Monday, November 10, 2014

Allergan Shareholders Get No Comfort on Proxy-Contest Strategy

[This story previously appeared in Securities Regulation Daily.]

By Anne Sherry, J.D.

The Delaware Court of Chancery declined to issue declaratory relief blessing a hypothetical strategy by Allergan stockholders to replace the entire board at a special meeting, as the challenge to Allergan’s interpretation of the “similar item” provision in its governing documents was not ripe for review (In re Allergan, Inc. Stockholder Litigation, November 7, 2014, Bouchard, A.).

Background. A joint entity created by the Pershing Square hedge fund and Valeant Pharmaceuticals to further those entities’ efforts to acquire Allergan is currently engaged in a proxy contest to remove six of Allergan’s nine directors. Other shareholders believe that a better strategy for the would-be acquirers would be to remove and replace the entire Allergan board, but a “similar item” provision in Allergan’s certificate of incorporation and bylaws could foreclose that tactic. In a supplemental proxy statement issued earlier this year, Allergan clarified that the similar item provision would allow stockholders to remove directors by written consent, but not to elect their successors by written consent. The shareholders requested declaratory relief essentially blessing the strategy of complete board replacement.

Ripeness. The court distinguished the cases cited by the plaintiffs in which challenges to stockholder rights plans and proxy put provisions were held to be ripe for review. In those cases, the court explained, the key consideration to the finding of a ripe controversy was the present deterrent effect of the provisions on stockholders. In contrast, the similar item provision could not be characterized as a significant deterrent to the ability of Allergan stockholders to exercise their franchise rights. In fact, the court noted, Allergan’s stockholders are currently engaged in a proxy fight for control of the board, which will be decided at the special meeting on December 18.

In the court’s view, it is appropriate to heed now-Chief Justice Strine’s caution, issued in a Chancery Court opinion cited by the plaintiffs, against deciding issues that may not have to be decided or that create hypothetical harm. Here, the court wrote, the plaintiffs’ request for declaratory relief does not implicate issues of statutory validity; the need to resolve the claim may never arise; and Allergan stockholders have not been deterred from pursuing a proxy contest. Under these circumstances and given the strong policy considerations against issuing advisory opinions, the motion for summary judgment was denied for lack of ripeness.

Breach of fiduciary duty. While the plaintiffs’ claim that the Allergan directors breached their fiduciary duty of “candor” in connection with the supplemental proxy was ripe for review because it involved a historical event, the court held that the plaintiffs failed to present a factual record concerning that event that would warrant entry of a judgment. A duty of disclosure is not an independent duty under Delaware law, but rather derives from the duties of care and loyalty. The plaintiffs failed to establish a factual record concerning the issuance of the proxy that would establish a breach of fiduciary duty, such as by demonstrating that the Allergan board acted in a grossly negligent manner or knowingly made a false statement.

The case is No. 9609-CB.