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 (The Facts)

By J. Robert Brown

We are discussing San Antonio Fire & Policy v. Amylin Pharmaceuticals, a Delaware court that upheld the use of coercive contractual terms that effectively denied shareholders their voting rights.

In 2007, the Amylin board assigned to members of senior management to negotiate the terms and conditions for the 2007 Notes (terms ultimately approved by the Finance Committee of the board).  Section 11.01 of the Indenture provided that the notes could be redeemed at face value following a Fundamental Change.  Fundamental Change included anytime "the Continuing Directors do not contitute a majority" of the board.  Continuing Director, in turn, was defined as the existing directors and any new directors "whose election to the Board . . . or whose nomination for election by the stockholders . . was approved by at least a majority of the directors then still in office."  In other words, if shareholders elected an unapproved majority to the board, either all at once or gradually over time, it would acclerate the notes. 

In early 2009, two large shareholders each announced that they would run a dissident slate of five directors.  Thus, ten total dissident directors would be running for positions in the 12 person board.  Because the number constituted a majority, their election would, absent approval of the incumbents, trigger the redemption of the notes under the Indenture (an amount somewhere around $575 million).  As even the Chancellor noted:  "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."

Plaintiff challenged the provision.  In the course of the litigation, the insurgents reduced the number of candidates to five and the incumbent board agreed to approve them under the terms of the Indenture, thereby allowing the candidates to qualify as "Continuing Directors" and not implicate the change of control provision of the Indenture.  The matter more or less seemed resolved, with the election allowed to go forward devoid of any problem under the agreement.

The Chancery Court, however, opted to do otherwise.  The court upheld the poison put under the duty of care.  Effectively the court held that the board had no obligation with respect to the provisions, despite their pernicious effect on shareholder voting rights.  Moreover, the board had no olbigation to be informed about contractual provisions that limited voting rights.

Even more astounding, the court went on the hold that a board could only approve the insurgent directors and avoid the acceleration provision in the Indenture, where "the board determines in good faith that the election of one or more of the dissident nominees would not be materially adverse to the interests of the corporation or its stockholders." The court concluded that the board had not made a sufficient showing of this standard, essentially upending the settlement. 

As a result, the election which is scheduled for May 27 will take place with shareholders aware that their votes may well contribute to the possibility of an acceleration of the 2007 Notes.  In other words, the coercion remains. We will look at these arguments in greater detail in the next few posts.

The opinion and assorted documents have been posted on the DU Corporate Governance web site.

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