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San Antonio Fire & Police Pension Fund v. Amylin Pharms.,Inc., et. al., C.A. No. 4446-VCL (Del. Ch. May 12, 2009) (Lamb, V.C.)

May 12, 2009

In this case, the Court of Chancery interpreted so-called “poison put” provisions in an indenture, holding that for purposes of the indenture’s continuing director provision, a corporate board of directors was permitted to “approve” as continuing directors persons nominated by dissident stockholders (so as to prevent triggering a default under the indenture), even though the board was at the same time opposing the election of the dissident slates in its communications with stockholders. The “poison put” provisions at issue were contained in a trust indenture (“Indenture”) governing publicly traded notes issued by, and a syndicated credit agreement (“Credit Agreement”) entered into by, defendant Amylin Pharmaceuticals, Inc. (“Amylin”). The trust indenture governing Amylin’s 3.00% convertible senior notes due 2014 (the “2007 Notes”) gave note-holders the right to demand redemption of any or all of their notes at face value upon the occurrence of certain events, including a Fundamental Change, defined within the Indenture as “any time the Continuing Directors do not constitute a majority of the Company’s Board of Directors.” Section 11.01 of the Indenture defined Continuing Directors as those directors who on the issue date constituted the board of directors or any new directors whose nomination or election was approved by at least a majority of the directors still in office who were directors on the issue date or whose nomination or election was previously so approved. The Credit Agreement at issue also provided that an event of default would occur thereunder if “Continuing Directors” failed to constitute a majority of the members of Amylin’s Board, but contained a much more strict definition of “Continuing Directors.”

On January 28, 2009, Icahn Partners LP and affiliates (“Icahn”), an 8.8% stockholder, notified Amylin of its intention to nominate a slate of five directors to Amylin’s twelve-person board. The following day, Eastbourne Capital Management, L.L.C. (“Eastbourne”), a 12.5% stockholder, notified Amylin of its intention to nominate its own five-person slate. Because the election of more than five of the dissidents’ nominees would trigger the Continuing Directors provisions, Eastbourne sent Amylin a letter on February 1, 2009 asking the Amylin board to prevent the provisions from being triggered. Specifically, Eastbourne asked the board to compile an approved slate of directors that would include a “significant number” of the nominee’s from each of Eastbourne’s and Icahn’s slates.

The Company and the banks that were parties to the Credit Agreement reached agreement on a waiver of the Credit Agreement covenant, mooting that issue. Thus, the Court considered the central issue in this case was whether or not the Amylin board had both the power and the right under the Indenture to approve the stockholder nominees as Continuing Directors. Because the Court found that the Indenture constituted a contract between Amylin and The Bank of New York Mellon Trust Co. (the Trustee for the 2007 Notes) under the Indenture, determination of this question was one of contractual interpretation based on New York law pursuant to a choice of law provision contained in the Indenture. The Court sided with Amylin’s definition of “approve,” finding that it means to “give formal sanction to; to confirm authoritatively.” This definition gives the board the power to approve a slate of nominees for the purposes of the Indenture without endorsing them, allowing the board to simultaneously recommend and endorse its own slate instead. After determining that the board has the power to approve the slate, the Court turned to the issue of whether the board properly exercised the right to do so. The Court found that the central question was whether approval by the board comports with the company’s implied duty of good faith and fair dealing, which is inherent in all contracts. Citing Hills Stores Co. v. Bozic (769 A.2d 88 (Del. Ch. 2000)), the Court noted that the board has the right to approve 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 noted that the parties had not introduced any evidence regarding the board’s deliberation with respect to the decision to approve the stockholder-nominated slate, but determined this issue to be unripe since the dissident parties reduced the size of their respective slates so that a majority of the board will remain Continuing Directors.

The Court also addressed whether the Amylin board had breached its duty of care by adopting the Indenture, insofar as it contained the Continuing Directors provisions. The Court found that the board approved the issuance of the Notes under the Indenture only after retaining “highly-qualified counsel” and seeking advice from Amylin’s management and investment bankers regarding the terms of the agreement. The Court found these actions did not constitute “the sort of conduct generally imagined when considering the concept of gross negligence” (which is the standard of conduct applicable to claims of the breach of the duty of care), ultimately concluding that the board did not breach its duty of care when it approved the issuance of the Notes under the Indenture. However, the Court noted that, because of the potentially significant adverse effects of the inclusion of such provisions, counsel advising boards considering debt instruments containing such provisions should “highlight” them to the board, because of the board’s “continuing duties to the stockholders to protect their interests.”

The full opinion is available here