In re Allergan, Inc. Stockholder Litigation ( 2014 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE ALLERGAN, INC. Consolidated
STOCKHOLDER LITIGATION C.A. No. 9609-CB
MEMORANDUM OPINION
Date Submitted: August 14, 2014
Date Decided: November 7, 2014
Stuart M. Grant, Michael J. Barry, Aaron W. Stewart and Bernard C. Devieux of GRANT
& EISENHOFER, P.A., Wilmington, Delaware; Mark Lebovitch, David L. Wales and
Edward G. Timlin of BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New
York, New York; Co-Lead Counsel for Co-Lead Plaintiffs.
Brian J. Robbins, Stephen J. Oddo, Edward B. Gerard and Justin D. Rieger of ROBBINS
ARROYO LLP, San Diego, California; Additional Counsel for The Police Retirement
System of St. Louis.
Lisa A. Schmidt, Raymond J. DiCamillo, Susan M. Hannigan and Rachel E. Horn of
RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Peter A. Wald of
LATHAM & WATKINS LLP, San Francisco, California; Blair G. Connelly and Virginia
F. Tent of LATHAM & WATKINS LLP, New York, New York; Michele D. Johnson
and Kristin N. Murphy of LATHAM & WATKINS LLP, Costa Mesa, California;
William Savitt and Bradley R. Wilson of WACHTELL, LIPTON, ROSEN & KATZ,
New York, New York; Counsel for Defendants.
BOUCHARD, C.
I. INTRODUCTION
Last April, Valeant Pharmaceuticals International, Inc. (“Valeant”) publicly
disclosed its interest in acquiring Allergan, Inc. (“Allergan”) in a merger transaction.
Pershing Square Capital Management, L.P. (“Pershing Square”), a well-known hedge
fund, has been working with Valeant as a co-bidder to consummate such a transaction.
In furtherance of their efforts, PS Fund 1, LLC (“PS Fund 1”), a joint entity created by
Pershing Square and Valeant that has acquired a significant position in Allergan, filed
two separate lawsuits in this Court seeking judicial declarations in aid of their desire to
run a proxy contest against the Allergan board of directors. Following preliminary
hearings, the parties settled both cases. PS Fund 1 currently is soliciting proxies to
remove six of the nine members of the Allergan board at a special meeting of Allergan’s
stockholders scheduled for December 18, 2014.
In this action, stockholders of Allergan who have been monitoring these events
believe that a better strategy for Pershing Square and Valeant – one they have chosen not
to pursue – would be to remove and replace the entire Allergan board at the same special
meeting of stockholders. This strategy implicates a provision found in Allergan’s
certificate of incorporation and its Bylaws known as the “Similar Item” provision. In a
supplemental proxy statement issued earlier this year (the “Supplemental Proxy”),
Allergan stated that the Similar Item provision would permit stockholders to remove
directors by written consent (and presumably at a special meeting) but not to elect their
1
successors by written consent if an election of directors had occurred within one year of
the Company’s receipt of a request to take action by written consent. 1
Presently before the Court is plaintiffs’ motion for partial summary judgment on
the first two of the five claims in their consolidated complaint. Plaintiffs seek (1) a
declaration that the Similar Item provision would not prohibit the stockholders of
Allergan from removing the entire board at a special meeting and simultaneously electing
at the same special meeting a new slate of individuals to replace them as long as those
same individuals had not been up for election by the Allergan stockholders within the
preceding year, and (2) entry of a judgment that the directors of Allergan breached their
fiduciary duties in connection with the issuance of the Supplemental Proxy by falsely
characterizing the meaning of the Similar Item provision.
For the reasons explained below, I conclude that plaintiffs’ request for declaratory
relief seeks an advisory opinion concerning a hypothetical proxy strategy that is not ripe
for review. I also conclude that plaintiffs, who have not taken discovery and have not
presented a factual record concerning the circumstances surrounding the issuance of the
Supplemental Proxy, have failed to establish that the Allergan board breached its
fiduciary duties. Accordingly, plaintiffs’ motion for summary judgment is denied.
1
The vacancies created by the removal of directors instead could be filled in another
manner. For example, the remaining director(s) on Allergan’s board could appoint
successor directors under Article 8 of its Certificate (discussed below) or the Court could
summarily order an election to fill the vacancies in certain circumstances specified in 8
Del. C. § 223.
2
II. BACKGROUND 2
A. The Parties
Plaintiffs City of Westland Police & Fire Retirement System, City of Riviera
Beach Police Officers Pension Fund and The Police Retirement System of St. Louis have
been stockholders of Allergan at all relevant times.
Defendant Allergan, a Delaware corporation, is a multi-specialty healthcare
company focused on developing and commercializing pharmaceuticals, biologics,
medical devices and over-the-counter products. Allergan develops and commercializes a
wide range of products for the ophthalmic, neurological, medical aesthetics, medical
dermatology, breast aesthetics, urological, and other specialty markets in more than 100
countries around the world. Allergan was founded in 1950 and is listed under the symbol
“AGN” on the New York Stock Exchange.
Defendants David E.I. Pyott, Michael R. Gallagher, Deborah Dunsire, Trevor M.
Jones, Louis J. Lavigne, Jr., Peter J. McDonnell, Timothy D. Proctor, Russell T. Ray, and
Henri A. Termeer were the nine members of Allergan’s board of directors in April 2014,
when the Supplemental Proxy was issued.
B. Allergan Amends its Certificate and Bylaws to Permit Special Meetings
of Stockholders and Action by Written Consent
Before 2013, Allergan’s certificate of incorporation (“Certificate”) did not permit
the calling of special meetings of stockholders or the taking of action by written consent.
2
The facts recited herein are based on the allegations of the consolidated complaint and
the parties’ submissions in connection with plaintiffs’ motion for summary judgment.
3
On March 8, 2013, in connection with Allergan’s annual stockholder meeting
scheduled for April 30, 2013, Allergan filed a definitive proxy statement with the
Securities and Exchange Commission (“SEC”) that included a proposal to amend its
Certificate to allow stockholders to call special meetings of stockholders upon the written
request of stockholders holding 25% of Allergan’s outstanding shares of common stock. 3
The proxy statement disclosed that if stockholders approved this amendment to the
Certificate, Allergan’s Bylaws also would be amended. 4 The proposed amendment to the
Bylaws contained, in relevant part, a “Similar Item” provision. It provided that special
meeting requests would not be permitted if “an identical or substantially similar item” to
that included in the special meeting request had been presented at a stockholder meeting
during the previous year:
(1) The Secretary shall not accept, and shall consider ineffective, a Special
Meeting Request if . . . (c) an identical or substantially similar item (a
“Similar Item”) to that included in the Special Meeting Request was
presented at any meeting of stockholders held within one year prior to
receipt by the Corporation of such Special Meeting Request. 5
In response to Allergan’s proxy statement, Institutional Shareholder Services Inc.
(“ISS”) issued a report addressing the special meeting proposal. ISS noted that the
Similar Item provision could make it difficult for stockholders to elect directors at a
special meeting:
3
Allergan, Inc., Definitive Proxy Statement (Schedule 14A) 16-17 (Mar. 8, 2013) (the
“2013 Proxy”) (Defs.’ Br. in Opp. to Pls.’ Mot. for Summ. J. Horn Aff. Ex. B at 16-17).
4
2013 Proxy at 16.
5
2013 Proxy at B-3 (§ 3(B)(1)(c)).
4
[T]he restriction limiting the type of business that may be covered to those
items not covered at an annual or special meeting within the last year could
make it difficult for shareholders to bring matters to a special meeting that
are generally routine items on an annual meeting agenda, such as director
elections. 6
Nonetheless, ISS recommended that Allergan stockholders approve the proposal, 7 which
they did at the April 30, 2013 annual meeting. 8
One year later, in connection with Allergan’s annual meeting of stockholders
scheduled for May 6, 2014, the Allergan board recommended that stockholders approve
an amendment and restatement of Allergan’s Certificate that would allow stockholders to
act by written consent if holders of at least 25% of the outstanding shares support the
request (the “Written Consent Amendment”). 9 As with the prior year’s proposal to allow
stockholders to call special meetings, the proposed amendment to permit actions by
written consent contained a Similar Item provision. It stated that stockholders would not
be permitted to act by written consent if, among other things, “an identical or
substantially similar item” was presented at a stockholder meeting in the previous year. 10
On April 19, 2014, ISS again weighed in on the proposed amendment. Consistent
with its statements about the prior year’s amendment regarding special meetings, ISS
6
Defs.’ Br. in Opp. to Pls.’ Mot. for Summ. J. Maletta Aff. Ex. A at 21 (2013 ISS report
addressing, inter alia, Allergan’s special meeting proposal).
7
Id. at 22.
8
Consol. Compl. ¶ 53.
9
Allergan, Inc., Definitive Proxy Statement (Schedule 14A) 16-17 (Mar. 26, 2014) (the
“2014 Proxy”) (Defs.’ Br. in Opp. to Pls.’ Mot. for Summ. J. Horn Aff. Ex. C at 16-17).
10
2014 Proxy at A-3 (Art. 9(c)(iii)).
5
stated that the “restriction limiting the type of business that may be covered to those
items not covered at an annual or special meeting within the last year could make it
difficult for shareholders to act by written consent on matters that are generally routine
items on an annual meeting agenda, such as director elections.” 11 ISS recommended that
stockholders approve the Written Consent Amendment, but that stockholders vote against
certain directors. 12
On April 21, 2014, Allergan emailed ISS to see if it could discuss ISS’s
preliminary proxy analysis. 13 Later that day, Allergan sent its initial comments to ISS,
noting that “the protective provisions in Allergan’s proposed written consent provisions
to the Charter and Bylaws generally track the special meeting proposal implemented by
Allergan in 2013.” 14 According to defendants, Allergan knew then – before Valeant and
Pershing Square disclosed they had entered a co-bidding arrangement – that it would
need to submit a supplemental proxy disclosure to convince ISS to alter its preliminary
recommendation because ISS’s published guidelines state that ISS will only consider
publicly available information when formulating its voting recommendations. 15
11
Defs.’ Br. in Opp. to Pls.’ Mot. for Summ. J. Maletta Aff. Ex. B at Key Takeaways 22
(2014 ISS report addressing, inter alia, Allergan’s proposed Written Consent
Amendment).
12
Id. at 1, 22.
13
See Defs.’ Br. in Opp. to Pls.’ Mot. for Summ. J. Maletta Aff. Ex. C (Apr. 21, 2014,
email from Allergan to ISS requesting more time to respond to ISS’s preliminary review).
14
Defs.’ Br. in Opp. to Pls.’ Mot. for Summ. J. Maletta Aff. Ex. D (Apr. 21, 2014, email
from Allergan to ISS setting forth initial comments on ISS’s preliminary review).
15
Def.’s Br. in Opp. to Pls.’ Mot. for Summ. J. at 14.
6
At approximately 5 p.m. (EDT) on April 21, 2014, Pershing Square and Valeant
filed Schedule 13Ds with the SEC disclosing that they had entered into a co-bidder
Agreement in February 2014 and had accumulated a 9.7% beneficial ownership stake in
Allergan. 16 Several hours later, at 10:30 p.m. (EDT), Allergan sent ISS a draft of a
supplemental proxy statement it had prepared in response to ISS’s comments. The draft
supplement stated that the “Similar Item” provision would permit stockholders to remove
directors by written consent but would not permit stockholders to elect directors by
written consent. 17
On April 22, 2014, Valeant delivered to Allergan a letter proposing a merger of
the two companies. Later that day, at a previously scheduled Board meeting, Allergan’s
board adopted a stockholder rights plan with a 10% trigger.
Also on April 22, 2014, Allergan filed with the SEC the supplemental proxy
statement it had sent to ISS in draft form the previous day (as defined above, the
“Supplemental Proxy”). Regarding the Similar Item provision contained in the Written
Consent Amendment, the Supplemental Proxy stated the following:
With consideration given to the direct input from stockholders, the Board
has proposed a procedural protection whereby stockholders are not entitled
to act by written consent if an identical or similar item (“Similar Item”) has
been presented at any meeting of stockholders held within one year of the
Company’s receipt of such request. This protection is included to prevent
the corporate waste caused by the serial submission of matters that have
recently been decided by a vote of stockholders. To clarify the breadth of
Similar Items, by way of example, the election of directors by written
16
See Allergan, Inc., Beneficial Ownership Report (Schedule 13D) (Apr. 21, 2014).
17
Defs.’ Br. in Opp. to Pls.’ Mot. for Summ. J. Maletta Aff. Ex. E.
7
consent would be a Similar Item; however, the removal of directors by
written consent would not be a Similar Item. 18
On May 6, 2014, Allergan stockholders approved the Written Consent
Amendment. 19
C. Procedural History and Developments in Valeant’s Pursuit of Allergan
On May 5, 2014, the City of Westland Police & Fire Retirement System filed the
initial complaint in this action against Allergan and the nine members of its board. The
initial complaint focused on Valeant’s proposal to acquire Allergan. It asserted that
“[s]hould the Board respond to this offer in a way that a majority of the stockholders
disagree with, the stockholders may well wish to replace all or a majority of the Board”
and that “[t]he quickest way to do so would be to act by written consent.” 20
To this end, the initial complaint asserted three claims. Count I sought a
declaration that the Written Consent Amendment “entitle[d] Allergan stockholders to
remove a majority of the members of the Board by acting through written consent, and
thereafter seek an order of this Court compelling an election pursuant to 8 Del. C. §
223(c).” 21 Count II sought a declaration that “the ‘Similar Item’ exception in the
[Written Consent] Amendment would not prohibit the election of directors by
stockholders through written consent so long as such directors were not also nominees for
18
Pls.’ Op. Br. in Supp. of Mot. for Summ. J. Ex. C at 2 (Supplemental Proxy).
19
Consol. Compl. ¶ 39.
20
Compl. ¶ 33.
21
Compl. ¶ 50.
8
election at a stockholder meeting within the preceding year.” 22 Count III asserted a claim
for breach of fiduciary duty against the Allergan board for making “false and misleading”
statements concerning the Allergan stockholders’ rights to elect directors through written
consent. 23
On May 14, 2014, plaintiffs moved the Court for a speedy hearing on the merits of
their complaint. On May 20, 2014, I denied the motion, finding that expedition was not
warranted for lack of a showing of irreparable harm because stockholders holding 25% of
Allergan’s shares had not sought to take action by written consent. I further explained
that I was “confident that any group of shareholders that can muster 25 percent of the
vote won’t be deterred from seeking an interpretation” of the Written Consent
Amendment if “that event comes to pass.” 24
On June 2, 2014, PS Fund 1 filed preliminary proxy materials with the SEC for the
purpose of calling a special meeting of Allergan’s stockholders to, among other things,
remove six of the nine members of Allergan’s board of directors and request that the
Allergan board engage in good faith discussions with Valeant regarding its proposal to
merge with Allergan.
On June 6, 2014, Pershing Square sent a letter to Allergan’s board seeking
assurances that certain interactions with other Allergan stockholders relating to its efforts
to call a special meeting of stockholders would not be deemed to trigger Allergan’s
22
Compl. ¶ 58.
23
Compl. ¶¶ 60-67.
24
Oral Argument Tr. 36 (May 20, 2014).
9
stockholder rights plan. On June 12, 2014, unsatisfied with Allergan’s response, PS Fund
1 filed a lawsuit against Allergan seeking various forms of declaratory relief in aid of its
efforts to call a special meeting of stockholders. 25 That case settled and was dismissed on
June 28, 2014.
On June 17, 2014, after Westland’s case had been consolidated with two others, 26
plaintiffs filed a consolidated complaint once again supporting Valeant’s efforts to
acquire Allergan, 27 but focusing on a different strategy than Pershing Square and Valeant
were pursuing in their takeover efforts, i.e., removal of the entire Allergan board of
directors rather than a majority of the board. According to plaintiffs, stockholders and
commentators had recognized that “pursuing a full-board strategy is significantly more
advantageous when compared to a partial-board strategy” because a partial-board strategy
“cannot disable” Article 8 of Allergan’s Certificate. 28 Article 8 states that vacancies
resulting from the removal of any directors “shall be filled solely by the affirmative vote
of a majority of the remaining directors then in office, even though less than a quorum, or
by a sole remaining director.” 29
25
See PS Fund 1, LLC v. Allergan, Inc., C.A. No. 9760-CB.
26
On June 13, 2014, the Westland action was consolidated with two related, later-filed
actions (C.A. Nos. 9675 and 9699).
27
See Consol. Compl. ¶¶ 41-44, 57-69, 106-13.
28
Consol. Compl. ¶ 50.
29
Pls.’ Mot. for Summ. J. Ex. A Art. 8 (Amended and Restated Certificate of
Incorporation of Allergan, Inc.) (emphasis added). As plaintiffs’ able counsel later
acknowledged, Article 8 of the Certificate presented a roadblock to certain of plaintiffs’
10
The consolidated complaint contains five counts. Count I requests a declaratory
judgment that “the ‘Similar Item Limitation’ would not prohibit the election of directors
at a single special meeting designed to remove the incumbent board and replace it with
nominees suggested by stockholders, so long as such nominees had not previously been
up for election by the Allergan stockholders within the preceding year.” 30 Count II
asserts that the Allergan directors breached their fiduciary “duty of candor” by “stating
that stockholders would not have the right to replace removed directors at a special
meeting.” 31 Count III seeks a declaration that Allergan’s rights plan will not be triggered
if a stockholder assists other stockholders in preparing a Special Meeting Request form. 32
Count IV seeks a declaration that defendants are obligated “to apprise stockholders of
their rights under DGCL § 223(c)” to request that the Court of Chancery summarily order
an election in the event that the majority of the Allegan board is removed. 33 Count V
seeks a declaration that the Allergan board is obligated to consider only the maximization
of stockholder value in responding to or seeking out takeover proposals.
initial claims seeking declarations concerning the removal of less than all of the members
of Allergan’s board of directors. Oral Argument Tr. 23 (July 23, 2014).
30
Consol. Compl. ¶ 128.
31
Consol. Compl. ¶ 133.
32
Specifically, plaintiffs requested “that the Court declare . . . that Allergan’s Poison Pill
is invalid and enjoin its application” to the extent that Allergan’s stockholder rights plan
would be triggered if a stockholder assists other stockholders in preparing a Special
Meeting request form. Consol. Compl. ¶ 141. PS Fund 1 litigated this issue in a separate
action (C.A. 9760-CB) and it is now moot.
33
Consol. Compl. ¶ 145.
11
On June 18, 2014, plaintiffs moved for partial summary judgment on Counts I and
II of the consolidated complaint. On July 23, 2014, I heard argument on plaintiffs’
motion for summary judgment and sua sponte questioned the ripeness of plaintiffs’
claims. 34 At the conclusion of argument, I requested supplemental briefing on the issue
of ripeness and the analytical framework for deciding Count II, the fiduciary duty claim,
which the parties had barely addressed in their briefing. The supplemental briefing was
completed on August 14. Plaintiffs made additional supplemental filings on August 26
and October 30.
On August 22, 2014, PS Fund 1 commenced another lawsuit against Allergan after
PS Fund 1 had delivered written requests for a special meeting from stockholders owning
more than 25% of outstanding Allergan common stock for the purpose of, among other
things, removing six of the nine Allergan directors. 35 PS Fund 1 sought a declaration that
the requesting stockholders had validly requested a special meeting under the Certificate
and that, to the extent the written requests did not comply with certain aspects of
Allergan’s Bylaws, those provisions of the Bylaws were invalid. PS Fund 1 also sought
an order requiring Allergan to call a special meeting as soon as reasonably possible. On
September 15, 2014, the parties stipulated that the special meeting requests submitted by
34
See Bebchuk v. CA, Inc., 902 A.2d 737, 740 (Del. Ch. 2006) (“Ripeness, the simple
question of whether a suit has been brought at the correct time, goes to the very heart of
whether a court has subject matter jurisdiction. As such, the court has a positive duty to
raise this issue on its own motion, even if neither party objects to the court’s exercise of
power over the case.”).
35
See PS Fund 1, LLC v. Allergan, Inc., C.A. No. 10057-CB.
12
PS Fund 1 were valid and that Allergan would hold a special meeting on December 18,
2014.
III. ANALYSIS
In order to prevail on a motion for summary judgment, the moving party must
show that no material facts are in dispute and that they are entitled to judgment as a
matter of law. 36 In determining whether this burden is met, I must view the facts in the
light most favorable to the non-moving party. 37 Summary judgment may be denied if an
action is not ripe. 38
A. Count I: Declaratory Relief
1. Legal Standard
Under 10 Del. C. § 6501, Delaware courts are authorized to entertain declaratory
judgment actions provided that an “actual controversy” exists between the parties. 39 For
an “actual controversy” to exist, four prerequisites must be satisfied:
(1) It must be a controversy involving the rights or other legal relations of
the party seeking declaratory relief; (2) it must be a controversy in which
the claim of right or other legal interest is asserted against one who has an
interest in contesting the claim; (3) the controversy must be between parties
whose interests are real and adverse; (4) the issue involved in the
controversy must be ripe for judicial determination. 40
36
Ct. Ch. R. 56 (c).
37
LaPoint v. AmerisourceBergen Corp., 970 A.2d 185, 191 (Del. 2009).
38
See Kingsbridge Capital Gp. V. Dunkin’ Donuts Inc., 1989 WL 89449 (Del. Ch. Aug.
7, 1989) (denying summary judgment motion for lack of ripeness).
39
Stroud v. Milliken Enters., Inc., 552 A.2d 476, 479 (Del. 1989).
40
Id. at 479-80 (citation omitted).
13
In deciding whether an action is ripe for declaratory judgment, the benefits to be
derived from issuing a declaratory judgment must be weighed against the court’s desire
to avoid advisory opinions. 41 As former Chief Justice Steele, then a Vice Chancellor,
explained:
Advisory opinions ill-serve the judicial branch and the public by expending
resources to decide issues that may never come to pass. More importantly,
the judiciary’s role in the lawmaking process is an interstitial one, carried
out by the application of legislative enactments and common law principles
to concrete factual circumstances that have created real and present
controversies. An action seeking declaratory relief is not exempt from
these requirements and must present the court with an actual controversy
that is ripe for judicial decision. The dispute between the parties, therefore,
must be actual, not hypothetical. 42
More recently, the Delaware Supreme Court explained the “common sense
assessment” the Court must undertake in determining whether a case is ripe for judicial
review as follows:
A ripeness determination requires a common sense assessment of whether
the interests of the party seeking immediate relief outweigh the concerns of
the court “in postponing review until the question arises in some more
concrete and final form.” Generally, a dispute will be deemed ripe if
“litigation sooner or later appears to be unavoidable and where the material
facts are static.” Conversely, a dispute will be deemed not ripe where the
claim is based on “uncertain and contingent events” that may not occur, or
where “future events may obviate the need” for judicial intervention. 43
41
See Siegman v. Tri-Star Pictures, Inc., 1989 WL 48746, at *4 (Del. Ch. May 5, 1989)
(“Applying those criteria, and weighing the reasons for not rendering a hypothetical
opinion against the benefits to be derived from a declaratory judgment . . . .”).
42
KLM Royal Dutch Airlines v. Checchi, 698 A.2d 380, 382 (Del. Ch. 1997).
43
XI Specialty Ins. Co. v. WMI Liquidating Trust, 93 A.3d 1208, 1217 (Del. 2014)
(citations omitted).
14
2. Count I is Not Ripe for Judicial Determination
Count I of the consolidated complaint does not challenge the facial validity of any
provision of Allergan’s Certificate or Bylaws. Plaintiffs instead advance what is
essentially a claim of contractual construction concerning the meaning of the Similar
Item provision as it might apply in a hypothetical situation. Specifically, Count I seeks a
declaration that the Similar Item provision would not prohibit the stockholders of
Allergan from removing the entire board of Allergan at a special meeting and
simultaneously electing at the same special meeting a new slate of individuals to replace
them as long as those individuals had not been up for election by the Allergan
stockholders within the preceding year. In my opinion, this is a classic example of a
request for an advisory opinion that is not ripe, and many never become ripe, for judicial
review.
As plaintiffs acknowledge, “no stockholder is currently pursuing” the strategy of
removing the entire Allergan board. 44 To the contrary, in aid of their efforts to facilitate a
merger of Valeant and Allergan, Valeant and Pershing Square are currently pursuing a
different strategy to remove six of the nine members of Allergan’s board of directors at a
special meeting scheduled for December 18, 2014, and to replace them with six of their
own nominees.
Significantly, if Valeant and Pershing Square are successful in their efforts and a
new board majority is installed at Allergan, the hypothetical espoused by the plaintiffs
44
Pls.’ Supplemental Op. Br. in Supp. of Mot. for Summ. J. at 5.
15
presumably would never arise. Even if Valeant and Pershing Square are not successful,
no stockholder may ever pursue plaintiffs’ suggested strategy and thus the issue still may
never need to be resolved. In short, plaintiffs’ request for declaratory relief amounts to a
purely hypothetical question.
Despite the hypothetical nature of Count I, plaintiffs argue that the claim is ripe
for adjudication because “Defendants’ incorrect public interpretation is currently
impeding stockholders’ understanding of and discouraging their ability to exercise their
rights to call a special meeting.” 45 According to plaintiffs, “Delaware courts . . .
regularly recognize that restrictions to stockholders’ rights to act under governing
documents are ripe, even if there is no vote pending.” 46
In support of this proposition, plaintiffs cite several decisions in which this Court
has found ripe for review challenges to the implementation of stockholder rights plans
and proxy put provisions. 47 In each of these cases, the key consideration to the Court’s
finding of a ripe controversy was the present effect the provisions in question were
deemed to have on stockholders because of their deterrent features.
45
Id. at 3.
46
Id.
47
The term “proxy put” is generally used to describe a right given to noteholders to
accelerate repayment of their debt if stockholders remove and replace the majority of a
corporation’s board without the approval of the ousted incumbents. See Kallick v.
Sandridge Energy, Inc., 68 A.3d 242, 244 n.8 (Del. Ch. 2013).
16
In Moran v. Household International, Inc., for example, plaintiffs contested the
“present effect” that Household’s implementation of a stockholder rights plan was having
on “their entitlement to receive and consider takeover proposals and to engage in a proxy
fight for control of Household.” 48 In finding plaintiffs’ challenge to the validity of the
stockholders rights plan ripe for review, the Court reasoned that “the plaintiffs here are
seeking a declaration that the Rights Plan, because of its deterrent features, presently
affects shareholders’ fundamental rights and is illegal under Delaware law.” 49
In KLM Royal Dutch Airlines v. Checchi, 50 the Court deemed ripe a challenge to a
corporation’s implementation of a rights plan where a stockholder had a pre-existing
option to purchase shares of the corporation in the future that, if exercised, would trigger
the rights plan. Citing Moran, the Court found that the “poison pill presently interferes
with [the stockholder’s] contractual rights to exercise the option in the future.” 51 One
year later, in Carmody v. Toll Brothers, Inc., 52 the Court found a claim challenging the
validity of a dead-hand provision in a stockholder rights plan to be ripe based on the
reasoning in Moran. 53
48
Moran v. Household Int’l, Inc., 490 A.2d 1059, 1072 (Del. Ch. 1985).
49
Id. (emphasis added).
50
698 A.2d 380 (Del. Ch. 1997).
51
Id. at 384.
52
723 A.2d 1180 (Del. Ch. 1998).
53
Id. at 1188; see also Leonard Loventhal Account v. Hilton Hotels Corp., 2000 WL
1528909, at *2-3, 10-11 (Del. Ch. Oct. 10, 2000) (finding declaratory relief claim
challenging the statutory validity of a rights plan to be ripe).
17
Just recently, in Pontiac General Employees Retirement System v. Ballantine, 54
Vice Chancellor Laster found ripe for review a challenge to the implementation of a
proxy put because of its “deterrent effect” on running a proxy contest. Discussing
Moran, KLM and Carmody, he explained that “Delaware courts have consistently
recognized that disputes are ripe when challenging defensive measures that have a
substantial deterrent effect.” 55 The Court thus found ripe for review whether “the board
of directors breached its duties in a factually-specific manner by adopting this poison
dead hand put arrangement.” 56
Here, notwithstanding plaintiffs’ protestations to the contrary, the Similar Item
provision cannot legitimately be characterized as a significant deterrent to the ability of
Allergan’s stockholders to exercise their franchise rights. This is made plain by the fact
that Allergan’s stockholders currently are engaged in a proxy fight for control of the
Allergan board, one which will come to a head at the special meeting of stockholders
scheduled for December 18 of this year. Valeant and Pershing Square may not have
chosen plaintiffs’ suggested proxy strategy, but the fact remains that they have not been
deterred from seeking control of the board through a proxy contest.
54
Pontiac General Employees Retirement System v. Ballantine, C.A. No. 9789-VCL at
*72-77 (Del. Ch. Oct. 14, 2014) (TRANSCRIPT). On October 30, 2014, plaintiffs
submitted this transcript ruling as a supplemental authority.
55
Id. at 73.
56
Id. at 75.
18
Plaintiffs cite for additional support the Court’s decision last year in Boilermakers
Local 154 Retirement Fund v. Chevron Corp. 57 In that case, Chief Justice Strine, then
serving as Chancellor, did comment in passing that plaintiffs’ challenges to the facial
validity of a forum selection bylaw that two companies had adopted were “ripe legal
issues.” 58 More relevantly for present purposes, however, the Chief Justice cautioned
against addressing hypothetical questions of the type raised here. Specifically, in reaction
to “an array of purely hypothetical situations” the plaintiffs had “conjured up” in
attacking the statutory validity of the forum bylaws, the Chief Justice stated that “it
would be imprudent and inappropriate to address these hypotheticals in the absence of a
genuine controversy with concrete facts. Delaware courts ‘typically decline to decide
issues that may not have to be decided or that create hypothetical harm.’” 59
In my view, this case presents an appropriate circumstance to exercise such
caution. As discussed above, plaintiffs’ request for declaratory relief amounts to a
hypothetical proxy strategy based on the language of a specific bylaw. The claim does
not implicate issues of statutory validity, the need to resolve the claim may never arise
and hardly appears inevitable, and it is indisputable that Allergan’s stockholders have not
been deterred from pursuing a proxy contest, albeit through a different strategy. Given
these circumstances, and taking into account the strong policy considerations against
57
73 A.3d 934 (Del. Ch. 2013).
58
Id. at 946.
59
Id. at 940 (quoting 3 Stephen A. Radin, The Business Judgment Rule: Fiduciary Duties
of Corporate Officers 3498 (6th ed. 2009) (discussing suits over bylaws)).
19
issuing advisory opinions, it would be improvident in my view to use scarce judicial
resources to opine on the hypothetical question posed by plaintiffs’ claim for declaratory
relief. Accordingly, plaintiffs’ motion for summary judgment on Count I of the
consolidated complaint is denied for lack of ripeness.
B. Count II: Breach of Fiduciary Duty
Count II of the consolidated complaint asserts that the Allergan directors breached
their fiduciary “duty of candor” by disseminating false information when they issued a
Supplemental Proxy interpreting the Similar Item provision to mean “that stockholders
would not have the right to replace removed directors at a special meeting.” 60 Unlike
Count I, this claim is ripe for review in my view because it involves an historical event
and thus the facts should be in a sufficiently concrete form to permit judicial review.
Plaintiffs, however, have failed to present a factual record concerning those facts that
would warrant entry of a judgment that Allergan’s directors breached a fiduciary duty.
Plaintiffs filed their motion for partial summary judgment as a preemptive strike,
before deposing any member of Allergan’s board of directors or taking any other
discovery concerning the circumstances surrounding the issuance of the Supplemental
Proxy. In their initial briefing, in fact, plaintiffs barely mentioned Count II and suggested
that, if their interpretation of the Similar Item provision were correct purely as a matter of
contract construction, the Court should automatically enter a judgment that the directors
60
Consol. Compl. ¶ 133.
20
breached a fiduciary duty, as if the standard was one of strict liability. Having considered
the matter, with the benefit of supplemental briefing, I decline to adopt this approach.
In Malone v. Brincat, 61 the Delaware Supreme Court explained that directors owe
a duty not to speak falsely:
Whenever directors communicate publicly or directly with shareholders
about the corporation’s affairs, with or without a request for shareholder
action, directors have a fiduciary duty to shareholders to exercise due care,
good faith and loyalty. It follows a fortiori that when directors
communicate publicly or directly with shareholders about corporate matters
the sine qua non of directors’ fiduciary duty to shareholders is honesty. 62
The Supreme Court further explained that “[d]irectors who knowingly disseminate false
information that results in corporate injury or damage to an individual stockholder violate
their fiduciary duty, and may be held accountable in a manner appropriate to the
circumstances.” 63
Although Count II is captioned in the consolidated complaint as a claim for breach
of the “fiduciary duty of candor,” there is no independent duty of disclosure under
Delaware law. Instead, the duty of disclosure derives from the duty of care and the duty
of loyalty. As Vice Chancellor Laster recently explained:
Directors of a Delaware corporation owe two fiduciary duties: care and
loyalty. The “duty of disclosure is not an independent duty, but derives
from the duties of care and loyalty.” The duty of disclosure arises because
of “the application in a specific context of the board’s fiduciary duties . . . .”
Its scope and requirements depend on context; the duty “does not exist in a
61
722 A.2d 5 (Del. 1998).
62
Id. at 10.
63
Id. at 9 (emphasis added).
21
vacuum.” When confronting a disclosure claim, a court therefore must
engage in a contextual specific analysis to determine the source of the duty,
its requirements, and any remedies for breach. 64
Here, plaintiffs did not seek preliminary relief concerning the disclosures in the
Supplemental Proxy in advance of Allergan’s 2014 annual stockholder meeting, which
would have entailed a probabilistic assessment of the merits of their claims, typically for
the purpose of obtaining additional or corrective disclosures under threat that the
stockholder vote otherwise would be enjoined. Instead, plaintiffs seek entry, after the
fact, of a final judgment that the Allergan board breached its fiduciary duties in
connection with the issuance of the Supplemental Proxy. As such, plaintiffs bear the
burden in my view to put forward evidence demonstrating that the issuance of the
Supplemental Proxy was, in fact, the product of a breach of the fiduciary duty of care
and/or loyalty. 65
Plaintiffs, however, have not put forth a factual record concerning the
circumstances surrounding the issuance of the Supplemental Proxy from which the Court
could reach such a conclusion. Plaintiffs have not provided facts, for example,
demonstrating that the Allergan board acted in a grossly negligent manner such as to
sustain a duty of care claim or knowingly made a false statement such as to sustain a duty
64
In re Wayport, Inc. Litig., 76 A.3d 296, 314 (Del. Ch. 2013) (internal citations
omitted).
65
Because plaintiffs seek equitable and not monetary relief in Count II, an exculpatory
Section 102(b)(7) provision would not bar the granting of relief. Consol. Compl. ¶ 135
(“Plaintiffs request an order requiring Defendants to promptly disseminate public
disclosures sufficient to correct the false statements Defendants have made, and to fully
and fairly advise Allergan’s stockholders of their rights.”).
22
of loyalty claim. Given the absence of any such evidence, plaintiffs have failed to make
the requisite showing to establish that the Allergan board breached a fiduciary duty in
connection with the issuance of the Supplemental Proxy. For this reason, plaintiffs’
motion for summary judgment with respect to Count II is denied.
IV. CONCLUSION
For the foregoing reasons, plaintiffs’ motion for partial summary judgment as to
Counts I and II of the consolidated complaint is denied.
IT IS SO ORDERED.
23