Inter-Tel, the Shareholder Franchise, and the Abandoment of the Blasius Standard

Imagine that you are a shareholder and you oppose a merger proposal by the board.  You have enough votes to defeat the proposal.  The board decides, solely because it is losing, to delay the meeting and try to find additional votes.  The delay results in a new record date and a new list of shareholders eligible to vote.  Ultimately, the board succeeds, gets enough shareholders to support the merger, and wins the vote.  An exam hypothetical?  Not exactly.  It reflects the facts in Mercier v. Inter-Tel, Inc., et al., 2007 Del. Ch. LEXIS 119, 2007 WL 2478625 (Del.Ch. 2007).     

The plaintiff brought action against the company Inter-Tel and several members of the company's management.  According to Plaintiff’s second amended complaint, Inter-Tel had relocated the state of incorporation from Arizona to Delaware in hopes of providing the company and its shareholders with possible defensive measures under Delaware law that could be exercised in the face of several pending merger offers. 

A Special Committee consisting of directors of Inter-Tel approved a merger with Mitel.  The board approved the merger and scheduled a meeting of shareholders for June 29.  The record date was May 25.  As time progressed, it became clear that the vote was running against the board.  Moreover, in what the court called a "crippling injury," Institutional Shareholder Services recommended against the merger.  The day before the meeting, the Special Committee voted to reset the date for July 23 and the record date for July 9.  The Committee did so despite the fact that the proxy contained a proposal that would have provided the authority to adjourn or postpone the meeting and it was clear that the proposal was unlikely to pass.  

Plaintiff sought a preliminary injunction.  Alleging that actions by the Special Committee thwarted the majority will of shareholders, plaintiff asserted that the defendant corporation and named directors must demonstrate a “compelling justification” for their actions as prescribed in Blasius. Plaintiff insisted that Defendants were unable to meet that heavy burden and in accordance with Blasius, Defendants should lose.  The Court of Chancery noted that the Delaware Supreme Court had characterized the "compelling justification" standard as “so strict a test that it is rarely applied.” Mercier, 929 A.2d 786 , 806 (2007) (citing Williams v. Geier, 671 A.2d 1368, 1376 (Del. 1996)).  Instead, a better test was the “reasonableness” standard established in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). 

The court concluded that under either the reasonableness or compelling justification standard, the board's decision to reschedule the meeting was proper. Although the actions of the Special Committee were recognized as less than ideal, they did serve a legitimate corporate purpose, by sustaining the value-maximizing opportunity for the stockholders to receive higher value for their shares through the merger, and there was no evidence that the actions either coerced or manipulated the shareholders. The fact that at the later meeting shareholders changed their vote from disapproval to approval was a result of individual shareholders changing their perception of the merger and not attributable solely to actions of the Special Committee.