In re Allergan, Inc. S’holder Litig., C.A. No. 9609-CB (Del. Ch. Nov. 7, 2014) (Bouchard, C.)
In this Memorandum Opinion, the Court of Chancery denied plaintiffs’ motion for partial summary judgment, holding that (i) plaintiffs’ request for declaratory relief regarding whether certain certificate of incorporation and bylaw provisions prohibited stockholders from electing directors amounted to a hypothetical proxy strategy that was not ripe for review, and (ii) plaintiffs failed to present a factual record establishing that directors had breached their fiduciary duty of candor.
In 2013, Allergan, Inc. (“Allergan”) amended its certificate of incorporation and bylaws to permit stockholders to call special meetings of stockholders (the “2013 Amendments”). The amendment to the bylaws contained a “Similar Item Provision,” providing that a meeting request would not be permitted if an identical or substantially similar request had already been presented at a stockholder meeting during the previous year. In connection with Allergan’s 2014 annual meeting of stockholders, Allergan director defendants (the “Directors”) recommended to the stockholders an amendment to Allergan’s certificate of incorporation that would permit stockholders to act by written consent (the “2014 Amendment”). As with the 2013 Amendments, the 2014 Amendment contained a “Similar Item Provision,” stating that stockholders would not be permitted to act by written consent on a similar item presented at a stockholder meeting in the previous year.
Institutional Shareholder Services Inc. criticized the 2014 Amendment, stating that the proposed amendment “could make it difficult for shareholders to act by written consent on matters that are generally routine items on an annual meeting agenda, such as director elections.” In response to the criticism, Allergan issued a supplemental proxy statement (the “Supplemental Proxy”), which stated that the Similar Item Provision would permit stockholders to removedirectors by written consent, but would not permit stockholders to electthe directors’ successors if an election of directors had occurred within one year of Allergan’s receipt of a request to take action by written consent. Allergan stockholders approved the 2014 Amendment.
In connection with efforts by Valeant Pharmaceuticals International, Inc. (“Valeant”) to acquire Allergan in a merger transaction, PS Fund 1, LLC (“PS Fund 1”), a joint entity created by Valeant and Pershing Square Capital Management, L.P., is soliciting proxies to remove six of the nine Allergan directors at a special meeting scheduled for December 18, 2014. Importantly, a provision in Allergan’s certificate of incorporation states that vacancies resulting from the removal of any directors will be filled solely by
the remaining directors in office. In light of that provision, certain Allergan stockholders (“Plaintiffs”) recognized that a partial-board removal strategy would not be as effective as a full-board removal strategy because the partial-board removal strategy would not prevent the remaining directors from filling the vacant seats.
In the first claim of their consolidated complaint, Plaintiffs sought a declaration that the Similar Item Provision would not prohibit stockholders from removing all of the Allergan directors at a special meeting and simultaneously electing a new slate of individuals as long as those individuals had not been up for election within the preceding year. The Court found that Plaintiffs’ claim concerned a hypothetical proxy strategy not ripe for judicial review because no stockholders were actually pursuing removal of all of the Allergan directors. The Court therefore concluded that the claim was a classic example of a request for an advisory opinion.
In reaching its decision, the Court rejected Plaintiffs argument that the claim was ripe for adjudication because the Directors’ purportedly inaccurate description of the Similar Item Provision in the Supplemental Proxy deterred stockholders from exercising their rights to call a special meeting. In support of this argument, Plaintiffs cited decisions in which the Court found ripe for review the deterrent features of rights plans and proxy put provisions. The Court disagreed, noting that PS Fund 1 had not been deterred from seeking control of the board through a proxy contest.
The Court then addressed Plaintiffs’ second claim, holding that Plaintiffs failed to present a factual record demonstrating that the Directors breached the duty of candor by disseminating false information about the Similar Item Provision in the Supplemental Proxy. Plaintiffs argued that the Directors falsely characterized the Similar Item Provision to mean that stockholders would not have the right to replacedirectors removed at a special meeting.
The Court explained that, although directors owe a duty not to speak falsely, there is no independent duty of candor under Delaware law. Rather, disclosure duties are derived from the duties of care and loyalty, and Plaintiffs bore the burden to demonstrate a breach of the duty of care or the duty of loyalty. The Court found that Plaintiffs did not provide facts “for example, demonstrating that the Allergan board acted in a grossly negligent manner such as to sustain a duty of care claim or knowingly made a false statement such as to sustain a duty of loyalty claim.” The Court noted that Plaintiffs filed their motion for partial summary judgment before deposing any of the Allergan directors or taking any discovery concerning the issuance of the Supplemental Proxy. The Court denied the motion.