City of Westland v. Axcelis Technologies: The Myth of Majority Vote Provisions and the Further Need for Preemption of Delaware Law (The Solution)

Shareholders simply wanted the minutes/agendas of the meetings where the board considered how to handle the resignations of the three directors who did not receive the requisite support from shareholders and the documents distributed at the meetings.  Not a very onerous demand.

In refusing to allow inspection of the records, the Chancery Court did so even where the General Counsel of Axcelis apparently described at least some of the issues confronted by the board in dealing with the issue.

• An account of how this evolved, authored by Axcelis’s General Counsel, may be found at Lynnette C. Fallon, How One Company Got Caught in the Middle of Proxy Firm Voting Recommendations, a “Pfizer” Governance Policy, and an Unsolicited Acquisition Proposal, 1704 PLI/Corp. 1173, (Nov. 12-14, 2008). Although the Court does not rely in any way upon this work, it may be of interest to the reader that the article’s author asserts that the Board was uncertain whether the withhold vote was the result of dissatisfaction with the its response to SHI’s acquisition proposals or its decision not to recommend in favor of declassification.

In other words, those taking a PLI course likely received more information on the director retention issue than shareholders seeking to invoke their legal inspection rights. 

The decision not to allow inspection of the records effectively insulates board decisions on these letters of resignation from review for conformity with fiduciary obligations. Shareholders who vote against directors need only be told that the board refused because of the desire to retain the knowledge and experience of the defeated directors.  Indeed, if the board of Axcelis made even one small mistake, it was issuing a press release that went beyond these points.  By suggesting the directors were needed for something specific (future negotiations), they provided shareholders with an opening that allowed them some room to contest the explanation.

By insulating these decisions from review, the courts avoid imposing on the decision making process any kind of meaningful standards.  In other words, directors making this determination do not really have to be informed since the material that they reviewed will never come to light.  Likewise, they really do not need to hold multiple meetings or deliberate in any meaningful way.  That information likewise will remain hidden from shareholder view.

The only real solution here is to have the SEC adopt a new requirement for the current report on Form 8-K.  The report should require boards refusing to accept letters of resignation to provide an explanation for the refusal, to submit the explanation for review by all deliberating directors (making them responsible for the content), and to describe the process by which the board came to its decision.  The consequence of federalizing the disclosure will result in boards having exposure under Rule 10b-5 to the extent they do not give an accurate rendition of what happened and why.

This is an unfortunate step.  Inspection rights are the proper way to obtain this information.  The state law system of inspection rights ought to be robust enough to deal with this.  But, as this case shows, it is not.  The federal regime is the only alternative.

Primary materials on this case can be found at the DU Corporate Governance web site.

The Car Czar Makes the Case for Access

Posted on Thursday, October 22, 2009 at 10:00AM by J. Robert Brown | Post a Comment | Email | Print

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In the earlier post, we discussed how the Delaware Chancery Court made the case, convincingly, for shareholder access.  The court discounted majority vote provisions, essentially making clear that they enhanced the board's authority not shareholders.

The second case made for access occurred in an interview with Steven Rattner, the Car Czar.  He described the board of directors at General Motors this way:

• if ever a board of directors needed shuffling, it was GM's, which had been utterly docile in the face of mounting evidence of looming disaster. We decided to recommend to Tim, Larry, and ultimately the President a package that would include replacing Rick with Fritz as interim CEO, changing at least half of the board, and making an outside director chairman (which should be universal).

Docile?  In other words, uninvolved.  Why?  Because there is no serious competition for the board.  Shareholders cannot vote them out of office, even if there is a majority vote provision (see above).  It's too expensive to run a competing slate of directors (although shareholder access will provide some savings once the SEC gets around to adopting it).  Our comment letter, including a criticism of majority vote provisions, is here.

But in fact, what explains the docile behavior is Delaware law.  Delaware courts encourage an ostrich approach to governance.  In the Citigroup case, the Chancellor lectured shareholders for trying to require boards to participate in risk review, all but concluding that they had no obligation to know about or participate in review of risk, irrespective of its enormity.  In Amylin, the Chancery Court first, then the Supreme Court in affirming, held that boards have no obligation to know about anti-takeover provisions that seriously undermine the shareholder franchise. 

In short, the courts in Delaware encourage indeed reward boards for not knowing.  In this legal climate, is it really any great surprise when a board acts in a "docile" fashion?  Why should it do otherwise?