City of Westland v. Axcelis Technologies: The Myth of Majority Vote Provisions and the Further Need for Preemption of Delaware Law (The Chancery Court Makes the Case for Access)

As we have noted, shareholders in this case merely sought board minutes/agendas and materials considered by the board in deciding whether to accept the letters of resignation by the three directors.  Shareholders presumably wanted to ensure that the letters were accepted in a manner that conformed with the board's fiduciary obligations.  The Chancery Court, however, refused to allow them to see the rquirested material, concluding that they had failed to present a "credible basis" for any wrongdoing.  The court did so despite an arguable inconsitency in the statements by the company and the statements by the potential acquirer of the company.

Shareholders nonetheless asserted that, given the majority vote provision, the board's behavior warranted "heightend scrutiny and a suspicion of wrongdoing."  The court rejected the argument, concluding that the "Plaintiff’s logic is not sufficiently credible to support such suspicion." 

• The Plaintiff’s position would require this Court to accept the theory that mere shareholder reliance upon a board-enacted governance policy could effectively rewrite the voting provisions contained in a corporation’s by-laws. The Axcelis By-laws provide for director election by plurality vote, and the interposition of the Board’s discretionary review required by the Policy cannot change that fact simply because the shareholders who chose to withhold their votes wish it to be so. Perhaps certain shareholders withheld their votes for the purpose of symbolically demonstrating their lack of confidence in the Board.

By referring to bylaws, the opinion made it sound like shareholders were asking for something inconsistent with the company's foundational documents.  In fact, the plurality requirement is in the Delaware statute and on this matter shareholders had no choice. 

Likewise, the court made it sound as if shareholders were asking for something that actually contradicted the franchise. 

• Merely pointing out the Board’s exercise of discretion under the Policy—an exercise which ultimately effectuated the shareholder franchise—is not credible evidence of wrongdoing on this record. The Three Directors took office, duly elected by a plurality of Axcelis shareholders. The ultimate result under the Policy was the result of the shareholder franchise, not an interference with it. Absent the Policy, the result of the May 2008 election would have been no different.

In other words, the majority vote requirement provided no enhancement of the franchise.  Indeed, the provision actually increased the authority of the board of directors. 

Boards ordinarily lack the authority to remove a director.  An unwanted director need not be renominated but can retain his/her seat until the next shareholder meeting.   The majority vote provision effectively circumvents this traditional restriction.  With directors duly elected under a plurality vote system but now required to resign because they failed to receive a majority, it was up to the board, not shareholders, who would get to decide whether "removal" was appropriate. 

In the end, as the court all but admits, majority vote provisions are little more than director enhancement provisions. 

The Chancery Court did make one point that we have stressed repeatedly.  Had shareholders wanted to have an actual voice in governance, they really had only one  choice.  "If the purpose was the removal of the Three Directors, then those shareholders would have been better served by supporting an alternative slate of directors in the May 2008 election."  Indeed, the court described this failure as a "poor strategic choice." 

In short, the Chancery Court made a persuasive case for the need for shareholders to possess the right to insert nominees in the company's proxy statement (shareholder access).  Only with enhanced authority to elect a competitive slate of directors can they affect the make-up of the board. 

On this point, we are in complete agreement. 

Primary materials on this case can be found at the DU Corporate Governance web site.