City of Westland Police & Fire Retirement System v. Axcelis Technologies, Inc., No. 594, 2009 (Del. Supr. August 11, 2010), read en banc Supreme Court opinion here. The affirmed opinion of the Court of Chancery was highlighted on this blog here. Bonus: Bullet-point commentary on Section 220 after the case highlights.
“Third, a plaintiff must also prove that information it seeks is necessary and essential to assessing whether a director is unsuitable to stand for re-election. Finally, access to board documents may be further limited by the need to protect confidential board communications . . ..”
“Whether the directors, as fiduciaries, made a disinterested, informed business judgment that the best interest of the corporation required the continued service of these directors, or whether the board had some different, ulterior motivation.”
“. . . a showing that enough stockholders withheld their votes to trigger a corporation’s (board-adopted) “plurality-plus” policy satisfies the Pershing Square requirement that “a stockholder must establish a credible basis to infer that a director is unsuitable, thereby warranting further inspection. Nevertheless, to be entitled to relief, the plaintiff must still make the additional showing articulated by the Chancellor in Pershing Square. That, in our view, strikes the appropriate balance between the shareholder’s entitlement to information and the directors’ entitlement to make decisions in the corporation’s best interest free from abusive litigation.”
Commentary: Based in part on the 91 or so posts with Section 220 case summaries and/or commentary on this blog over the past 5 years, as well as multiple additional cases I have handled over the last 20 years or so that are not covered on this blog, I will venture a few observations about Section 220 cases in general:
- As the case highlighted above indicates, one can spend substantial amounts of time and money seeking documents in a Section 220 case, only to "come up dry".
- The wording of the statute appears somewhat straightforward, but even in meritorious cases, corporations and their counsel can use Fabian tactics to effectively make it cost prohibitive for most shareholders to pursue their Section 220 rights.
- The Delaware courts encourage plaintiffs to exercise their Section 220 rights prior to bringing derivative suits or other plenary claims, often referring to Section 220 as a "tool" that needs to be employed, but the query must be presented: Is it an effective tool?
- As a practical matter, in this writer’s view, Section 220 litigation is only cost-effective for the shareholder who has substantial sums invested. This is so, because it cannot be predicted until after litigation is commenced, whether the corporation will engage in Fabian tactics and otherwise require the plaintiff to spend as much money as possible on discovery disputes, pre-trial pedantry on esoteric nuances, pre-trial briefing, trial and appeal. Unless substantial holdings are involved, many shareholders will make an economic decision that the cost-benefit analysis does not support a Section 220 suit. After all, even if a trial and appeal is successful for the Section 220 plaintiff, the victory merely means that certain documents will be produced. In light of the American Rule, those documents often come, (if they come at all), at a very high price.