Blasius Industries, Inc. v. Atlas Corp.

Delaware Court of Chancery · 1988 · Corporations

CorporationsShareholder voting rightsBoard action affecting corporate controlshareholder franchiseboard expansionwritten consentfiduciary dutyduty of loyalty

Facts

Blasius, Atlas's largest shareholder at 9.1%, proposed a restructuring and then delivered written consents that would expand Atlas's board from seven to fifteen and elect eight Blasius nominees. The next day, Atlas's board met by telephone, increased the board from seven to nine, and appointed two new directors, knowing this would prevent shareholders from placing a majority of new directors on the board through Blasius's consent solicitation. The court found the board's principal motivation was to impede or preclude shareholders from effectively implementing the Blasius proposal, although the board acted in good faith and not for selfish personal entrenchment. In the later consent-count dispute, independent judges of election counted only the written cards before them and concluded Blasius fell short of the required majority.

Issue

When a board acts in good faith and with due care, may it nevertheless expand the board and fill the new seats for the primary purpose of preventing shareholders from electing a new majority through written consent? Also, in reviewing a close consent solicitation, may judges of election or the court go beyond the face of the consent materials to resolve conflicts based on extrinsic evidence?

Rule

The business judgment rule does not apply to board action taken for the primary purpose of interfering with the effectiveness of a shareholder vote. Instead, because the shareholder franchise is central to the legitimacy of directorial power, the board bears a heavy burden of demonstrating a compelling justification for such action; absent such justification, the action is inequitable and invalid even if taken in subjective good faith. In counting consents, judges of election and reviewing courts generally must confine themselves to the face of the consent materials and the corporation's regular books and records, and may not reconcile conflicts through extrinsic evidence absent fraud or breach of duty.

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Red Mesa Minerals, a Delaware corporation based in Phoenix, learns that a group of unaffiliated stockholders has begun a written-consent campaign to amend the bylaws and elect five new directors. The next morning, Red Mesa's board expands the board by two seats and fills both with respected industry experts, expressly recognizing that the move will prevent the stockholders from obtaining a board majority through the pending consent effort.

If the directors acted in subjective good faith and honestly believed the dissident slate would pursue a harmful strategy, which standard is most likely to govern review of the board's action?

Explanation. When directors act for the primary purpose of preventing or impeding the effectiveness of a shareholder vote, ordinary business-judgment deference does not apply. The majority opinion treats such conduct as involving allocation of governance authority between principal and agent, so the board must demonstrate a compelling justification. Good faith, due care, and the qualifications of the appointees do not restore business-judgment protection by themselves. (Derived from Blasius Industries, Inc. v. Atlas Corp. (1988).)