Corporate Governance

City of Westland Police v. Axcelis: The Erosion of the Credible Evidence Standard (Introduction)

By J Robert Brown Jr.

The Supreme Court just issued the anticipated opinion in City of Westland Police v. Axcelis.  That was the case where three directors did not receive majority support from shareholders and, under the policy in place, submitted letters of resignation to the board.  The board declined to accept the resignations, explaining that:  

• [T]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 a 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.

Plaintiff invoked its inspection rights and sought documents relating to the board's decision.  The request was no fishing expedition.  Plaintiff merely sought:

• 6. All minutes of agendas for meetings (including all draft minutes and exhibits to such minutes and agendas) of the Board at which the Board discussed, considered or was presented with information concerning or related to the Board's decision not to accept the resignations of Directors Stephen R. Hardis, R. John Fletcher, and H. Brian Thompson.

• 7. All documents reviewed, considered, or produced by the Board in connection with the Board's decision not to accept the resignations of Directors Stephen R. Hardis, R. John Fletcher, and H. Brian Thompson.

Nonetheless, the trial court declined to allow access to the requested documents.  In effect, Vice Chancellor Noble concluded that shareholders were not entitled to explore the process used by the board in declining to accept the letters of resignation.  The decision potentially meant that these decisions would be unreviewable, insulating the board even where it refused to accept the resignation letters for improper purposes. 

The Supreme Court affirmed the lower courts denial of inspection rights but on an odd basis.  The Court created a new standard for seeking documents in the context of a majority vote provision then affirmed the lower court because the plaintiff had failed to invoke this new standard.  Nonetheless, the Court went on to repudiate a substantial portion of the lower court's reasoning and, to some extent, overturning established Delaware law.  It did so on a narrow basis and left uncertain the extent to which shareholders can in fact use inspection rights to explore the board's reasoning for refusing to accept the resignation of those directors who do not receive majority support.

Full post as published by The Race to the Bottom on August 24, 2010 (boomark / email).