Corporate Governance

City of Westland v. Axcelis Technologies: Majority Voting and Delaware Law (The Demand to Inspect)

By J. Robert Brown

We are discussing CITY OF WESTLAND POLICE & FIRE RETIREMENT SYSTEM v. AXCELIS TECHNOLOGIES, INC., a case involving the invocation of inspection rights to investigate the reasons why the board of directors of Axcelis did not accept the resignation of three directors who failed to receive majority support from shareholders voting in the eleciton.

The majority vote provision required the Nominating and Governance Committee to recommend to the Board the action to be taken with respect to such offer of resignation.  The Committee, which had been reduced to a single member (one of the resigning directors was on the committee but recused himself) recommended that the resignations not be accepted.  See DEFENDANT'S OPENING PRE-TRIAL BRIEF, at 16 ("Thereafter, Mr. Nettles, the sole remaining member of the Nominating and Governance Committee, after deliberation over the factors influencing the vote and the qualities of the three directors, recommended that the Board not accept the offers of resignation."). 

The board (with the three resigning directors recused) approved the resignation.  The press release issued by the Company explained that:

• In making there determination, 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 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.

The decision spawned a request from Westland P & F for records relating to the decision not to accept the letters.  Having wisely opted to incorporate in Delaware (although having its principal executive offices in Beverly, Massachusetts), the Company refused to provide the requested documents.  As a result, the CWPFRS filed suit under Section 220 of the Delaware Code.  According to the complaint:

• Shareholders have reasonable grounds to believe that the Board may have breached its fiduciary duties to the Company and its shareholders in connection with recent acquisition proposals from Sumitomo Heavy Industries, Inc. ('SHI'), and in connection with the Board's refusal to accept the resignations of three Board members whose candidacy was opposed by a majority of shareholders during the course of the Board's consideration of SHI's offers.

The complaint alleged that the board never disclosed the "steps it took" to determine that it was in the best interests of shareholders to support the retention of the directors.  Instead, the decision indicated "Board members were more interested in entrenching themselves on the Board than in guarding the best interests of shareholders." 

Finally, the complaint noted that Axcelis sold Sumitomo the 50% interest in the joint venture between the two companies, which was what Sumitomo "wanted all along."   As a result, Axcelis' sale of [the stake in the joint venture] to [Sumitomo] at a rock-bottom price, in an attempt to preserve control of the board."

The complaint and other primary materials are posted on the DU Corprate Governance web site.

Full post as published by The Race to the Bottom on July 20, 2009 (boomark / email).