A Delaware Chancery Court decision last week raises significant questions regarding the interpretation and validity of various types of “continuing director” change-in-control provisions that are common features in one formulation or another in loan agreements, indentures and other contracts. Following the opinion, some existing provisions may not be interpreted as expected by some lenders and other existing provisions may be invalid. The court’s opinion also raises considerations for boards approving financing and other agreements (including employment agreements and benefit plans) with such provisions in the future and for lawyers negotiating such agreements, advising boards and drafting disclosure regarding such provisions.
San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals, Inc. arose out of a proxy contest in which two separate dissident stockholders [1] of Amylin, prevented from agreeing to form a unified minority slate by the Company’s “poison pill,” each proposed a slate of five nominees to the 12-member Amylin Board of Directors, thereby raising the possibility that a majority of the Board could be changed at the upcoming Annual Meeting despite each stockholder’s seeking only minority representation. Amylin’s public Indenture [2] contains a common change in control provision giving noteholders the right to put their notes to the company at par if “at any time Continuing Directors do not constitute a majority of the Company’s Board of Directors”. The term “Continuing Directors” is defined as directors in office on the Issue Date of the Notes and “any new directors whose election to the Board of Directors or whose nomination for election by the stockholders of the Company was approved by at least a majority of the directors then still in office…either who were directors on the Issue Date or whose election or nomination for election was previously so approved.”
One of the insurgents requested that the Board (consisting entirely of Continuing Directors) approve the nomination of both dissident slates of nominees for purposes of this Indenture provision, even though the Board continued to recommend its own slate and oppose the election of the dissidents’ nominees. The Board refused the request and a stockholder commenced a suit seeking a declaration that the board had the power to approve the dissidents’ nominees and a fiduciary obligation to do so. In a partial settlement of the stockholder lawsuit, the Board agreed to approve both dissidents’ slates of nominees subject to obtaining a court order confirming the Board’s contractual right to do so. The Indenture Trustee, however, continued to litigate, arguing that the word “approve” in the Indenture is synonymous with “endorse” or “recommend”, and that the Board could thus not both run its own slate and simultaneously “approve” the dissident slate for purposes of the Indenture.
Following a trial on limited issues, Vice Chancellor Lamb disagreed with the Indenture Trustee, concluding that the language of the Indenture was clear and that the Board had the right to approve the dissident nominees for purposes of the Indenture even though actively opposing their election. The court stated that to interpret the Indenture to prohibit such Board approval of dissidents would have:
“an eviscerating effect on the stockholder franchise [that] would raise grave concerns. In the first instance, those concerns would relate to the exercise of the board’s fiduciary duties in agreeing to such a provision. The court would want, at a minimum, to see evidence that the board believed in good faith that, in accepting such a provision, it was obtaining in return extraordinarily valuable economic benefits for the corporation that would not otherwise be available to it. Additionally, the court would have to closely consider the degree to which such a provision might be unenforceable as against public policy.”
Having decided that the board had the power to approve such stockholder nominees, the court turned to whether the board’s agreement to approve the two slates in this case complied with the company’s implied duty of good faith and fair dealing inherent in the indenture, as in all contracts. While the Vice Chancellor concluded that, under the record before him, a decision on this question was not ripe for resolution, the opinion discusses the relevant standard for a board’s decision to exercise its power to approve nominees and concluded that “the board may approve a stockholder’s 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. [3] And the court further noted that “the directors are under absolutely no obligation to consider the interests of the noteholders in making this determination”.
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