Mercier v. Inter-Tel (Delaware), Inc.
929 A.2d 786 (Del.Ch. 2007)
The directors of Inter-Tel decided
to enter into an all-cash merger with another corporation called Mitel.
To make the deal official,
the directors established a special committee (aka an independent committee) and put the issue up for a shareholder vote.
A number of shareholders expressed
opposition to the deal with Mitel, and the directors decided that it was
virtually certain that they would lose the vote. The special committee decided to postpone the vote on the day the
vote was to occur.
The special committee figured that postponing the vote would give
shareholders more time to consider that Inter-Tel was doing badly, and
that the market wouldn't sustain the expectations some shareholders had
about the value of Inter-Tel.
In addition, a delay would
give speculators and arbitrageurs time to buy up piles of Inter-Tel stock
and sway the vote in favor of a merger.
Some shareholders, led by
Mercier, sued for an injunction to stop the vote altogether.
The shareholders argued that
postponing the vote was simply a way to manipulate the vote, and that was
a breach of fiduciary duty.
The directors argued that
their actions were covered by the business judgment rule.
The Trial Court declined to
issue the injunction.
The Trial Court looked to
the compelling justification test
established in Blasius Industries, Inc. v. Atlas Corp. (564
A.2d 651 (1988)) and found that postponement is appropriate when there is
a "compelling justification.
Compelling justifications
include:
When stockholders are
about to reject a third-party merger proposal that the independent
directors believe is in their best interests;
When information useful to
the stockholders' decision-making process has not been considered
adequately or not yet been publicly disclosed; and
When if the stockholders
vote no the opportunity to receive the bid will be irretrievably lost.
The Court combined the Blasiuscompelling justification test
with the reasonableness standard
set in Unocal Corp. v. Mesa Petroleum Co. (493 A.2d 946
(1985)). That standard required that the directors:
Identify a "legitimate
corporate objective," one that was "proper and not
selfish," served by its decision to postpone the meeting and set a
new record date and
Show that the board's
actions were "reasonable in relation to their legitimate
objective" and "did not preclude the stockholders from
exercising their right to vote or coerce them into voting a particular
way."
The Court noted that the
directors were serving with an "honesty of purpose" because if
the deal with Mitel went through they would have lost their jobs anyway.
Therefore there was no
possibility of a breach of the duty of loyalty where directors manipulate the system in
order to keep their jobs.
Basically, this case said that
under the standard set in Blasius,
when directors take an action "for the primary purpose of thwarting
the exercise of a shareholder vote," even if the action is taken in
subjective good faith, the directors must show that it had a
"compelling justification" to take the challenged action.
