San Antonio Fire & Police v. Amylin: Delaware and the Ostrich Approach to Governance

Amylin is a startling case even by Delaware standards.  The case raises extraordinarily important issues about the board's obligations with respect to the adoption of contractual provisions that significantly limit the shareholder franchise.  Delaware courts have often claimed that there is nothing more important than this franchise, recognizing that while shareholders have no say in management they at least ought to have a say over who serves as management.

San Antonio Fire & Police v. Amylin put into direct conflict the franchise of shareholders and the role of the board.  Yet resolution of the conflict had an obvious and common sense resolution.  The Delaware court merely needed to hold that boards had an obligation to know about and consider any contractual provisions that could materially diminish the franchise of shareholders.  It would have required boards, in considering important contracts, to merely ask, in a routine fashion, "are there any provisions that materially reduce the shareholder franchise?"

To the extent the answer was yes, the directors would have to decide whether the provisions were appropriate, with the decision subject to review under traditional fiduciary duty analysis. 

Yet the Chancery Court and now the Supreme Court of Delaware did no such thing.  The two courts effectively held that boards have no obligation to be informed of these types of provisions.  Unaware that they exist, boards cannot be liable for breaching their fiduciary duties.  In other words, despite the pretense that boards must have a system that allows them to monitor the activities of the corporation (i.e. Caremark duties), the courts in Delaware do not require that these systems have any specific content and, in the aftermath of Amylin, specifically will not require that boards be informed about matters that significantly limit the franchise of shareholders. 

Primary materials can be found at the DU Corporate Governance web site.