Poison Puts and Fiduciary Obligations and the Irrelevance of the Delaware Courts: Pontiac General Employees Retirement v. Healthways (Part 5)
We are discussing Pontiac General Employees Retirement v. Healthways.
What makes this case so remarkable? One possibility is the decision. By denying the motion to dismiss, the court has announced that boards putting in place dead hand poison puts will confront litigation risk. The court also emphasized that poison puts, even without a deadhand feature, raise possible fiduciary duty concerns.
Most importantly, however, the decision not to allow dismissal of the aiding and abetting claim raises the specter of liability for the bank or other lender in the transaction. Banks aware of this possibility will now have to determine whether the value of the provision outweighs the litigation risk that will arise from any subsequent challenge by shareholders. One suspects that most banks will decide that this vestige of the 1980s has little real value and that the marginal value does not outweigh the litigation risk. The provisions are likely to disappear not at the insistence of the board but at the insistence of the lender.
But perhaps the most interesting aspect of this case is the apparent irrelevance of the Delaware courts to issuers and their boards in adopting these provisions. Amalyin addressed poison puts. The court in that case gave Amylin a pass on the use of the provision but served warning that the provisions were suspect. Nonetheless, the "warning" did not stop Healthways. Moreover, a search of the EDGAR data base in the post-Amalyin period reveals that poison puts remain not uncommon.
The behavior has a number of possible explanations. One possibility is that issuers simply did not believe the "warning" issued by the Delaware court in Amalyin. In other words, when the next poison put was litigated, the company would get another stern lecture but given the same pass that went to Amalyin. The reaction of the Delaware courts, therefore, was irrelevant in deciding whether to adopt these provisions. Given the management friendly nature of the Delaware courts, this is not an unreasonable expectation.
Delaware courts probably have their greatest influence when they provide management with increased authority and discretion. Where, however, the courts are seeking to impose limits, their authority appears to be decidedly less robust and, at least in some cases, irrelevant.
The primary materials in Pontiac General Employees Retirement v. Healthways can be found at the DU Corporate Governanceweb site.