Poison Puts and Fiduciary Obligations and the Irrelevance of the Delaware Courts: Pontiac General Employees Retirement v. Healthways (Part 2)
Shareholders brought an action for breach of fiduciary duty against the board and one for aiding and abetting against the creditor. In addition, the shareholder sought declaratory relief that the dead hand proxy put was invalid. The company sought dismissal primarily on the grounds of ripeness.
With respect to ripeness, the court found the matter ready for adjudication.
- Here, the defendants argue that the dispute is not ripe because a variety of additional events must take place before the proxy put with its dead-hand feature is actually, in fact, triggered and does actually accelerate the debt. The plaintiffs, however, have cited two different injuries. The first is the deterrent effect of the proxy put. Namely, because the proxy put exists, it necessarily has an effect on people's decision-making about whether to run a proxy contest and how to negotiate with respect to potential board representation.
The "substantial deterrent effect" of the provision was, therefore, enough to make the matter ripe. It was, as the trial judge observed, a "sword of Damocles" theory of ripeness. See Transcript, at 10. Or, perhaps, more colorfully, its the "loaded artillary" theory of ripeness. As the court described:
- Like, if somebody's got a piece of artillery sitting on a hill overlooking my town, it is definitely true that before a shell can land on my town, people have to go up there, people have to load the weapon, you know, people have to go through the firing sequence, somebody actually has to pull the cord, the shell actually has to fire, the shell has to arc through the air, it has to land, and it actually has to go off. But that's a different thing from how I change my behavior driven by the fact that somebody has a piece of artillery on a hill over my town.
Transcript, at 16.
As to whether the complaint stated a cause of action for aiding and abetting against the creditor, the court concluded that it did. The creditor asserted that there had not been "knowing participation" in any breach of fiduciary duty. While acknowledging that creditors had the right to negotiate at arms length and obtain "the best deal", they could not "propose terms, insist on terms, demand terms, contemplate terms, incorporate terms that take advantage of a conflict of interest that the fiduciary counterparts on the other side of the negotiating table face."
The court emphasized that lenders had been put "on notice that these provisions were highly suspect". As the court reasoned:
- Given the facts here, as alleged, including that there was a historic credit agreement that had a proxy put but not a dead hand proxy put, and then that under pressure from stockholders, including the threat of a potential proxy contest, the debt agreements were modified so that the change-in-control provision now included a dead hand proxy put, and considering that all of this happened well after Sandridge and Amylin let everyone know that these provisions were something you ought to really think twice about, I believe that, as pled, this complaint satisfies the requirement to survive a motion to dismiss.
The court, therefore, denied the motion to dismiss.
The primary materials in Pontiac General Employees Retirement v. Healthways including the transcript can be found at the DU Corporate Governance web site.