In City of Westland Police & Fire Retirement System v. Axcelis Technologies, Inc., 1 A.3d 281 (Del. 2010), the Delaware Supreme Court affirmed the dismissal of an action brought under Section 220 of the Delaware General Corporation Law, 8 Del. Code § 220, to review books and records of a corporation. The Court of Chancery had dismissed the action on the ground that plaintiff failed to present "some evidence" suggesting a "credible basis" from which the court could infer a "proper purpose" for the review, such as possible wrongdoing or mismanagement. The decision offers enhanced guidance on the "proper purpose" test, particularly with respect to corporations that follow "plurality plus" governance policies.
Axcelis Technologies, Inc. ("Axcelis") is a Delaware
corporation specializing in the manufacture of ion implantation and
semiconductor equipment. Plaintiff is a Michigan pension fund that
beneficially owns Axcelis common stock. In 1983, Axcelis and a
Japanese company, Sumitomo Heavy Industries, Ltd.
("Sumitomo"), became partners in a joint venture. In
February and March 2008, Sumitomo made two unsolicited bids to
acquire Axcelis. The Board of Directors of Axcelis rejected the
bids, stating that the bids undervalued Axcelis and were not in the
best interests of the company or its shareholders. The Board,
however, expressed its willingness to meet with Sumitomo privately
to explore whether the parties could reach an agreement on a
transaction involving their joint venture.
In May 2008, Axcelis held its annual shareholders' meeting.
Three directors stood for reelection at that meeting. Axcelis
follows a "plurality plus" governance policy under which
a director may be elected without receiving a majority of the votes
cast. If a director is elected with less than a majority of the
votes cast, however, the director must submit a letter of
resignation for the Board's consideration. At the May 2008
meeting, the three directors who stood for reelection received less
than a majority of the votes cast, triggering the "plurality
plus" governance policy. In accordance with that policy, the
three directors tendered letters of resignation. The Board decided,
though, not to accept the resignations.
In June 2008, the parties agreed that Sumitomo would submit a
revised acquisition proposal by August 1, 2008. After Axcelis
furnished Sumitomo due diligence information, Sumitomo requested an
extension of the deadline for the revised proposal. Axcelis did not
agree to the extension and Sumitomo informed Axcelis it was putting
all acquisition discussions "on hold." Axcelis publicly
announced that development and its stock dropped significantly.
This led plaintiff to send a written demand to review Axcelis'
books and records. After the company rejected the demand, plaintiff
filed a complaint seeking court-ordered inspection of Axcelis'
books and records under Section 220 of the Delaware General
Corporation Law.
Section 220(c) requires that the person seeking inspection
establish that it has a "proper purpose" for doing so.
Plaintiff argued that it did so state a proper purpose for its
demand: to investigate possible management wrongdoing. More
specifically, plaintiff claimed that the Axcelis Board's
rejection of Sumitomo's acquisition proposals and the
directors' resignations established a credible basis from which
the court could infer that wrongdoing may have occurred. Plaintiff
contended that the Board's rejection of the acquisition
proposals constituted improper "defensive measures"
(i.e., board entrenchment) and that the Board's
refusal to accept the directors' resignations thwarted the will
of the shareholders who did not vote for their reelection. The
Chancery Court rejected plaintiff's assertions, finding that
the uncontested facts in the record did not support any
entrenchment motive other than plaintiff's bare accusations.
The lower court thus found no credible basis to infer any possible
wrongdoing or bad faith by the Axcelis Board.
On appeal, plaintiff conceded that the lower court invoked the
proper standard for reviewing a Section 220 demand, namely, that a
plaintiff seeking inspection of books and records must present some
evidence, "through documents, logic, testimony or
otherwise," to suggest a credible basis from which the court
could infer that wrongdoing may have occurred. Plaintiff argued,
however, that the lower court misapplied that standard by requiring
plaintiff to provide affirmative evidence of wrongdoing.
Plaintiff also argued that the uncontested facts, standing alone,
established a credible basis to infer wrongdoing.
The Supreme Court disagreed. Relying upon Seinfeld v. Verizon Communications,
Inc., 909 A.2d 117 (Del. 2006), it noted that a
"mere statement of a purpose to investigate possible general
mismanagement, without more, will not entitle a
shareholder to broad § 220 inspection relief." A
plaintiff may establish a credible basis to infer wrongdoing
"through documents, logic, testimony or otherwise." Such
evidence need not prove that wrongdoing, in fact, occurred. The
credible basis standard "sets the lowest possible burden of
proof" and a reduction of that burden "would be
tantamount to permitting inspection based on the
plaintiff-stockholder's suspicion of wrongdoing." Like the
Chancery Court, the Supreme Court did not interpret the facts as
plaintiff did. The Court concluded there simply was no credible
basis in the record to infer that the Axcelis Board's decisions
to reject Sumitomo's proposals and its request to extend the
proposal deadline were other than good faith business
decisions.
Regarding the Axcelis Board's decision to reject the director
resignations, the Supreme Court disagreed with plaintiff that in
cases where a plurality plus policy is triggered, a
corporation's board must show it had a compelling justification
for rejecting the resignations. Such a requirement, the Court
observed, would improperly shift to the corporation plaintiff's
burden to establish a "proper purpose." One judicially
recognized proper purpose is "to determine an individual's
suitability to serve as a director." Pershing Square, L.P. v. Ceridian
Corp., 923 A.2d 810, 818 (Del. Ch. 2007). Plaintiff
did not rely upon this purpose in seeking relief; but even if it
had, the Court noted, "merely stating this purpose does not
automatically entitle a shareholder to relief." The Supreme
Court thus affirmed dismissal of plaintiff's action.
The Supreme Court went on to elaborate on the director
reelection/resignation issue because the "relationship between
the shareholder inspection right and the 'plurality plus'
policy adopted by the Axcelis board merits sharper focus for future
guidance." Where a board unilaterally confers upon itself the
power to override an exercised shareholder voting right without
prior shareholder approval, the board should be accountable for its
exercise of that power. This accountability, the Court advised,
should take the form of being subject to a shareholder's
Section 220 right to seek inspection of any documents and records
upon which the board relied in deciding not to accept the tendered
resignations. To be entitled to inspection, however, the
shareholder-plaintiff must also show that the information it seeks
is necessary and essential to assessing the suitability of a
director for reelection. This, the Court opined, "strikes the
appropriate balance between the shareholders' entitlement to
information and the directors' entitlement to make decisions in
the corporation's best interest free from abusive
litigation."
This decision from the Delaware Supreme Court offers enhanced
guidance on shareholder inspection rights, particularly with
respect to Delaware corporations that follow board-adopted
plurality plus policies.
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