Majority Voting in Director Elections: Delaware Supreme Court Outlines Shareholder Inspection Rights If the Board Rejects the Resignation of a Director Who Failed to Receive a Majority Vote

Sullivan & Cromwell LLP - September 30, 2010

As the 2011 proxy season approaches, Delaware corporations with so-called Pfizer-style director resignation policies should be aware that the Delaware Supreme Court in City of Westland Police & Fire Retirement System v. Axcelis Technologies, Inc. held that where “the board confers upon itself the power to override an exercised shareholder voting right without prior shareholder approval . . . the board should be accountable for its exercise of that unilaterally conferred power.” The decision arose in the context of a shareholder request to inspect a company’s books and records concerning the board’s determination to reject a mandated director resignation, and a consequence of the decision is that any such board determination will lead to heightened shareholder scrutiny. Specifically, the decision states that, for purposes of shareholders’ inspection rights under Delaware law, determining an individual’s suitability to serve as a director is a “proper purpose” and, where the company has a board-adopted majority voting and director resignation policy, the failure to receive a majority vote is sufficient to provide a “credible basis” to infer that a director is unsuitable, thereby warranting further investigation.

This decision highlights how important it is for boards to properly document their decision-making process, because shareholders are now more likely to assert inspection rights and then challenge non-acceptance of director resignations in court. The Court did affirm, however, that the board’s determination to reject a director resignation in this context is not an interference with or frustration of a shareholder vote in a manner that requires application of the Blasius “compelling justification” test.