Corporate Governance

Poison Puts, Shareholder Voting Rights and the Need for an Even Stronger Shareholder Bill of Rights: San Antonio Fire & Policy v. Amylin Pharmaceuticals (Introduction)

By J. Robert Brown

We have been writing about the Shareholder Bill of Rights, legislation soon to be introduced by Senator Schumer.  As we have noted, the legislation would largely preempt large segments of Delaware corporate law.  Among other things, it constitutes a recognition that Delaware and its courts have put in place a system of corporate governance that does not protect shareholders and results in excessive risk taking designed to maximize short term executive compensation. 

The bill will be controversial and, of course, will engender serious resistance (as it already has from Wachtell Lipton).  While the merits favor the legislation, support will apparently emanate from an unlikely source:  The Delaware courts.  It won't take very many decidedly anti-shareholder cases to push Congress to adopt the legislation.  This week, the courts provided the first piece of supporting evidence with the decision in San Antonio Fire & Policy v. Amylin Pharmaceuticals. 

In effect, the decision upheld poison puts. 

These are contractual provisions in debt agreements and indentures that provide for the acceleration of the debt whenever there is some type of change of control.  Change of control can have a myriad of definitions.  It turns out that in many agreements, the provisions apply to the election of a majority of shareholder nominated directors.  In other words, if shareholders have the temerity to run a competing slate and vote them into office, they will accelerate outstanding debt, potentially destroying the business (particularly when the debt is not trading at face value and replacement credit is tight). 

We will devote several posts to the case.  Suffice it to say that as long as the case remains good law, it provides yet another reason for federal preemption and expansion of the Shareholder Bill of Rights.  The Delaware Chancery Court effectively held that fiduciary obligations do not apply to the insertion of contract provisions that severely restrict voting rights of shareholders.   It did so remarkably by concluding that common terms in contracts were not subject to fiduciary oversight, irrespective of their impact on shareholder voting rights.  The case provides management with a mechanism for deterring and/or winning any proxy contest. 

We have posted the opinion and many of the supporting documents on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on May 28, 2009 (boomark / email).