In City of Westland Police & Fire Retirement System v. Axcelis Technologies, Inc., No. 4473-VCN, 2009 Del. Ch. LEXIS 173, at *1 (Del. Ch. Ct. September 28, 2009), the Court of Chancery of Delaware dismissed a books and records action brought by a shareholder against Axcelis Technologies, Inc. (“Axcelis”).  Plaintiffs claimed Axcelis refused to accept the resignations of three directors who received less than a majority of the votes when standing for reelection, while at the same time selling the company’s principal asset to a competitor after failing to accept an acquisition offer from the same competitor. 

Axcelis specialized in manufacturing ion implantation and semiconductor equipment.  SHI, a Japanese company in the same business as Axcelis, participated with Axcelis in a joint venture, SEN.  SEN manufactured ion implantation and semiconductor equipment.  On two occasions, Axcelis’ board rejected offers by SHI to acquire the company, asserting that the price failed to adequately compensate the shareholders for the synergistic value of SEN. 

In the aftermath of SHI's unsuccessful efforts, Axcelis held elections for three directors on its staggered board.  The company had in place a policy providing that directors failing to receive a majority of the shareholder vote had to submit a letter of resignation to the board.  The board had the discretion to accept or reject the resignation.  The three Axcelis directors ran unopposed in the May, 2008 election but received less than a majority of the votes cast.  They resigned, as required by the policy, but the Axcelis board declined to accept the resignations, explaining that the directors were knowledgeable and experienced, that one or more served on key committees, and that losing them would harm the company and interfere with negotiations with SHI.  As the press release stated:

• In making their determination, the Board considered a number of factors relevant to the best interests of Axcelis. The Board noted that the three directors are experienced and knowledgeable about the Company, and that if their resignations were accepted, the Board would be left with only four remaining directors. One or more of the three directors serves on each of the key committees of the Company and Mr. Hardis serves as lead director. The Board believed that losing this experience and knowledge would harm the Company. The Board also noted that retention of these directors is particularly important if Axcelis is able to move forward on discussions with SHI following finalization of an appropriate non-disclosure agreement.

Plaintiffs sought to inspect the company's records and obtain material concerning the board's review of the offers by SHI and materials related to the decision not to accept the resignations by the directors who did not obtain a majority of the votes cast.  Plaintiff demanded to inspect Axcelis’ books and records under Section 220 of the Delaware Code.

Under Section 220, a shareholder has the right to inspect the books and records of the corporation if the shareholder demonstrates a proper purpose.  Proper purpose requires some evidence of mismanagement, waste or other wrongdoing.  A shareholder must produce some evidence of a credible basis that wrongdoing has occurred.  Delaware courts describe this as a low burden of proof that may be shown through documents, logic, testimony, or otherwise. 

The court held the plaintiff did not show a credible basis from which to infer wrongdoing in the board’s rejection of SHI’s offers to purchase Axcelis.  The board claimed that SHI failed to adequately value the company.  Plaintiff offered no reason to infer that the rejection was anything other than a good faith business decision.  Negotiations only occurred after SHI agreed to sign a confidentiality agreement.  According to the court, the plaintiff demonstrated no evidence of bad faith in the conduct of the negotiations.  Failed negotiations do not form a credible basis from which to infer wrongdoing.

The court also found that plaintiff failed to show any credible basis from which to infer wrongdoing from the board’s decision to reject the directors’ resignations.  Plaintiff's claims that the decision was motivated by entrenchment or to impede a change of control were considered by the court to be bare allegations and therefore insufficient.  Under the court’s analysis, the directors were properly reelected under plurality voting provisions.  The lack of a majority vote triggered the requirement to resign and, by rejecting the resignations, the board fulfilled the requirments of the policy.  The court concluded that the desire for a different outcome did not consitute credible evidence of wrongdoing under Section 220.

Likewise, the court held that plaintiff did not have any credible evidence to show that the sale of SEN should be considered wrongdoing.  The drop in stock price was not sufficient to trigger a Section 220 inspection right.  If it were, Delaware corporations would constantly be subject to inspection, which would be extremely burdensome.

The court concluded that the plaintiff failed to demonstrate credible evidence that wrongdoing occurred in respect to the rejection of SHIs proposals to acquire Axcelis, the board’s decision to retain the directors, and the sale of SEN.  Therefore, the court dismissed the Section 220 books and records action and entered judgment in favor of Axcelis.

The primary materials for the post are available on the DU Corporate Governance website.