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 Lessons)

By J. Robert Brown

This case contains several lessons.  It shows the resolute refusal of the Delaware courts to make the obligations of the board meaningful.

Under the rational of the opinion, boards can approve transactions that have serious adverse consequences on the voting rights of shareholders without being aware of these consequences.  The court could easily have imposed a duty on boards to be made aware of these types of provisions.  In the future, boards would have to receive reports on the transactions that included any significant limits on the shareholder franchise.  Instead, the court merely admonished outside counsel to be more forthcoming but otherwise imposed no obligation on the board to be aware of the information. 

In addition, the court took contractual provisions and affirmatively declined to interpret them in a manner that coincided with the board's fiduciary obligations.  Thus, where the board approves the insurgent directors under the poison puts, debt holders will always have an argument that the approval was inconsistent with the meaning of the language in the contract.  Had the court simply concluded that the language was meant to allow boards to approve directors whenever deemed appropriate under the board's fiduciary obligations, boards would have been able to waive the poison put whenever beneficial to shareholders.  Instead, the court developed an entirely different standard that promised to give debt holders room to litigate whenever they disagreed with the board's approval of insurgent directors (which would likely be anytime they preferred to put the debt back to the company).

The case provides a mechanism for contractual limitations on voting rights and entirely exonerates the board from any responsibility.  In an era of shareholder access, when dissidents will have greater opportunity to elect their candidates to the board, the case illustrates that the Delaware courts will nonetheless continue to permit road blocks and interfere with process where ever possibe.

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 02, 2009 (boomark / email).