City of Westland Police and Fire Retirement System v. Axcelis Technologies, Inc.

Supreme Court of Delaware · Corporations

CorporationsBooks and RecordsSection 220Director ElectionsProper PurposeDGCL Section 220proper purposecredible basis

Facts

SHI made two unsolicited acquisition proposals for Axcelis in 2008, first at $5.20 per share and later at $6.00 per share, and the Axcelis board rejected both as undervaluing the company. At Axcelis's May 2008 annual meeting, three directors standing for reelection received more withheld votes than votes for, triggering the company's board-adopted "plurality plus" policy requiring them to tender resignations, but the board declined to accept those resignations. Westland later demanded books and records under Section 220 to investigate whether the board had breached fiduciary duties in handling SHI's proposals and in refusing the resignations. Axcelis refused the demand, and Westland sued to compel inspection.

Issue

Did Westland establish a proper purpose under Section 220 by presenting some evidence of a credible basis to infer possible wrongdoing from the board's rejection of SHI's bids and refusal to accept the directors' tendered resignations? Also, should the court apply Blasius to shift the burden to the board in reviewing the refusal to accept resignations under a plurality-plus policy?

Rule

A stockholder seeking inspection under 8 Del. C. § 220 to investigate possible wrongdoing must present some evidence, through documents, logic, testimony, or otherwise, establishing a credible basis from which a court can infer possible mismanagement or wrongdoing; mere suspicion or a conclusory assertion is insufficient. In addition, investigating an individual's suitability to serve as a director is a proper purpose under Section 220, and in the specific context of a board-adopted plurality-plus policy, a showing that enough stockholders withheld votes to trigger the policy satisfies the credible-basis requirement to infer possible director unsuitability, though the stockholder must still satisfy the additional requirements identified in Pershing Square.

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Redwood Circuit Systems, a Delaware corporation based in San Jose, receives an unsolicited acquisition proposal at a premium over market price. Its board rejects the offer after announcing that it undervalues the company, and stockholder Nina Patel of Sacramento serves a Section 220 demand stating that the rejection must have been motivated by entrenchment because the directors would lose their seats in a sale.

If Nina sues to compel inspection solely on those facts, which is the most likely result?

Explanation. A stockholder investigating possible wrongdoing under Section 220 must present some evidence creating a credible basis to infer possible mismanagement or wrongdoing. The majority held that rejecting unsolicited acquisition proposals, without more, does not by itself support an inference of entrenchment or other wrongdoing; bare accusations are insufficient. (Derived from City of Westland Police and Fire Retirement System v. Axcelis Technologies, Inc. (n.d.).)