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 Fiduciary Out)

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.

The Chancellor concluded that the inclusion of a poison put in an indenture did not implicate the duty of care because the board had outside counsel and the provision was common place.  As is the case with the duty of care, the terms did not matter.  The fact that the provision imposed coercive pressure on the shareholder franchise earned some lecturing language but was otherwise irrelevant to the analysis.

The provision, however, contained an out.  It allowed the board to "approve" the insurgent directors.  Approved directors would not result in acceleration of the notes.  Indeed, the board agreed to approve the insurgent directors as part of a settlement.  The court merely had to approve the settlement.

Because the court viewed the matter as one of contract interpretation, it limited the analysis to whether approval comported with the duty of good faith and fair dealing.  Approval would only be consistent with this duty if "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 could have interpreted the provision to impose the duty of care and the business judgment rule.  In other words, debt holders could not successfully challenge the decision unless showing that it was inconsistent with the elements of the business judgment rule.  Instead, the court developed an entirely new and untested standard.  Moreover, the court gave plenty of room for debt holders to challenge the board's decision.  Shareholders voting for "approved" directors would know that debt holders might challenge the board's decision (as breach of contract) and, if successfully, would cause the poison put to be triggered.  In other words, the court's interpretation effectively left the coercion in place.

Even more extraordinary, the court in fact overturned the settlement among the parties, including the board's approval of the insurgent directors.

• The application of this rule here is problematic. The court has been presented with no evidence regarding the board's deliberation with respect to the decision to approve the stockholder-nominated slate. No party has placed into the record any board minutes, resolutions, or other evidence that would indicate how the board came to its decision. Rather, before the court are two less than helpful sets of circumstances. First are the negative public statements made by the board in various fight letters with respect to the dissident nominees. . . Second is the posture in which the board appears to have made its decisionto approve. . . The board did not do so until April 13, 2009, and then only in exchange for a partial settlement with the plaintiff in which the plaintiff agreed to amend its complaint to remove any allegations of breach of the duty of loyalty by the individual defendants, and not to seek money damages against them. These circumstances at least raise a question whether the board's decision to approve was made in a good faith exercise of its considered business judgment, or instead taken simply to avoid facing a suit for money damages against themselves personally.

In other words, the court effectively upheld a challenge to the board's decision.  Moreover, the court made it clear that opposition to the insurgent slate (a universal reaction) would provide evidence that the board had not met the standard for approval.  This reaffirmed the uncertainty of the approval requirement and made it abundantly clear to shareholders that voting for insurgent directors who had been approved by the board nonetheless posed a real risk that the approval would later be overturned and the poison put triggered.

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 June 01, 2009 (boomark / email).