When I read the Delaware Supreme Court's en banc order in San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals, Inc., I realized that courts are increasingly referring to the unexpected occurance and size of the financial crisis that struck the world in 2008, at least when denying a particular claim (I guess courts won't be too eager to mention this disculpatory circumstance when finding liability). As Justice Jacobs emphasized in footnote 2, to an otherwise not very interesting ruling (from a doctrinal perspective):
The Court of Chancery determined, inter alia, that Amylin Pharmaceuticals' board of directors did not breach its duty of care in authorizing the corporation to enter into the Indenture Agreement, with its 'proxy put' provision. That determination was correct, not only for the reasons made explicit in the Court's opinion, but also for one that is implicit: 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 months later, and was aggravated by the unexpected, cataclysmic decline in the nation's financial system and capital markets beginning in the Spring of 2008.
Another thing came to mind when reading this footnote. The Supreme Court first refers to the duty of care claim, that was denied by VC Lamb in the decision a quo. His analysis essentially ran as follows.
In addition to its claims sounding in contract, the plaintiff alleges that the board of Amylin breached its duty of care in the adoption of the Indenture for the 2007 Notes, insofar as the Indenture contained the Continuing Directors provisions. The plaintiff bases its claim largely on the fact that the Pricing Committee never discovered during its approval process that the proposed Indenture contained a Continuing Directors provision.
The duty of care requires that 'in making business decisions, directors must consider all material information reasonably available, and that the directors' process is actionable only if grossly negligent. ... [T]he standard for judging the informational component of the directors' decisionmaking does not mean that the Board must be informed of every fact. The Board is responsible for considering only material facts that are reasonably available, not those that are immaterial or out of the Board's reasonable reach.
Thus, the question is squarely framed: was the board of Amylin (or its delegate, the Pricing Committee) grossly negligent in failing to learn of the existence of the Continuing Directors provisions?
The answer must be no. The board retained highly-qualified counsel. It sought advice from Amylin's management and investment bankers as to the terms of the agreement. It asked its counsel if there was anything 'unusual or not customary' in the terms of the Notes, and it was told there was not. Only then did the board approve the issuance of the Notes under the Indenture. This is not the sort of conduct generally imagined when considering the concept of gross negligence, typically defined as a substantial deviation from the standard of care.
The plaintiff argues that the board's questioning if there was anyting 'unusual or not customary' in the Indenture was insufficient. But the way in which the board inquired into the material terms of the Indenture cannot be equated with gross negligence in failing to inform itself. Certainly, no one suggests that the directors' duty of care required them to review, discuss, and comprehend every word of the 98-page Indenture.
(footnotes omitted)
So we're basically talking here about whether the decisionmaking process was sufficiently careful. As we know, especially since the Delaware Supreme Court's 2000 Brehm v. Eisner decision, a due care analysis is limited to the decisionmaking process only. As to the substance, the court typically doesn't review in terms of 'care' (at least not under the business judgment rule; VC Lamb seemed to rely on that doctrine here, using snippets from Brehm v. Eisner that cover this doctrine). When it comes down to evaluating the 'riskyness' of the business decision made (i.e., the substance of the business decision), courts typically limit themselves to bad faith/lack of good faith review (sometimes coined in terms of lack of any rational business purpose, or waste), if looking at that part of the equasion at all (as courts really aren't well equipped to - ex post - judge appropriate degrees of business risk). I explained this more in detail in post No. 29.
Does it make sense then, for the Delaware Supreme Court to refer in this 2009 decision to the possible involvement of reasonably foreseeabe "material risk to the corporation or its stockholders" when still looking through the due care prism as applied by the Delaware Chancery Court in its decisionmaking process review? I would think this element relates to the substance of the business decision made (i.e., the approval of the proxy put itself), where the duty of care normally doesn't play a role in the court's analysis. I confess to finding this footnote 2 somewhat puzzling in this respect.
Comments