I am reminded here of State of Wisconsin Investment Board v. Peerless Systems Corp., 2000 WL 1805376 (Del. Ch.), in which Peerless sought shareholder approval of amendments to its stock option plan, referred to as Proposal 2, which plan benefited its directors. SWIB opposed Proposal 2 and solicited proxies against it. At the annual shareholder meeting, the proposal did not pass. The chairman closed the polls with respect to two other proposals, but adjourned the meeting for 30 days without closing the polls with respect to Proposal 2. During the adjournment period, Peerless selectively solicited shareholders. When the meeting resumed, Proposal 2 passed. SWIB sued.U.S. railroad CSX Corp's unusual decision to postpone releasing results of a shareholder vote looked to some like a desperate attempt to delay the inevitable appointment of several dissident nominees to its board.
But the company has bought itself a month before it has to announce whether any of the five dissident nominees of activist hedge funds The Children's Investment Fund (TCI) and 3G Capital Partners made it onto the board -- the two funds claim they won four seats on the 12-member board -- giving it time to rethink its strategy, and perhaps alter the vote.
"A delay is in the interest of the incumbents as it gives them continued control of the corporate machinery to seek fresh options," said Stephen Bainbridge, a professor of law at UCLA. "(CSX) may have lost narrowly and will need to go back out there to persuade select shareholders to change their vote."
If that were the case, the Jacksonville, Florida-based railroad's rarely used strategy to put off publishing the vote results until July 25 would look more like a shrewd move than a desperate gamble. ...
... law professors say that as Ward adjourned the meeting rather than ending it, the meeting is still in session and votes could still be changed or added. This provides CSX with time and room to maneuver, but also opens up the risk of lawsuits from TCI and 3G over the delay.
Because the Peerless board acted for the ?primary purpose? of interfering with the free exercise of the shareholder franchise, the Blasius Indus. v. Atlas Corp. standard applies. Under that standard, the board must demonstrate that there was a ?compelling justification? for its actions.
The chancery court drew a number of unfavorable parallels between Peerless?s conduct with respect to Proposal 2 and its handling of other votes. Peerless claimed it adjourned the meeting due to low turnout, for example, but the turnout at a recent special meeting to vote on an acquisition had been even lower but there had been no adjournment. The selective solicitations and absence of general disclosures were also inconsistent with Peerless?s claimed reasons. The court concluded that management adjourned the meeting solely because it was dissatisfied with the result of the voting.
The court evaluated no fewer than six alleged ?compelling justifications? proffered by Peerless. At the end of that process, the court expressed doubt as to whether the defendant would be able to establish any of them at trial, but concluded that the state of the record does not allow summary judgment for either side. I believe the case thereafter settled.
Blasius has always been controversial and Vice Chancellor Leo Strine recently suggested scrapping the Blasius standard in favor of one based on Unocal. If CSX does try a selective resolicitation and litigation results, this high profile proxy contest could present the Delaware courts with an opportunity to recast Blasius.
