In Perlegos v. Atmel Corporation, (Del. Ch., Feb. 8, 2007), 2007 WL 475453, read opinion here, the Chancery Court addressed issues under DGCL Section 211 regarding the calling, and cancellation of, a special meeting of stockholders as well as a determination of who the company’s rightful directors are based on the provisions for a summary proceeding under DGCL Section 225. The initial complaint also included a demand under DGCL Section 220 but that claim was later withdrawn.
There are many quotable nuggets of bedrock Delaware legal principles in this case. The factual background of the case could make a good made-for-TV-movie. It involves the firing by non-management directors, of the co-founder and chairman of the board, after the investigation by a special committee of improper travel expenditures.
This decision also serves as a useful guide for how an independent committee of non-management directors, with independent counsel and independent advisors, employing careful processes and thorough investigation, will be given appropriate deference by the court for authorized actions taken by it. See footnote 147 of the court’s opinion (citing Brehm v. Eisner, 746 A.2d 244, 264, n. 66(Del. 2000)). The court observed that the Special Committee’s reliance on their experts was reasonable and reasonable efforts were made to base a decision on the material facts that were available after an investigation that lasted 8 months and that the court determined was the product of a rational process. Though the process was not perfect, the court stated that it need not be perfect.
The Westlaw format of the case is 32 pages long, so I will highlight a few of the more notable excerpts while I highly recommend downloading the whole case at the link above for a "real page-turner" of an opinion.
An imbroglio followed the calling of a Special Meeting of Stockholders by the chairman who was later fired. Although it was disputed whether he called the meeting to retaliate for his firing, the court held that he called the meeting as chairman pursuant to the bylaws. However, once the board fired the "old" chairman, the "new" chairman cancelled the Special Meeting.
An order was sought pursuant to DGCL Section 211 requiring that the special meeting of stockholders be held as noticed originally, based on the relevant section of the bylaws. The court determined that the new chairman was technically authorized to cancel it but that the new chairman and the new board lacked the proper and sufficient reasons to do so. See footnote 176 (noting the court’s authority to rescind or nullify a corporate action that may have been technically legal but that was done for an inequitable purpose)(citing Stahl v. Apple Bancorp, Inc., 579 A.2d 1115, 1121(Del. 1990) and Schell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 1971)). This, of course, is a famous paradigmatic aspect of Chancery Court’s capacious arsenal of remedies.
Several statements of fundamental principles of shareholder rights under Delaware law were recited in the opinion. For example, if it was determined that the meeting was cancelled for the "primary purpose" of interfering with shareholder action, the directors would be required to establish "compelling justification" for the cancellation, relying on the seminal case of Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 661-62 (Del. Ch. 1988). The Blasius case is famous for emphasizing the importance that Delaware courts place on the "shareholder franchise". This is the money quote from page 659 of Blasius:
"A stockholder’s vote is one of the most fundamental rights of owning stock. Although such a vote may be seen as a ‘vestige or ritual of little practical importance’, it is clear that it is the ‘ideological underpinning upon which the legitimacy of directorial power rests.’
Moreover, the court in the current case added that:
"Along with the right to vote, the forum in which shareholders exercise this right plays a fundamentally important role in the corporate governance structure established under the DGCL. In short, a stockholders’ meeting is an important event on the corporate calendar."
In the instant case, it was not merely a postponement of the meeting that was problematic, but rather, the result of the cancellation of the meeting was that it prevented the stockholders "from voting on the removal of the Director Defendants until the next scheduled annual meeting" (about 9 months later). Thus, the court ruled that the special meeting must be held.
Somewhat asymmetrically (perhaps), the firing of the chairman was also upheld. What was not clear from the ruling (and was not necessary to the court’s ruling) was whether the ousted chairman had enough votes to regain power at the meeting of shareholders. That is another story for another day.
UPDATE: Prof. Chiappinelli has an insightful post here about the case.