City of Westland Police v. Axcelis Technologies: The Appeal (Part 1)

Axcelis ought to have been a simple case that generated little controversy.  Shareholders defeated three directors under a majority vote provision.  The three directors dutifully submitted their resignation letter which the board declined to accept.  Shareholders asked to see the minutes of agendas for the meetings where the resignations were considered as well as the documents distributed at the meeting.  

The case was hardly a fishing expedition.  Moreover, plaintiffs alleged that the company had been inconsistent in its explanation for not accepting the resignations, allowing them to meet the minimal "credible" basis standard to inspect the requested documents.  The Chancery Court, therefore, had plenty of room to grant the request.  Yet it did not.  The court essentially resolved the alleged inconsistency against the plaintiffs as if deciding the matter on the merits.  The result was to effectively cut off any examination by shareholders of the reasons for not accepting the letters of resignation.

In effect, the Chancery Court gutted majority vote provisions.  The opinion allowed directors to refuse to accept resignation letters without allowing shareholders the right or opportunity to look at the reasoning that went into the decision.  In effect, directors could do so for any reason, even an entrenchment one, without concern that the reasoning would be probed or examined.

At one level, the case once again raised issued about the use of excessive pleading standards to deny owners their obvious inspection rights.  That shareholders would want to know in greater detail why the board refused to accept the letters seems obvious and ought to be inherent in the exercise of inspection rights without having to demonstrate a credible basis of wrongdoing.  Nonetheless, even with the credible basis standard, shareholders made a sufficient showing here, given the admonition that the standard is supposed to be a low one.

As it stands, the case demonstrates the meaninglessness of majority vote provisions.  It also invites federal preemption, with the SEC likely at some point to consider adding a specific disclosure item when directors decline to accept letters of resignation from directors who do not receive majority support under a majority vote policy or bylaw. 

The case is, however, on appeal and plaintiffs have filed the first brief.  There is at least a possibility that the Supreme Court will correct this decision if for no other reason that to cut off the inevitable federal intervention.

The brief and the other primary documents can be found at the DU Corporate Governance web site.