City of Westland Police & Fire Retirement System v. Axcelis Technologies, Inc.: Delaware Supreme Court Clarifies Section 220 Standard in the Context of a Board-Adopted “Plurality Plus” Governance Policy

October 28, 2010

Publication| Corporate Transactions| Corporate & Chancery Litigation

In City of Westland Police & Fire Retirement System v. Axcelis Technologies, Inc., No. 594, 2009 (Del. Aug. 11, 2010), the Delaware Supreme Court affirmed the dismissal of a books and records action under 8 Del. C. § 220 (“Section 220”), holding that plaintiff did not meet its evidentiary burden to demonstrate a “proper purpose” to support inspection where a board of directors rejected the resignations of three directors who failed to receive a majority of the votes cast in an uncontested election.

Defendant Axcelis Technologies, Inc. (“Axcelis”) followed the plurality voting provisions of Delaware statutory law, under which a director may be elected upon receiving a plurality of votes cast. See 8 Del. C. § 216(3). Importantly, the Axcelis board of directors also had adopted a “plurality plus” governance policy, which provided that any nominee in an uncontested election receiving a greater number of votes “withheld” than votes “for” his or her election would be required to submit a letter of resignation for consideration by the board of directors. All three directors seeking reelection at the 2008 annual meeting received less than a majority of the votes cast and in accordance with the “plurality plus” governance policy tendered their resignations. The board, however, decided not to accept the tendered resignations.

The Court acknowledged that plaintiff’s stated purpose for its Section 220 demand—the investigation of possible wrongdoing or mismanagement—was a proper purpose, but held that plaintiff failed to present any evidence to suggest a credible basis from which a court could infer possible mismanagement or wrongdoing that would warrant further investigation.

The Court also rejected plaintiff’s argument that the board must show a “compelling justification” under Blasius for its decision not to accept the three directors’ resignations because the board’s nonacceptance of the resignations frustrated the stockholder vote. The Court concluded that plaintiff’s Blasius argument improperly attempted to shift to Axcelis plaintiff’s burden to establish a “proper purpose” and affirmed the Court of Chancery’s decision not to adopt the Blasius standard for reviewing a board of directors’ discretionary decision to reject resignations where a “plurality plus” governance policy is triggered and requires that resignations be tendered.

Importantly, the Court also discussed that another proper purpose for seeking inspection of corporate books and records under Section 220 is to determine an individual’s suitability to serve as a director, a purpose that plaintiff did not rely upon for seeking relief. In this connection, the Court noted that Axcelis’s “plurality plus” policy was adopted unilaterally as a resolution by the board of directors. The Court explained that where a board confers upon itself the power to override the determination of a stockholder majority by unilaterally adopting a “plurality plus” policy, the board should be held accountable for its exercise of that “unilaterally conferred power” by being subject to a stockholder’s right under Section 220 to seek inspection of any documents or other records upon which the board relied in deciding to reject the tendered resignations, indicating that in such circumstances there is a credible basis to infer that a director is unsuitable, thereby warranting further investigation. The Court indicated, however, that the filing of a Section 220 action for the purpose of investigating the suitability of directors whose tendered resignations are rejected in the context of a “plurality plus” policy will not automatically entitle a plaintiff stockholder to relief. A plaintiff still must satisfy the other evidentiary burdens required, including the necessity of the requested information to assess the suitability of the director.

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