Delaware Court Expedites Proceedings to Enjoin Enforcement of Advance Notice Bylaw

Editor’s Note: Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn client alert by Jeffrey Chapman, Brian Gingold, and Rachel Harrison. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On April 20, 2012, Vice Chancellor Noble of the Delaware Court of Chancery issued an opinion in Icahn Partners LP v. Amylin Pharmaceuticals, Inc. [1] granting a motion to expedite a claim by Carl Icahn that Amylin’s directors breached their fiduciary duties by not waiving Amylin’s advance notice bylaw. Following the passage of the bylaw deadline, Icahn sought to nominate candidates for election to Amylin’s board of directors in the wake of his learning of Amylin’s recent rejection of an unsolicited takeover proposal by Bristol-Myers Squibb Co. Vice Chancellor Noble found that Icahn successfully made a “sufficiently colorable claim” [2] of irreparable injury as a result of the Board’s decisions to reject the Bristol-Myers proposal and his request to waive the advance notice deadline and re-open the nomination process.

The Facts

Amylin’s bylaws contain a fairly customary advance notice provision requiring stockholders to submit director nominations at least 120 days prior to the first anniversary of the preceding year’s annual meeting, unless the meeting date is delayed or advanced by more than 30 days from the anniversary. Given that Amylin’s 2011 annual meeting was held on May 24, 2011 and its 2012 annual meeting was scheduled for May 15, 2012, the cutoff for valid stockholder nominations was January 25, 2012 (the 120th day prior to the first anniversary of the May 24, 2011 meeting). No stockholder nominations were received prior to such date.

On March 28, 2012, Icahn learned that the director defendants (in Icahn’s words) “rejected, without considering,” [3] a takeover proposal from Bristol-Myers to acquire Amylin at a 43% premium. After learning these facts, Icahn purportedly had two “unproductive conversations” [4] with Amylin, followed by sending a letter to the defendants on April 4, 2012. In this letter, Icahn criticized the Board for approving a public offering and granting options to the company’s officers in March, without disclosing the proposal from Bristol-Myers, and suggested that the Board actions “served to substantially dilute” stockholders. [5] Icahn demanded that the Board respond by providing the stockholders with a ten-day period to nominate directors. On April 9, 2012 (12 days after he first learned of the Bristol-Myers proposal and with the defendants having yet to respond to his letter), Icahn filed the action to seek expedited discovery.

The Decision

The decision should be taken in the context of a motion to expedite, which only requires a “colorable claim” to succeed. Based on this low standard, the Court (i) accepted Icahn’s contention that one of the key elements of Amylin’s investment thesis, was “the prospect for a value maximizing transaction, and for the Board to faithfully consider a transaction that presented a compelling value when viewed against the considerable risks to the Company as a stand-alone business” [6] and (ii) ruled that enforcement of the bylaw should therefore be waived in order to give Icahn and the other stockholders the opportunity to elect directors committed to carrying out this investment thesis. Although Amylin’s directors argued that Icahn’s claim was not ripe for adjudication since neither he nor any other stockholders had submitted director nominations, Icahn convinced the Court that the Board had radically changed its outlook and, accordingly, the stockholders could be irreparably injured if the Court were not to enjoin enforcement of the advance notice provision. In granting Icahn’s motion, the Court observed [7] that if Icahn were not permitted to submit his slate of nominees, Amylin’s stockholders would have to wait 13 months to effectuate the requisite board changes needed to re-align the stockholders’ and the company’s investment thesis. [8] The Court further reasoned that without the right to make such nominations, Amylin’s stockholders would be denied their sacrosanct voting rights at a critical point in the company’s history.

The Court also dismissed defendants’ laches claim, finding that Icahn’s twelve-day delay in filing the action “appears to have been justified” by his attempt to persuade Amylin to engage with Bristol-Myers. [9] The Vice Chancellor noted, however, some plaintiffs may in the future fail in securing such relief where “at some point, the time between when a board radically alters its stance and the date of the annual meeting is too short.” [10]

Conclusion

Despite the ultimate dismissal of the case by Icahn pursuant to undisclosed discussions with Amylin, the opinion is a reminder of how far Delaware courts will go to uphold stockholder voting rights. Going back to Hubbard, this ruling is not as much an aberration as one might otherwise think and is a reminder to directors that they should consider the potential ramifications of any decision (at least in a takeover or other strategic context) made after the applicable advance notice deadline has passed. In light of this recent case, which reaffirms the Hubbard decision, activist investors may have been given a new weapon in their arsenal to attack board decisions and open up the nomination window. The question we are left with is where does this line of reasoning end? Is it just an affirmative act that will open the window or would significantly missing guidance trigger this as well?

Endnotes

[1] Icahn Partners LP v. Amylin Pharmaceuticals, Inc., C.A. No. 7404-VCN (Del. Ch. Apr. 20, 2012).
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[2] Id. at 7 (citing Giammargo v. Snapple Beverage Corp., 1994 WL 672698, at *2 (Del. Ch. Nov. 15, 1994).
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[3] Id. at 4.
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[4] Id. at 11.
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[5] See Schedule 13D/A filed by Carl Icahn, filed April 4, 2012.
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[6] Id. at 4.
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[7] Id. at 7 – 10 (citing Hubbard v. Hollywood Park Realty Enterprises, Inc., 1991 WL 3151 (Del Ch. Jan. 14, 1991) (noting that under potentially similar circumstances the Chancery Court issued a preliminary injunction in the absence of director nominations).
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[8] Id. at 8. The Court noted that plaintiffs committed to submitting notice of director nominations if permitted.
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[9] Id. at 10-11.
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[10] Id. at 11, fn. 21.
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