Corporate Governance

City of Westland Police v. Axcelis Technologies: The Appeal (Part 2)

By J. Robert Brown

Plaintiffs in their brief have made a very straightforward argument.  First, plaintiffs challenged the standard used by the Chancery Court in dismissing the inspections request.

• By rejecting Plaintiff's 220 demands because it did not feel that the Plaintiff presented sufficient 'evidence' of the Axcelis Board's wrongful intent, the Court of Chancery essentially elevated the 'credible basis' standard on par with the standard applicable in the context of a motion for summary judgment. The court's holding thus renders Section 220 completely irrelevant as part of the 'tools at hand' thatthis Court repeatedly has urged shareholders to use to investigate possible wrongdoing before commencing litigation.

The second issue challenged the standard used to judge the board's decision not to accept the resignations.  Plaintiff asserted that the correct standard was not the business judgment rule, but the compelling justification standard in Blasius. 

• The Court of Chancery held that because the policy gave discretion to the Axcelis Board, a decision by the Board on that issue necessarily was subject to the protection of the business judgment rule, and as such could not be investigated under Section 220. . . .  And, in any event, the business judgment rule does not apply simply because Axcelis's voting policy gives certain discretion to the Board.  The Axcelis Board has discretion with regard to director resignations only because the voting policy gives it to them. But what standard applies in reviewing directors' conduct in this regard is determined under Delaware law. And on this point, Delaware law is clear: Under Blasius, where director conduct is designed to frustrate the outcome of a shareholder vote or impede the shareholder franchise, the business judgment rule does not apply and directors must provide a 'compelling justification' for their actions. . . .  By rejecting these resignations (and by agreeing to continue to serve with regard to the directors who resigned), Axcelis's Board thwarted the will of the majority of the Company's shareholders. As such, the Axcelis Board should have been required to provide a compelling justification for their actions, and the Court of Chancery erred in holding that the business judgment rule necessarily applied.

We shall await the response from Axcelis before assessing the merits.

The brief and the other primary documents can be found at the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on January 22, 2010 (boomark / email).