Corporate Governance

City of Westland Police v. Axcelis Technologies: The Appeal (Part 4) (The Prospect of Federal Preemption)

By J. Robert Brown

The brief filed by shareholders also noted the risk of preemption should the Supreme Court affirm the Chancery decision. 

• Shareholders will be forced either to compel companies to eliminate the policies, or to look elsewhere for authority to get corporate directors to justify their decisions.8

Footnote 8?

• 8 See J. Robert Brown, City of Westland v. Axcelis Technologies: Majority Voting and Delaware Law (The Beginning of the Evisceration), http://theracetothebottom.org (Jul. 22, 2009, 6:00 a.m.): 

The problem in the end is that there shouldn't be a need to invoke a higher standard of review. For matters that directly contradict the voting position of shareholders, shareholders ought to have an inherent right to know the reasons and explore any supporting documentation. Only with the information can shareholders be certain that the board acted in a manner consistent with its fiduciary obligations. In other words, there should be no need for "credible" evidence beyond the actions taken by the board to overturn the shareholder vote. ... If the Chancery Court does not allow inspection to occur in this case, it will be another area where the SEC will need to preempt and substantially increase the disclosure obligations on the company. It will be the only way for the owners of the company to obtain the information they need to assess the quality of the managers.

This is not an idle possibility.  The Commission, we understand, is quite aware of this case and likely quite aware of the lacuna in shareholder disclosure that it creates.  With the most recent disclosure reforms delving into board diversity and the separation of chairman/CEO, it would be eminently consistent that the SEC would undo this case. 

After all, the SEC has tried to use disclosure to affect the substantive behavior of the board (see Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure), a stretch of its regulatory mandate.  In this instance, there is no stretch.  It is about providing material information to shareholders.  Look for a proposal if the Supreme Court affirms the denial of access to the documents connected to the decision to not accept the resignation of the directors who did not receive the requisite majority.

Full post as published by The Race to the Bottom on January 25, 2010 (boomark / email).