In 2007 Amylin Pharmaceuticals issued 3.00% convertible senior notes due 2014. The Note Indenture gives the noteholders the right to demand redemption of any or all of their notes at face value upon the occurrence of "Fundamental Change," which occurs, among other time, when “the Continuing Directors do not constitute a majority of the Company’s Board of Directors . . . .” The Indenture defines “Continuing Directors” as follows:
In a case issued today, Vice-Chancellor Lamb was asked to decide whether this provision "prevents the issuer’s board of directors from 'approving' as 'continuing directors' persons nominated by stockholders in opposition to the slate nominated by the incumbent directors." Certain stockholders -- including Carl Icahn and Eastbourne Capital Management, who together nominated five directors for election to Amylin's 12-person board of directors -- want the board to approve the directors to avoid the negative consequences associated with the change-of-control provision. The incumbent directors agreed to do this as part of a partial settlement of this litigation, but the Note Trustee believes that the board should be precluded from granting such approval.
This is a plain old contract interpretation case, but unfortunately for VC Lamb, the contract doesn't expressly address the issue, and the drafting history of the Indenture doesn't provide much guidance. He tries to make something of the word "approval": if the board opposes the election of the Icahn and Eastbourne nominees, can they really be said to approve those directors? VC Lamb:
That seems right. When you consider the negative consequences associated with the change-of-control provision, the narrow interpretation of "approval" would effectively prevent shareholders from electing a new majority of the board of directors, and VC Lamb suggests that this would raise public policy concerns regarding the enforceability of such a contract.
Thus, the Amylin board has the right to approve the dissident nominees, but it must exercise this right in good faith. Here's the decision rule: "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 problem in applying this rule is that the incumbents made negative public statements about the dissidents. According to Lamb, "if taken at face value, these statements would suggest that the board has concluded that the dissidents would be harmful to the company, [but] such a reading would be inappropriate" because the statements are nothing more than "election puffery." The more important point is that approval was granted in exchange for a partial settlement of the litigation. That looks like it could be a good faith business judgment about the effect of approval on the corporation and its stockholders. Or a decision by the incumbent directors to serve their own selfish interests. Unfortunately, Lamb did not have enough evidence to draw any conclusions. And because the dissidents are seeking to elect less than a majority of the directors, the issue will not be ripe for adjudication until the dissidents gain control.
This is not a monumental case, but it reminded me how much I like reading Steve Lamb's opinions. His writing is economical, and he is always sophisticated about the implications of his opinions. I will miss him when he retires later this year.
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1. Posted by Mark S. Devenow on May 13, 2009 @ 9:04 | Permalink
This is interesting commentary. The note trustee probably did not marshal sufficient factual indicia to vitiate the business judgment of incumbent directors, fight with dissident holders,vel non. Relatively obscure, fact-intensive and recondite cases form much of the fabric of the law regarding corporate control and business to business commercial relations. However, it would seem that the post should have contained a direct link to the opinion.
2. Posted by San Antonio Attorney on May 24, 2010 @ 19:11 | Permalink
These VCs come up wiht a lot of creative ways to take control of board positions. Many times they buy a stake in the company and then replace board members one by one with people that work for them.
3. Posted by pension funds on June 16, 2011 @ 23:45 | Permalink
I would love to go to work....but I would also love to walk again too. Centel, who was purchased by Sprint, now Embarq, now Centurylink....or something like that, no only screwed us out of benefits we paid for...... they also STOLE MONEY from our retirement fund