Below you will find news, cases, and commentary–all with a Delaware Corporate and Business Law focus. If you have any news or commentary you would like to contribute, please e-mail firstname.lastname@example.org.
by Prof. Lawrence A. Hamermesh, Ruby R. Vale Professor of Corporate and Business Law
Court of Chancery Deals a Blow to Use of “Pfizer Type” Majority Voting Policies as a Mechanism for Shareholder Activism
In a very interesting opinion on a matter of first impression, Vice Chancellor John Noble has indicated that the refusal of a board of directors to accept the resignation of a director who fails to obtain a majority vote under a “Pfizer-style” majority vote resignation policy is largely immune from judicial review.
The case – City of Westland Police & Fire Retirement System v. Axcelis Technologies, Inc., decided September 29, 2009 – involved something of a collateral issue: namely, whether to permit inspection of documents relating to the board’s decision to reject the proffered resignations of three directors. In rejecting that demand, however, the court suggested that such a rejection would not ultimately be tested under standards of judicial review more demanding than the business judgment rule. For reasons explained below, I question whether that degree of deference should prevail as a general rule, especially in the situation where the majority voting rule exists as a requirement in the bylaws, rather than only as a matter of board policy…
Domineering Chairman, Derivative Claims, and More
In re NYMEX S’holders Litig., C.A. 3621-VCN, 2009 WL 3206051 (Del. Ch. Ct. Sept. 30, 2009).
A couple of noteworthy principles were touched on in an opinion dismissing a litany of shareholder claims regarding NYMEX’s approval of a merger with CME. Primarily, the shareholders claimed they did not receive fair value for their shares.
First was the court’s response to allegations of board acquiescence in the face of an imperial chairman. The court responded: “That directors acquiesce in, or endorse actions by, a chairman of the board-actions that from an outsider’s perspective might seem questionable-does not, without more, support an inference of domination by the chairman or the absence of directorial will.” The most that could be inferred from Plaintiff’s allegations is that the Board’s process was not perfect. But, the court reaffirmed, “there is no single blueprint that a board must follow to fulfill its duties.”
Second, the court relied on the standard recently articulated in Lyondell and Corti to dismiss any claims of bad faith. Specifically, the Complaint failed to allege that the Board “utterly failed to obtain the best sale price.”
Finally, the court provided some lengthy guidance on the Parnes exception to the direct/derivative claim distinction in a merger context. The court explained that to be considered a direct claim under this narrow exception “there must be a causal link between the breach complained of and the ultimate unfairness of the merger.” Here, the plaintiffs did not demonstrate causality when significant time lapsed between the collapse of negotiations with one bidder and the serious negotiations with the final bidder.
Interview with Newly Sworn In Vice Chancellor J. Travis Laster
Available via Francis Pileggi.
Cases & Commentary 10.11
Amylin Pharmaceuticals and a Substantive Duty of Care?
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.
New Vice Chancellor Confirmed
On September 20th, J. Travis Laster was confirmed by the Delaware Senate to become the newest Vice Chancellor on the Delaware Court of Chancery. October 9 is the expected date for his investiture and swearing in ceremony. Laster will fill the seat vacated by retired Vice Chancellor Stephen P. Lamb.
New Business Lawyer Articles on Delaware Law
Two articles in the current issue of The Business Lawyer, a publication of the ABA’s Business Law Section, discuss Delaware corporate law decisions.
- Sabin Willet, Gheewalla and the Director’s Dilemma, 64 Bus. Law. 1087 (Aug. 2009).
Did North American Catholic Education Programming Foundation, Inc. v. Gheewalla change anything? The Delaware Supreme Court ruled in 2007 that corporate directors owe no direct fiduciary duty to creditors in insolvency, but the bar seems to have met the case with a collective shrug, concluding that the preservation of a creditor’s right to pursue derivatively on behalf of a distressed corporation a claim for breach of fiduciary duty leaves intact the “fiduciary duty to the corporate enterprise” theory that informed pre-Gheewalla advice.
This Article posits that this general view is wrong. In the vicinity of insolvency, two oft-cited principles—that a board should strive to maximize enterprise value, and that it should protect the shareholders—sometimes are in conflict. In a period where insolvency deepens, a discounted sale may maximize enterprise value, even as it cuts off a less likely, but real prospect of an equity-preserving restructure.
This Article argues that “duty to the enterprise” theory is incoherent and ignores the reality of business valuation, which is that all prospects are uncertain. The necessary consequence of Gheewalla, construed in light of other relevant authorities, is that where any business strategy may generate a return for equity holders, the board must favor that strategy and reject alternatives, even if in the board’s business judgment the strategy is unlikely to succeed, and alternatives, on a risk-adjusted basis, would maximize the enterprise value.
The full article is available online with the ABA, if you are a member.
- Lyman Johnson and Dennis Garvis, Are Corporate Officers Advised About Fiduciary Duties?, 64 Bus. Law. 1105 (Aug. 2009)
This Article reports the results of an empirical study of whether and how in-house corporate counsel advise corporate officers about fiduciary duties. The fiduciary duties of officers long have been neglected by courts, scholars, and lawyers, even though executives play a central role in corporate success and failure. The study’s findings, organized by type of company (public or private), size, and attorney position, show several interesting patterns in advice-giving practices. For example, fewer than half of all respondents provided advice to officers below the senior-most rank. The results raise the possibility that, unlike directors who may overestimate their liability exposure, certain shortcomings in giving advice to officers may cause them to underestimate personal liability exposure and engage in more risky behavior than is desirable for the company itself. The Article also offers recommendations for improved practices in advising officers about their duties.
The full article is available online with the ABA, if you are a member.
The “Proof of Beneficial Ownership” Requirement Explained
Smith v Horizon Lines, Inc., C.A. 4573-CC, 2009 WL 2913887 (Aug. 31, 2009).
The statute governing demands for inspection rights requires a beneficial owner who makes demand to provide proof of beneficial ownership. This decision explains what form that proof must take. An account statement that just has the owner’s last name and does not indicate the date of ownership is not good enough. Moreover, a sworn statement is not a proper substitute.
U.S. Supreme Court to Weigh in On Executive Pay
The United States Supreme Court has agreed to hear Jones v. Harris Associates, a case on executive pay. The case is on manager’s fees in the mutual fund industry, but the holding will likely effect corporate governance in all industries. Oral arguments are scheduled for November 2.
Bainbridge on Fiduciary Duties and Preferred Stockholders
The Court of Chancery’s recent decision in In Re: Trados Incorporated Shareholder Litigation, No. 1512-CC, 2009 WL 2225958 (July 24, 2009) prompted Professor Bainbridge to question the basic issue of whether there ought to be fiduciary duties to preferred stock holders at all. On his blog, Professor Bainbridge gives a brief overview of this area of Delaware corporate law and concludes that Jedwab v. MGM Grand Hotels, Inc., 509 A.2d 584 (Del. Ch. 1986) should be overturned on both doctrinal and policy grounds. See the full commentary here.
Amendments Made to the Delaware General Corporation Law
The amendments to the Delaware General Corporation Law that were signed by the Governor this past spring became effective on August 1, 2009. They can be viewed here. As described more fully in the synopsis to the legislation, these are very significant amendments, dealing with issues like proxy access bylaws (new Section 112), proxy contest expense reimbursement bylaws (Section 113), bifurcation of record dates for notice and voting at stockholder meetings (amended Section 213 and related sections), and alteration of rights to indemnification and advancement of defense costs (amended Section 145(f)).
Along with Edward Welch and Rachel Barnett, Widener alum and Skadden Arps partner Edward Micheletti published an article in the M&A Lawyer May 2009 issue discussing five important takeaways from the Delaware Supreme Court’s opinion in Lyondell v. Jacobs.