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

Axcelis "designs, manufactures and services ion implantation, dry strip and other processing equipment used in the fabrication of semiconductor chips."  See Annual Report on Form 10-K, March 31, 2009.

The company has a staggered board. (A proposal to repeal the provision passed in 2008 by about 76 million votes for, about 6 million against, but failed because it obtained less than 75% of the outstanding shares).  The CEO and Chairman are one and the same.  See Id.  ("Ms. Puma is Axcelis' Chairman (since May 2006), Chief Executive Officer (since January 2002) and President (since May 2000)").  And, of course, Axcelis had the foresight of incorporating in Delaware, triggering that state's lax regulation.  The Company does, however, have a majority vote provision.  The provision provides:

• At any shareholder meeting at which Directors are subject to an uncontested election, any nominee for Director who receives a greater number of votes “withheld” from his or her election that votes “for” such election shall submit to the Board a letter of resignation for consideration by the Nominating and Governance Committee. The Nominating and Governance Committee shall recommend to the Board the action to be taken with respect to such offer of resignation. The Board shall act promptly with respect to each such letter of resignation and shall promptly notify the Director concerned of its decision.

The board is an independent one, at least based upon the standards set out by Nasdaq.  All of the directors are listed as independent except for Mary Puma, the CEO. See Proxy Statement for 2007 ("The Board of Directors has determined that all directors who served on the Board during 2007, other than Ms. Puma, are or were independent under the criteria established by NASDAQ, and that the members of the Audit Committee also meet the additional independence requirements of the Securities and Exchange Commission.").

In February 2008, the Company received an offer from Sumitomo Heavy Industries for $5.20 a share or $532 million.  See Joint Pretrial Order, Statement of Uncontested Facts (On February 4, 2008, SHI, along with TPG Capital LLP (“TPG”), made an unsolicited bid to acquire Axcelis for $5.20 per share.").  Before the offer, the shares had been trading at slightly above $4. Id. ("On February 4, 2008, Axcelis closed at a price of $4.18 per share.").  In March, the offer was raised to $6.  Id.  (On March 10, 2008, SHI proposed to acquire Axcelis for $6 per share.").  The board, however, rejected the offer.

While the overture from Sumitomo was underway, Axcelis conducted an election for three directors to the board.  The Company expressed unhappiness that Sumitomo was trying to influence the election by encouraging shareholders to withhold their votes for the directors running for election.

• We are concerned that at this point, SHI may be trying to use you, our shareholders, as a tool to pressure the Board by advocating that you withhold votes for our director nominees. The Board rejected SHI’s $6.00 per share offer, which SHI has said it does not intend to increase, because we continue to believe that this offer significantly undervalues the Company. While we are ready to have discussions with SHI, the fact that SHI will not agree to reasonable terms for those discussions, and that it continues to lobby our shareholders for withhold votes, suggests that SHI may now simply be trying to gain negotiating leverage.

The directors, however, lost and not, according to the Quarterly Report filed in August 2008, by an insignficant amount  (see below).  The Company immediately disclosed that the directors "were re-elected" but with "less than a majority of the stockholder vote in support of their election" and as a result each director will "offer to resign from the Board."  The announcement indicated that the Board would consider whether to accept the resignations but provided a clear rational for not doing so.

• We believe that these results were impacted by the recommendation by Institutional Shareholder Services that stockholders withhold their votes for the election of the director nominees due to the failure of the Board to recommend in favor of the proposed change to the Certificate of Incorporation. Under one of Axcelis’ corporate governance policies, each of these directors will offer to resign from the Board. The Nominating and Governance Committee will consider each of these resignations and make a recommendation to the full Board on the acceptance or rejection of the resignations. The Board will then act on the recommendation as they determine appropriate and in the best interests of shareholders. Axcelis will report on the Board’s decision once it is made.

Ultimately, the board refused to accept the letters of resignation.  In a press release dated May 23, 2008, the Company announced that determination.

• In making their 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

In other words, the Company suggested that the resignation of the directors would be inconvenient and result in a loss of experience, a justification that would pretty much apply to almost any director.  The loss of the lead director could have been more inconvenient but there was little information in the press release explaining why this was the case.  Because the Company had a staggered board, the effect of the refusal to accept the letter of resignation was to return the directors to the board for a three year term (see proxy statement disclosing that directors will remain in office until 2011).

At least some shareholders were apparently not satisfied with the explanation and invoked their inspection rights to obtain additional information.  We will discuss this in the next post. 

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

Nominee		Number of Votes For			Number of Votes Withheld
R. John Fletcher			40,393,217			55,214,528
Stephen R. Hardis			40,402,432			55,205,313
H. Brian Thompson			40,388,548			55,219,197

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