It will come as no surprise to those who have participated in a proxy fight to learn that these disputes can be heated affairs. Parties to a fight will routinely seek to discredit the other side to bolster their own narrative or otherwise gain a strategic advantage. In such an atmosphere, it can be difficult to draw the line between behaviour that’s merely aggressive and behaviour that crosses into unethical or illegal territory. A recent U.S. District Court case, Eshelman v. Auerbach et al, provides an example of the serious consequences that can ensue for those who cross this line.
A federal jury in North Carolina awarded Fredric Eshelman over $22 million USD in damages after finding that he had been defamed by Puma Biotechnology Inc. The defamatory statement arose in the course of a campaign launched by a dissident against Puma. The goal of the campaign was to increase Puma’s board from five directors to nine, and to fill at least one of the new seats with a representative favourable to the dissident’s cause. Puma opposed the bid, labelling it a “wasteful and unproductive campaign” and quickly mounting a defense.
As one aspect of its defense, Puma released a publicly-available investor presentation setting out the reasons why shareholders should vote against the dissident’s proposal. A number of slides in the presentation were stated that the dissident “continues to demonstrate a lack of integrity.” These slides focused on his tenure as CEO of a pharmaceutical company, and in particular on the details of a clinical trial fraud committed by an employee of that company. The narrative ended with the following message: “Puma’s Board does not believe that someone who was involved in clinical trial fraud that was uncovered by the FDA should be on the Board of Directors of a public company; particularly a company that is in the process of seeking FDA approval.”
Puma ultimately won 80% of the shareholder vote on the dissident’s proposal. However, this victory may have lost its lustre when the dissident filed a lawsuit alleging that Puma has defamed him, and caused lasting damage to his reputation, with its public accusation that he had been “involved in clinical trial fraud.” According to the dissident, this was a false characterization of his role in the fraud, which has been concealed from him by the guilty actor. The jury agreed with him not only on this point, but also that Puma had acted maliciously and with the sole intention of defeating the dissident’s efforts in the proxy fight.
For Canadian defamation disputes, it is unlikely that damages would amount to anything close to the award in this case, given the relative uncommonness of civil juries and punitive damages. Nevertheless, there are lessons to be taken away from this harsh reproach of Puma’s conduct. Adversaries in proxy contests need to be careful about disparaging remarks about the other side, regardless of where they are made—whether in a presentation, in communications with other shareholders, in proxy circulars, or elsewhere. While the issuer in this case may have defeated the dissident campaign for board seats, it paid a steep price for its allegations against him.
The authors would like to thank Eric Vice, articling student, for his assistance in preparing this legal update.