Opinion ID: 2441952
Heading Depth: 2
Heading Rank: 4

Heading: Proper Purpose to Investigate Suitability of Directors

Text: Westland's second claim on appeal is that this Court should adopt the Blasius standard when reviewing a board of directors' decision to reject director resignations in cases where a plurality plus governance policy (or by-law) is triggered and requires that resignations be tendered. Under Blasius, a corporation's board must demonstrate a compelling justification for board-adopted measures that interfere with, or frustrate, a shareholder vote. [28] Westland claims that by withholding their votes in the May 2008 director electionsthereby triggering Axcelis' plurality plus governance policya majority of Axcelis shareholders expressed their will that the three directors should be removed. Because the Board's non-acceptance of the three directors' resignations frustrated that shareholder will and vote (Westland urges), the Axcelis Board must be required to show a compelling justification for its decision. The Court of Chancery rejected Westland's Blasius argument. We have concluded that Westland's Blasius argument lacks merit, because it improperly attempts to shift to Axcelis Westland's burden to establish a proper purpose for a Section 220 inspection. Accordingly, we agree with the Court of Chancery's decision not to adopt the Blasius standard when reviewing a board of directors' discretionary decision to reject director resignations in cases where a plurality plus governance policy is triggered and requires that resignations be tendered. Although we conclude that the Court of Chancery properly rejected Westland's Blasius argument, the fact that this dispute arises in connection with a shareholder vote requires a further elaboration of the proper purpose requirement of our Section 220 jurisprudence in that context. At common law a stockholder of a Delaware corporation had a qualified right to inspect or examine the books and records of the corporation. The shareholder had to show that the requested inspection was for a proper purpose, which at common law was a purpose relating to the interest the shareholder sought to protect by seeking inspection. [29] The shareholder's right of inspection is currently codified in Title 8, Section 220 of the Delaware Code. With fidelity to its common law origins, Section 220(b) defines proper purpose as a purpose reasonably related to such person's interest as a stockholder. Over time, that concept has expanded as Delaware courts have interpreted the statutory term proper purpose to reconcile legitimate interests of shareholders with the ever-changing dynamics and technology of corporate governance. A leading treatise on Delaware law has compiled a non-exclusive list of judicially recognized proper purposes under Section 220. [30] One of those purposes is to determine an individual's suitability to serve as a director, which the Court of Chancery recognized in Pershing Square, L.P. v. Ceridian Corp. [31] There, the Court of Chancery stated: It is difficult for me to understand how determining an individual's suitability to serve as a corporate director is not reasonably related to a person's interest as a stockholder. After all, stockholders elect directors to represent their interests in the corporation and have few other avenues by which they may influence the governance of their companies. Once elected, stockholders may express dissatisfaction only through the electoral check. [32] The Chancellor recognized, however, that merely stating that purpose does not automatically entitle a shareholder to Section 220 inspection relief: Inspection under § 220 is not automatic upon a statement of a proper purpose. First, a defendant may defeat demand by proving that while stating a proper purpose, plaintiff's true or primary purpose is improper. Second, a plaintiff who states a proper purpose must also present some evidence to establish a credible basis from which the Court of Chancery could infer there are legitimate concerns regarding a director's suitability. That is, a stockholder must establish a credible basis to infer that a director is unsuitable, thereby warranting further investigation. Third, a plaintiff must also prove that the information it seeks is necessary and essential to assessing whether a director is unsuitable to stand for reelection. Finally, access to board documents may be further limited by the need to protect confidential board communications. Thus, accepting that a desire to investigate the suitability of a director is a proper purpose does not necessarily expose corporations to greater risk of abuse. [33] We agree that the purpose articulated in Pershing Square is a proper purpose for seeking inspection of corporate books and records under Section 220. Although that does not change the outcome of this case because Westland did not rely on that purpose as a basis for seeking relief nonetheless the relationship between the shareholder inspection right and the plurality plus policy adopted by the Axcelis board merits sharper focus for future guidance. In this case, the Axcelis plurality plus policy was adopted unilaterally as a resolution of the Board, rather than as a by-law or as part of the certificate of incorporation, both of which would require shareholder approval. [34] Here, the Axcelis Board unilaterally conferred upon the shareholders the right to elect directors by majority vote. But, the Board also conditioned that right upon the board's discretionary power to accept (or reject) the resignations of those directors who were elected by a plurality, but not a majority, shareholder vote. There is a relationship between the shareholders' inspection right and a unilaterally adopted plurality plus policy whereby the directors confer upon themselves the discretion to reject resignations tendered by candidates who fail to receive a majority vote. The less-than-majority shareholder vote may be viewed as a judgment by the holders of a voting majority that those director-candidates were no longer suitable to serve (or continue to serve) as directors. Correspondingly, the Board's decision not to accept those resignations may be viewed as a contrary, overriding judgment by the Board. At stake, therefore, is the integrity of the Board decision overriding the determination by a shareholder majority. Stated differently, the question arises whether the directors, as fiduciaries, made a disinterested, informed business judgment that the best interests of the corporation require the continued service of these directors, or whether the Board had some different, ulterior motivation. Where, as here, the board confers upon itself the power to override an exercised shareholder voting right without prior shareholder approval (as would be required in the case of a shareholder-adopted by-law or a charter provision), the board should be accountable for its exercise of that unilaterally conferred power. In this specific context, that accountability should take the form of being subject to a shareholder's Section 220 right to seek inspection of any documents and other records upon which the board relied in deciding not to accept the tendered resignations. That is not to say that the making of a Section 220 demand, or the filing of a Section 220 action, for the purpose of investigating the suitability of directors whose tendered resignations were rejected, will automatically entitle the plaintiff shareholder to relief. It is to say that a showing that enough stockholders withheld their votes to trigger a corporation's (board-adopted) plurality plus policy satisfies the Pershing Square requirement that a stockholder must establish a credible basis to infer that a director is unsuitable, thereby warranting further investigation. [35] Nevertheless, to be entitled to relief, the plaintiff must still make the additional showing articulated by the Chancellor in Pershing Square. That, in our view, strikes the appropriate balance between the shareholders' entitlement to information and the directors' entitlement to make decisions in the corporation's best interest free from abusive litigation.