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Court of Chancery Approves "Continuing Directors"

San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals Inc., C.A. 4446-VCL (May 12, 2009)

One defense against a hostile takeover is a provision that permits only "continuing directors" to approve certain important corporate acts.  In general, to be a "continuing director" you need to be "approved" by the existing board.  Hence, if you are elected in a proxy contest that marks the beginning of a takeover battle, you may not be an approved "continuing director."  That would be a bad thing for your client.

In this decision, the Court upheld the power of the board to approve even candidates from an opposition slate of directors to be "continuing directors."  This unusual circumstance was the result of a bond debenture provision that would have triggered a default if there were too many non-continuing directors on the board.  To avoid a default, it was decided to approve even the enemy.

That, in turn, lead the Court to be concerned about whether the board had acted in the stockholders' best interests.  The Court cautioned that the approval must be a considered act and that the adoption of such continuing director provisions needs to be carefully reviewed by the board in the future if they are to be upheld.

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