In a post-trial opinion in City of Westland Police & Fire Retirement System v. Axcelis Techs., Inc., C.A. No. 4473-VCN (Del. Ch. Sept. 28, 2009), read opinion here, the Court of Chancery denied a stockholder’s request pursuant to § 220 to inspect the company’s books and records because the stockholder failed to prove a “proper purpose” for its request.
Kevin Brady, a highly respected Delaware lawyer, provides us with the following synopsis of this case.
The Court found that the plaintiff had not demonstrated any basis from which the Court might infer wrongdoing in the Board’s business decisions and that plaintiff’s allegations and reliance upon a precipitous stock price fall were insufficient to support a § 220 request. Because the plaintiff’s request was denied, the Court dismissed the action.
Plaintiff City of Westland Police & Fire Retirement System (“Westland”) is a beneficial owner of shares of Defendant Axcelis Technologies, Inc. (“Axcelis”). In 1983, Axcelis and SHI entered into a joint venture, SEN. In February 2008, SHI offered to acquire Axcelis for $5.20 per share (shares closed at $4.18 the day of the offer). The board of Axcelis rejected SHI’s proposal finding that the “price failed to compensate shareholders adequately for synergistic value of the SEN joint venture and ignored the substantial business opportunity to take market share back from Axcelis competitors.”
In March, 2008, SHI raised its bid to $6 per share (shares closed at $5.45 the day of the offer). The board of Axcelis again rejected the bid finding that a transaction with SHI would not to be in the stockholders’ best interests and stating that there would need to be a confidential exchange of information for serious negotiations to occur.
Director Elections – Resignations Rejected
In May 2008, Axcelis held its annual shareholders’ meeting at which the terms for three Directors (the “Three Directors”) were expiring. While the Three Directors ran unopposed for reelection, they all received less than a majority of the votes in their reelection bids (Axcelis employs plurality voting). The Court noted that in reviewing the facts, it assumed that the plaintiff’s position was correct – that this failure “was the result of a concerted effort by at least some Axcelis shareholders to ‘send a message to the board, expressing their discontent with [Axcelis’] unresponsiveness to SHI’ by withholding support for each of the Three Directors. . . .”
As a result of the vote, an Axcelis corporate governance policy (the “Policy”) was triggered pursuant to which, directors who do not “receive a majority of the stockholder vote must submit their resignations to the Board’s Nominating and Corporate Governance Committee, which must then consider and recommend to the Board whether such resignations should be accepted or rejected. The Board then must then accept or reject resignations submitted by its directors under the Policy.”
Accordingly, the Three Directors submitted their resignations but the Board decided not to accept the resignations. The Board cited the knowledge and experience of the Three Directors, as well as their importance in furthering negotiations with SHI.
Negotiations Renewed Without Success; Share Price Drops
In June 2008, Axcelis and SHI entered into a confidentiality agreement and SHI then had access to a significant amount of Axcelis’ information. Axcelis also imposed a September 4, 2008 deadline for SHI to submit an acquisition proposal. While Axcelis anticipated that this process would result in a revised bid from Axcelis, the deadline passed without a proposal and SHI put its discussions on “hold.” By this point, Axcelis’s shares were trading at $1.43 per share.
Westland Section 220 Demand Rejected
In December 2008, Westland delivered to Axcelis a demand for the inspection of books and records, pursuant to 8 Del. C. § 220. While Westland sought various categories of documents pertaining to the negotiations with SHI, Axcelis rejected the demand claiming that Westland had failed to satisfy the standard of § 220 and the corresponding Delaware case law.
Westland Files Complaint
In the beginning of 2009, Axcelis was in need of capital so it agreed to sell its ownership in SEN to SHI. On March 30, 2009 when the deal closed, Axcelis’ shares were trading at $0.41 per share. Just days later, Westland filed a Complaint seeking to compel inspection of certain Axcelis’ books and records pursuant to § 220. Westland alleged that the Board had breached its fiduciary duties in its decision to retain the Three Directors and in its handling of SHI’s bids. In its Complaint, Westland alleged as its “proper purpose” that the Board had breached its fiduciary duties by:
(1) rebuffing the attempts by SHI to negotiate an acquisition of Axcelis for more than 18 months; (2) subsequently rejecting two above-market acquisition proposals from SHI as inadequate; (3) retaining three candidates for the Board after a majority of the shareholders refused to support them, allegedly for their failure to negotiate with SHI; and (4) selling one of Axcelis’s most important assets, its stake in SEN, to SHI.
Plaintiff Failed to Demonstrate ”Proper Purpose”
Under § 220, a stockholder has a limited right to inspect the books and records of the corporation as long as the stockholder demonstrates that there is “a purpose reasonably related to such person’s interest as a stockholder” for the inspection. To succeed, a stockholder must present ‘some evidence to suggest a credible basis from which [this Court] can infer that mismanagement, waste, or wrongdoing may have occurred.’ Mere suspicion is insufficient.
Here the Court addressed two aspects of the Board’s alleged breaches: (i) the Board’s retention of the Three Directors; and (ii) the Board’s handling of SHI’s bids. With respect to the retention of the Three Directors, Westland alleged that the Board made its decision “for the purpose of entrenching those directors and themselves in office.” However, the Court found that the plaintiff had failed to demonstrate “any credible basis from which the Court might infer the foundational assumptions upon which the Plaintiff’s theory rests….” The Court determined that Westland’s “mere accusations are insufficient.”
The Court noted that the Three Directors had been properly reelected to the Board under Delaware corporate law’s plurality voting provisions. It was the stockholder vote that also triggered the Policy which then placed the Three Directors’ retention at the discretion of the Board. The Court held that the Board’s actions did not rise to the level of wrongdoing by exercising its discretion under the Policy to retain the Three Directors. There was “no evidence that the Board identified, and then sought to thwart, the will of the shareholder franchise by refusing to accept the resignations of the Three Directors.” The Court noted that if Westland wanted to remove the Three Directors, it should have supported an alternative slate. As the Court concluded, “[a] poor strategic choice cannot be the basis of a Section 220 action.”
Westland Invokes Unocal
Westland also raised a unique argument that the Board’s retention of the Three Directors amounted to a defensive measure thereby requiring the heightened standard under Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). The Court found this argument unavailing, reasoning that there was no threat to Axcelis’ corporate control at the time of the May election.
With respect to the Board’s handling of SHI’s acquisition proposals, the Court likewise held that there was no basis for the application of Unocal. The Court held that the rejection of an acquisition offer alone is not a defensive action that would warrant the application of enhanced scrutiny of Unocal. Moreover, the Court held that there is no basis from which to infer that the Board engaged in wrongdoing when rejecting the bids.
Recognizing that Westland was interested in learning more about the negotiations and the ultimate loss of share value, the Court nonetheless held that Westland was required to “point the Court to something other than a precipitous drop in stock price before Section 220 inspection rights may be granted. Otherwise, Delaware corporations would be universally subject to the very burdens Section 220 was carefully designed to protect against.” Accordingly, the § 220 request was denied and the action dismissed.