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Professor J.W. Verret discusses here an article he wrote and his opposition to a pending federal bill that would require more disclosures regarding the "people behind the entities" that are formed on a state level. The stated purpose is to thwart terrorists from using such entities, but the good professor explains why the proposed bill would…

Professor Ribstein observes here that: "One of Dodd-Frank’s major gifts to lawyers is Section 913(g), titled authority to establish a fiduciary duty for brokers and dealers.” This provides authority to the SEC "to create a standard of conduct for broker-dealers and investment advisers…." Apart from the fact that most fiduciary definitions traditionally have been a matter of state…

Grayson v. Imagination Station, Inc., C.A. No. 5051-CC (Del. Ch. Aug. 16, 2010), read opinion here.

Factual Background

The intriguing background facts of this case involve a company’s founder and sole shareholder, Grayson, who sold additional shares in return for investments by Defendants Collins and Goss. In connection with that new investment, a Voting…

Professor J.W. Verret, a former law clerk at the Delaware Court of Chancery, and a rising star in the academic world of corporate law, provides a list of the top ten books in corporate governance here. A link at the bottom of his post refers to supplements and commentary on the list by Professor Stephen Bainbridge.

Professor Bainbridge discusses an article here from The Wall Street Journal that quotes a Delaware Superior Court judge in connection with a dress code for those who appear in his court. Most Delaware lawyers know that it is at least an unwritten rule that a "white dress shirt" is expected of lawyers who appear in a…

Yucaipa American Alliance Fund II, L.P. v. Riggio, C.A. No. 5465-VCS (Del. Ch. Aug. 12, 2010), read post-trial opinion here. This Delaware Court of Chancery opinion rejected breach of fiduciary duty claims and upheld the poision pill defense that Barnes & Noble implemented as part of a plan to spurn the advances of investor Ron Burkle’s Yucaipa entity.

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.

 
Brief Overview
 
This decision affirms the decision of the Court of Chancery which rejected the claim of a shareholder for books and records pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”).  The shareholder’s two main reasons for its demand for books and records under Section 220, which were rejected by both the Court of Chancery and the Supreme Court, were as follows: (1) The decision of the Axcelis board to reject the tendered resignations of directors, frustrated the shareholder vote and was therefore in violation of Blasius Indus. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1998); and (2) the rejection by the board of an acquisition proposal was a defensive measure that created a credible suspicion of wrongdoing (i.e., board entrenchment) under Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).
 
Notably as a procedural matter, the trial took place about 3 months after the complaint was filed and was based on stipulated facts. There was only oral argument at the trial and no live testimony.
 
This case is instructive for shareholders who might be inclined to read Section 220 and think that it is a simple matter to demand books and records pursuant to the statute which requires a reply from the corporation within five days. In this case, for example, after more than a year of litigation and an en banc decision of the Delaware Supreme Court, the request by the shareholder for books and records was denied.
 
Factual Background

 
Axcelis follows the plurality voting provisions of Delaware statutory law, under which a director may be elected without receiving a majority of the votes cast. See 8 Del. C. Section 216 (3). Importantly, however, the Axcelis Board also adopted a “plurality plus” governance policy, sometimes referred to as a Pfizer-style policy, which provided that at a shareholder meeting at which a director is subject to an uncontested election, if any nominee for director received a greater number of votes “withheld” from his election than voted “for” such election, he or she would be required submit to the board a letter of resignation. The board then has the option of accepting or rejecting the resignation.
 
At the 2008 annual meeting, three directors received less than a majority of the votes cast, which triggered the “plurality plus” governance policy and those three directors tendered their letters of resignation. The board, however, did not accept those resignations.
 
Importantly, this plurality plus policy was adopted by board resolution, as distinguished from being adopted by either a bylaw or as part of the Certificate of Incorporation. This is especially noteworthy because, pursuant to the current versions of Sections 141(b) and 216 of the DGCL, a board of directors may not repeal a stockholder-adopted bylaw that provides for a majority voting or some other non-plurality standard. The DGCL was also amended to permit a resignation of a director to be irrevocable when the director was acting in conformity with a policy requiring the director to tender her resignation in the event she does not secure a majority of votes cast in an uncontested election.
 
The Vice Chancellor at the trial level found no credible basis from which to infer any possible wrongdoing from the rejection of the acquisition proposals, reasoning that "rejecting an acquisition offer, without more, is not a ‘defensive action’ under Unocal.” See footnote 12 (citing Gantler v. Stephens, 965 A.2d 695, 705 n. 23 (Del. 2009)). The Vice Chancellor likewise rejected the argument that the refusal of the board to accept the resignations of the three directors thwarted the will of the shareholders or impeded their voting franchise in violation of the Blasius line of cases.
 
Legal Analysis

 
The Supreme Court noted that its review of a trial court decision regarding whether or not a stockholder stated a proper purpose pursuant to Section 220(b) is de novo. After discussing the definition of proper purpose as one that is “reasonably related to such person’s interest as a stockholder,” and recognizing that the investigation of possible wrongdoing or mismanagement is a well-established proper purpose, the Court focused its analysis on whether the plaintiff in this case established a “credible basis”, which can be demonstrated via either “documents, logic, testimony or otherwise,” without needing to prove actual wrongdoing.
 
The Court recognized as a proper purpose the effort to obtain books and records under Section 220 in order: “to determine an individual’s suitability to serve as a director.” (citing Pershing Square, L.P. v. Ceridian Corp., 923 A.2d 810, 818 (Del. Ch. 2007)). See generally, footnote 30 (referring to a lengthy list of recognized proper purposes under Section 220, including contacting other stockholders and communicating with them).
 
The Chancellor in the Pershing Square case described four criteria in a Section 220 demand that is based on a legitimate concern regarding the suitability of a director. In addition to first establishing a proper purpose and second, a credible basis on which legitimate concerns can be inferred, the third and fourth items are especially important for the Supreme Court’s conclusion in this case. The Chancellor explained further that:
 
“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 . . ..”
 
The Supreme Court explained “for future guidance” that the relationship between an inspection right under Section 220 and a “plurality-plus” policy where directors themselves decide, within their discretion, whether to accept a resignation, raises the following question:
 
“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.”
The Supreme Court concluded by reasoning that:
 “. . . 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.”

Continue Reading Delaware Supreme Court Clarifies Section 220 Standard for Shareholder Access to Books and Records