Provides Instruction to Lawyers Advising Boards on Complex Documents
San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals, Inc., No. 4446-VCL (Del.Ch., May 12, 2009), read opinion here. This Chancery Court decision addressed the issue of "poison puts" or a provision in an indenture that would have triggered an obligation of the company, and a right of noteholders, that allowed the holders of the notes to put their notes to the corporation at face value if a majority of the board changed control. This would have required Amylin to pay out $915 million in cash which was about $100 million more in cash than Amylin had available. The genesis of the case was an attempt by dissident shareholders to put a new majority of directors on the board.
[N.B.: On May 13, a Notice of Appeal was filed.]
The court rejected the arguments of the indenture trustee and held that: "… construed in accordance with generally applied standards, the provision is properly understood to permit the incumbent directors to approve as a continuing director any person, whether nominated by the board or a stockholder, as long as the directors take such action in conformity with the implied covenant of good faith and fair dealing and in accordance with their normal fiduciary duties."
I will only focus on that part of the opinion that dealt with the application of Delaware law by the court on the fiduciary duty of care in light of New York law being applied to the interpretation of the indenture document. However, for a discussion of the background facts and a general discussion of the case, see Prof. Gordon Smith’s summary here which includes his closing tribute to the opinion’s author, Vice Chancellor Lamb, whose terms expires soon (and he is not seeking reappointment).
A prior post here linked to an extensive background discussion of the case by Prof. Davidoff soon after it was filed.
Expedited Proceedings. Trial Less Than Six Weeks from Original Complaint and Less than One Month From Fourth Amended Complaint
A quintessentially Delaware aspect of this case is the procedural celerity with which the case was decided, measured from the date the case was filed and put at issue. The purported class action complaint was filed on March 24, 2009. In early April a second and third amended complaint were filed. On April 16, a fourth amended complaint was filed. A pretrial conference was held on May 1 and a one-day trial was held on May 4 at which argument was also presented on cross-motions for summary judgment. On May 6, two days after the close of the record, the indenture trustee asked the court to decline to rule, based on new facts, arguing that the issues are no longer ripe. On May 12, the Chancery Court issued its 28-page decision.
Key Points in Ruling on Fiduciary Duty of Care
The issue decided by the court on this topic was whether the board or its delegate committee, breach the duty of care (i.e., was grossly negligent) in failing to learn of the existence of a provision in the indenture which triggered a right of noteholders to call the note if a majority of the board changed control?
The court ruled that "The answer must be no." In addition to explaining its ruling, the court provided instruction and advice to lawyers advising boards in similar situations.
(1) Reasoning for Ruling on Why Duty of Care Not Breached
The court explained its rejection of the claim that board breached its fiduciary duty of care by not being aware of the provision that called for a default if the same directors did not continue in office, while noting that the directors relied on experienced counsel and that they should not be expected to read every word of a 98-page indenture. The actual language of the opinion is quoted below:
The board retained highly-qualified counsel. It sought advice from Amylin’s management and investment bankers as to the terms of the agreement. It asked its counsel if there was anything “unusual or not customary” in the terms of the Notes, and it was told there was not. Only then did the board approve the issuance of the Notes under the Indenture. This is not the sort of conduct generally imagined when considering the concept of gross negligence, typically defined as a substantial deviation from the standard of care.
The plaintiff argues that the board’s questioning if there was anything “unusual or not customary” in the Indenture was insufficient. But the way in which the board inquired into the material terms of the Indenture cannot be equated with gross negligence in failing to inform itself.45 Certainly, no one suggests that the directors’ duty of care required them to review, discuss, and comprehend every word of the 98-page Indenture.
(2) Instruction to Counsel Advising Boards regarding Long, Complex Documents that May Impinge on Shareholder Franchise
This decision provides somewhat practical instruction to both boards and the lawyers advising boards to be especially careful when approving terms in agreements that could interfere with what in Delaware is sacrosanct: the shareholder franchise (e.g., the right of shareholders to vote for and select directors) – regardless of whether or not such language is deemed "customary" (which can mean different things to different parties), The actual excerpt from the opinion on this point follows:
This case does highlight the troubling reality that corporations and their counsel routinely negotiate contract terms that may, in some circumstances, impinge on the free exercise of the stockholder franchise. In the context of the negotiation of a debt instrument, this is particularly troubling, for two reasons.
First, as a matter of course, there are few events which have the potential to be more catastrophic for a corporation than the triggering of an event of default under one of its debt agreements. Second, the board, when negotiating with rights that belong first and foremost to the stockholders (i.e., the stockholder franchise), must be especially solicitous to its duties both to the corporation and to its stockholders. This is never more true than when negotiating with debtholders, whose interests at times may be directly adverse to those of the stockholders. Outside counsel advising a board in such circumstances should be especially mindful of the board’s continuing duties to the stockholders to protect their interests. Specifically, terms which may affect the stockholders’ range of discretion in exercising the franchise should, even if considered customary, be highlighted to the board. In this way, the board will be able to exercise its fully informed business judgment.