The Delaware Court of Chancery has held that a new board chair has the power to rescind a prior chair’s valid calling of a special stockholder meeting. In Perlegos v. Atmel Corp., the plaintiff was chairman, president, and CEO of the defendant. Following an internal investigation, a special committee of the board resolved to terminate plaintiff for cause because he obtained personal travel at corporate expense. The special committee also requested plaintiff to resign from the board.
The committee emailed notice of Perlegos’ termination as president and CEO to his lawyer. A few hours later, plaintiff, as chairman of the board, called a special meeting of stockholders for the purpose of amoving the directors on the special committee. The next day, the board elected Sugishita as “non-executive chairman”, although it did not remove plaintiff as chairman. The board also authorized and directed Sugishita to rescind plaintiff’s call of the special meeting, which he did. Plaintiff brought suit against the company and board seeking, among other things, an order that the special meeting be held.
Vice Chancellor Noble, after a trial on the merits, held that the special meeting must be held. Although plaintiff had been terminated from employment earlier that day, he remained the chairman when he called the special meeting. He had the power to act because, under the company bylaws, the board, the chairman, or the president may call special meetings of stockholders. The Vice Chancellor rejected defendants’ argument that plaintiff’s motivation in calling the meeting was inequitable, although that surely was a close call. The Vice Chancellor ruled that electing Sugishita as non-executive chairman had the effect of removing plaintiff as chairman, even though the resolution did not explicitly remove plaintiff from that office. This is so because the company’s bylaws clearly anticipate only one chairman.
The Vice Chancellor then faced two other questions. First, whether a properly called stockholder meeting can be canceled and, second, whether the cancellation here was consistent with the duty of loyalty. As to the first question, Vice Chancellor Noble held, in essence, that a board chair can’t make a rock so heavy he or she can’t lift it. Thus, Sugishita had the power to rescind the meeting notice even in the absence of an explicit grant in the bylaws. This is surely consistent with Omnicare, which the Vice Chancellor cites.
On the second question, the Vice Chancellor pretty much held that Blasius, in its original incarnation, applied. As a fallback, he held that the defendants could not pass muster under Unocal, either. He did not acknowledge that Blasius has been subsumed under Unocal, in practical effect, at least since MM Companies, if not much earlier. Here, the compelling justification test applied because canceling the meeting had the effect of precluding a vote on replacing the defendants until the next annual meeting.
The Vice Chancellor didn’t buy defendants’ argument that the effect was postponing (permitted) rather than preventing (not permitted) a shareholder vote. I think the Vice Chancellor was incorrect in that holding. Regardless of whether the vote is one to amove directors at a special meeting or elect the board at an annual meeting, the stockholders will have an unfettered opportunity to vote on retaining the defendants as directors. The trigger is whether the defendants’ action would “interfere with or impede the effective exercise of” the franchise. In my view, the defendants’ actions would do neither.
In any event, whether the compelling justification test is considered part of Blasius alone or Blasius under Unocal, the defendants fail. The stated reasons for canceling the meeting were that the board had been elected only three months previously, the time and expense of the meeting would distract management, and the meeting could confuse stockholders and employees. A post-hoc reason was concern that amoving the directors would put the company’s NASDAQ listing in jeopardy. I think the Vice Chancellor was clearly right on this. None of those reasons is compelling justification.
Alternatively, the Vice Chancellor held that the defendants fail Unocal, as well. Although the opinion is not explicit, it seems likely that the defendants failed the second prong of the test. That is, they likely showed that they had reasonable grounds to perceive a danger to corporate policy and effectiveness but did not show that their response was reasonable in relation to the threat posed. More precisely, the Vice Chancellor held that the corporation could have implemented “a less preclusive and more reasoned response”. The word “preclusive” is, as the corporate cognoscenti know, a term of art. It’s one of the two ways to show that a response is “Draconian” and therefore impermissible. It’s less clear whether, if not Draconian, the response would be within the range of reasonableness, as required by Unitrin. “[M]ore reasoned” is not the same as outside the range of reasonableness.
The court is arguably right here, but I’m not completely convinced. The threat can be seen as punishing independent directors by removal because they properly performed a special committee function. That punishment is likely to have a chilling effect on board members in this corporation. The response is neither coercive nor preclusive and certainly reasonable. Thus I think the decision to rescind the call was proper.
Francis Pileggi has a very good post (here) on this case.