San Antonio Fire & Police Pension Fund v. Amylin Pharm., Inc., 2009 WL 3182602 (Del.).

In the trial below, the plaintiffs claimed, among other issues, that the board violated their fiduciary duty of care because they were not explicitly aware of the proxy puts when they approved the Indenture and credit agreements. The board had retained highly-qualified counsel and asked if there was anything “unusual or not customary” in the terms of the agreement.  It was told there was not.  The Proxy Puts exposed the Company to immediate repayment and repurchase obligations if Amylin shareholders elected a board of directors that did not include a majority of the incumbent directors, or directors approved by the incumbent directors.  These obligations could have required Amylin to remit more than $900 million – an amount exceeding the Company’s available cash.

Although the Court of Chancery gave fair warning that “terms which may affect the stockholders’ range of discretion in exercising the franchise should, even if considered customary, be highlighted to the board,” it found the directors did not violate their duty of care.  The directors relied on experienced, qualified advisors, and the way in which the board inquired into the terms can not be equated with gross negligence.  “Certainly, no one suggests that the directors’ duty of care required them to review, discuss, and comprehend every word of the 98-page Indenture.”

In a brief order affirming the opinion below, Justice Jacobs added a footnote stating that, in addition to the reasons stated below, the board did not violate their duty of care because “no showing was made that approving the ‘proxy put’ at that point in time would involve any reasonably foreseeable material risk to the corporation or its stockholders.” That risk materialized only after the market crash last fall.

For an interesting critique of this footnote see TheDefiningTension.com (post here), which questions why the Supreme Court appeared to be making a substantive evaluation of the board’s decision when the duty of care focuses on the process of decision-making.