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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:

(i) individuals who on the Issue Date constituted the Board of Directors and (ii) 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 (or a duly constituted committee thereof) either who were directors on the Issue Date or whose election or nomination for election was previously so approved.

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:

To read the provision as the Trustee suggests would mean that any election of stockholder nominees resulting from a contested election, even over insubstantial matters, would bar the board from approving the dissident slate for the purposes of the Indenture.

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."

Hmm.

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.

Case dismissed.

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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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:

(i) individuals who on the Issue Date constituted the Board of Directors and (ii) 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 (or a duly constituted committee thereof) either who were directors on the Issue Date or whose election or nomination for election was previously so approved.

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:

To read the provision as the Trustee suggests would mean that any election of stockholder nominees resulting from a contested election, even over insubstantial matters, would bar the board from approving the dissident slate for the purposes of the Indenture.

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."

Hmm.

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.

Case dismissed.

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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