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

Supreme Court of Delaware · 2010 · Corporations

CorporationsSection 220 books and records inspectionproper purposecredible basisdirector suitabilityDGCL 220books and recordsproper purpose

Facts

Axcelis's board rejected two unsolicited acquisition proposals from SHI, concluding the bids undervalued the company. At Axcelis's 2008 annual meeting, three unopposed directors received more withheld than affirmative votes, which triggered the board-adopted plurality-plus policy requiring them to tender resignations, but the board declined to accept those resignations and explained its reasons in a press release. Westland, a beneficial stockholder, then demanded books and records under Section 220 to investigate whether the board breached fiduciary duties in rejecting SHI's bids and refusing to accept the resignations. Axcelis refused, 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 acquisition proposals and refusal to accept the three directors' tendered resignations? Also, should Blasius govern review of the board's decision not to accept resignations under Axcelis's plurality-plus policy in this Section 220 setting?

Rule

Under DGCL Section 220, a stockholder seeking inspection to investigate possible wrongdoing or mismanagement must present some evidence, through documents, logic, testimony, or otherwise, suggesting a credible basis from which a court could infer possible wrongdoing; a mere statement or suspicion is insufficient. In the separate context of investigating director suitability, that is a proper purpose under Section 220, and when a board-adopted plurality-plus policy is triggered by enough withheld votes, that fact satisfies the credible-basis requirement to infer possible unsuitability and warrant further investigation, though the stockholder must still show the requested materials are necessary and essential and satisfy other Section 220 limits.

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Lakeshore Robotics, a Delaware corporation based in Cleveland, receives an unsolicited acquisition proposal from North Peak Holdings at a 22% premium over market. Its board rejects the offer after announcing that the price undervalues the company, and stockholder Elena Ruiz sends a Section 220 demand stating that the directors must have acted to keep their jobs because they turned down a takeover premium.

If Elena sues to compel inspection solely to investigate wrongdoing, which is the strongest argument for the corporation?

Explanation. A stockholder investigating wrongdoing under Section 220 must present some evidence creating a credible basis to infer possible mismanagement. Mere suspicion or conclusory entrenchment allegations are insufficient. The majority held that rejection of an unsolicited acquisition offer, without more, does not itself create a credible basis to infer wrongdoing.