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The Delaware Chancery Court in San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals, Inc.¹ analyzed both the duties of boards of directors and the process of board action in regard to provisions in debt agreements that allow creditors to call outstanding indebtedness upon a change in control of the debtor.

In Amylin, the Chancery Court decided that a board could—without violating its contractual obligations—approve dissident directors, nominated through a proxy contest, even if the board had nominated an opposing slate of directors.

Relevant Facts

In 2007, Amylin Pharmaceutical, Inc. entered into an indenture that contained a provision allowing noteholders to immediately redeem their notes upon a change of control, defined to include the failure of the “Continuing Directors” to constitute a majority of Amylin’s board of directors. The indenture defined Continuing Directors as directors as of the issue date and any new directors whose election by the board or nomination for election by the stockholders “was approved by at least a majority of the directors . . . either who were directors on the Issue Date or whose election or nomination for elections was previously so approved.”

In 2009, two separate stockholders launched proxy contests, and each nominated different slates of five directors—none of whom were then directors—to serve on the company’s twelve-member board. To avoid triggering the poison put provision of the indenture, one of the stockholders called for the board to approve the dissident slates. The board, instead, set a tentative date for the company’s annual meeting to elect the company’s directors, including the board’s suggested directors. It is important to note that the board never expressly disapproved the competing slate; instead, it merely offered its own slate of directors.

A stockholder not involved in the proxy contest then sued Amylin, requesting an injunction to force the company to approve the dissident slate of directors in accordance with the directors’ duty of care and loyalty and seeking for a declaratory judgment that the directors on the board had breached their duties of loyalty and care by approving the indenture. The trustee of the indenture contended that, pursuant to the terms and duties owed under the indenture contract, the board did not have the authority to approve the dissident slate.

During the course of the litigation, the board eventually relented and agreed that if the court found it had the power to approve the dissident slates, it would do so in order to avoid the poison put provision of the indenture. Accordingly, a partial settlement of the claims resulted, and the remaining issues for the court were (1) “whether or not the Amylin board has both the power and right under the Indenture to approve the stockholder nominees” and (2) whether the board breached its duty of care by entering into the indenture without adequately considering the poison put provision.

Reasoning and Decision

The court found that under New York law the board had the power under the indenture to approve the dissident slate of directors. The court held that the term “approve” in the “Continuing Directors” definition meant that the board could sanction a slate of directors that it had opposed during a proxy contest. Importantly, the court warned that if the indenture were not interpreted in this manner, the poison put provision could eviscerate the stockholder franchise and thereby the provision could question the good faith determination of a board and also potentially render the provision unenforceable as against public policy. The trustees’ reading was particularly untenable in this instance because the board had not disapproved the dissident slate, but had only offered a competing slate of directors.

The court then considered whether the board’s approval of the dissident slate was consistent with “company’s implied duty of good faith and fair dealing[,] which inheres in all contracts . . . .” In reaching its decision, the court cited the previous Court of Chancery decision, Hills Stores Company v. Bozic,² which held that “the measure of whether the approval was in good faith was whether the board believed that the dissident slate posed a danger to the interest of the corporation and its stockholders.” Applying Bozic, the Amylin court determined that “the board may approve the stockholder nominees 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 further ruled that if the board could make such a good faith determination, then that good faith determination was sufficient for the board and company to fulfill its duty of good faith and fair dealing under the indenture contract. Moreover, in a footnote, the court emphasized that the board owed a duty of care and loyalty to the company’s stockholders but was under “absolutely no obligation” to consider the noteholders. After establishing this rule, the court nevertheless found that it could not apply the rule to the facts of this case because there was no evidence of the board’s deliberation either way, and therefore, the issue was not ripe for decision.

The court then addressed the directors’ duty of care in approving the indenture and its poison put provision. The court determined that the board had satisfied the requisite duty of care. In arriving at its determination, the court noted that the Amylin board had retained and relied upon qualified counsel and financial advisors and sought the advice of management. In particular, although the specific provision was not discussed explicitly with the board, the board had asked and was advised by counsel that the indenture did not contain any unusual terms.

The court concluded its opinion with a warning of the potential danger of controlling director triggers on redemptions, which are particularly troubling to the stockholder franchise because of the “catastrophic” damage such a default could cause to a company. The court noted that boards should pay particular attention to the impact such agreements have upon the stockholder franchise because the interests of debtholders “at times may be directly adverse to those of the stockholders.” The court also suggested that outside counsel bring these risks to the attention of boards to ensure that boards can exercise their “fully informed business judgment.”

Conclusion and Guidance

The Chancery Court’s opinion in Amylin is instructive for companies, boards and counselors. The decision demonstrates that a board can ultimately approve a slate of directors (thereby making them continuing directors under a poison put provision) even though the board did not originally endorse the directors, so long as the board determines that approval of such directors would not be materially adverse to the interests of the corporation or its stockholders. Counselors should note that the board in Amylin put forward a competing slate of directors, but never stated that it did not approve of the dissident slates. The opinion also emphasizes the general tenet that when approving indentures and other agreements with complex provisions, a board should follow a good process with competent advisors to ensure that the board acts on a fully informed basis after appropriate deliberation.