564 A.2d 651, 660 n.2 (Del. Ch. 1988)
Blasius Industries, Inc. began accumulating shares of Atlas Corporation in July 1987 and by October 29, 1987, with affiliates owned 9.1% of Atlas common stock as disclosed in its Schedule 13D filing with the SEC.1 In that filing, Blasius stated its intent to encourage a restructuring or other transaction to enhance shareholder value and disclosed it was exploring obtaining control, including through a tender offer or board representation.2 Blasius had come under the control of Michael Lubin and Warren Delano, who raised $60 million through junk bonds underwritten by Drexel Burnham to fund the acquisition, creating debt service obligations that could not be met from operations.3
On December 2, 1987, following a regular Atlas board meeting, Lubin and Delano met with Atlas management including CEO Weaver, CFO Devaney, counsel Masinter, and a Goldman Sachs representative to propose a leveraged recapitalization involving a $35 million cash dividend and $125 million in 7% secured subordinated gold-indexed debentures, funded partly by a gold loan and asset sales.4 Atlas directed Goldman Sachs to analyze the proposal, which management viewed skeptically, leading to a December 9 press release questioning the timing and debt burden amid market uncertainty after the October crash.5 Further meetings were delayed pending Goldman's analysis.6
On December 30, 1987, Blasius delivered a written consent to Atlas proposing a precatory resolution for restructuring, amending bylaws to expand the board from seven to fifteen members, and electing eight new directors nominated by Blasius; it also filed suit challenging certain bylaws.7 The next day, December 31, Atlas held an emergency telephone board meeting that expanded the board to nine members and appointed John Devaney and Harry Winters to the new positions, with terms expiring in 1988 and 1990 respectively under the staggered board structure.8
Subsequently, on January 6, 1988, after Goldman Sachs presented its analysis concluding the proposal would lead to bankruptcy and low stock value, the Atlas board rejected the recapitalization.9 A consent contest followed with competing mailings, culminating in Blasius presenting consents on March 6, 1988; an independent fiduciary as judge of elections reported on March 17 that none of the proposals achieved the required 1,486,293 consents, falling short by about 45,000 shares.10 The second action was filed on March 9, 1988. The cases were consolidated for trial in the Delaware Court of Chancery before Chancellor Allen.11
Whether the Atlas board's December 31, 1987 action expanding the board from seven to nine members and appointing two new directors was valid?12
When a board acts for the primary purpose of preventing or impeding an unaffiliated majority of shareholders from expanding the board and electing a new majority, such action constitutes an offense to the relationship between corporate directors and shareholders that has traditionally been protected in courts of equity.13 This holds even if the directors acted in good faith and with appropriate care.14 The business judgment rule does not apply.15 The board bears the heavy burden of demonstrating a compelling justification for the action.16
No. The established facts demonstrate that the board expanded the board and appointed two new directors on December 31 immediately after receiving Blasius' consent solicitation the prior day. The principal motivation was precluding a majority of shareholders from electing eight new directors through that solicitation. The emergency telephone meeting was called specifically to implement this step before any court could intervene.17
The directors understood and admitted that the action would prevent Blasius from obtaining a board majority.18 No consideration was given at the meeting to the merits of the recapitalization proposal itself.19 Although the new directors were qualified, the timing and admissions establish that the primary purpose was to thwart the shareholder franchise rather than an independent operational decision.20
The board action taken on December 31 was invalid and must be voided.21
Whether Blasius Industries' consent solicitation obtained the support of a majority of Atlas shares for its proposals to expand the board and elect new directors?22
In reviewing the outcome of a consent solicitation, judges of election acting in good faith must confine their count to the face of the consent cards and the regular books and records of the corporation. They may not inquire into the subjective intent of record or beneficial owners absent fraud or breach of duty.23 Later dated revocations from record holders are given effect by subtracting the shares they represent from earlier consents submitted by the same record holder.24
No. The judges of election properly applied the face-of-the-card rule and netting procedure for revocations received from record holders. This produced a tally in which each of Blasius' five proposals fell short of the required 1,486,293 consents by approximately 45,000 shares. Although errors occurred both by the judges and by record holders or their agents, and although extrinsic evidence showed some mismatches between beneficial-owner intent and the cards actually submitted, those errors do not alter the announced result once the proper legal standard is applied.25
Blasius' consent solicitation failed to garner the support of a majority of Atlas shares.26