In Mercier v. Inter-Tel (Delaware), Inc., 929 A.2d 786 (Del. Ch. 2007), Vice Chancellor Leo E. Strine of the Delaware Court of Chancery urges restraint and reformulation in the application of the exacting "compelling justification" standard of review announced in Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del Ch. 1988). According to the Vice Chancellor, the Blasius standard of review should not be applied unless director conduct affects an election of directors or a vote touching on matters of corporate control. Moreover, suggests the Vice Chancellor, the "compelling justification" standard should be reformulated in other cases to focus on the reasonableness of directors' actions directed to a corporate objective that impacts the stockholder voting process.
Mercier involved a motion by stockholders of Inter-Tel (Delaware), Inc. ("Inter-Tel" or the "Company") to enjoin the consummation of a merger ("Merger") with Mitel Networks Corporation ("Mitel"), which Merger was approved by a majority of the Company's stockholders. The transaction was an all-shares, all-cash acquisition by Mitel at $25.60 per share. The Merger vote was originally scheduled to take place at a special meeting of the Company's stockholders on June 29, 2007. As the meeting date drew near, Inter-Tel's directors became aware that the Merger would not be approved and that an additional ballot item–a proposal authorizing adjournment to solicit additional proxies in the event there were not sufficient votes to approve the Merger at the special meeting–also would not be approved.
On the morning of June 29, the special committee of Inter-Tel's board of directors ("Special Committee"), after a lengthy meeting the day before, decided to reschedule the Merger vote. Among the reasons for the rescheduling were (i) to allow stockholders more time to consider recent developments, including changes in the debt capital markets adversely affecting the availability and cost of financing for acquisitions; (ii) to provide stockholders with an update regarding Inter-Tel's sales results, which reflected lower than expected results; (iii) to advise stockholders of Mitel's recent announcement that it would not increase its bid; (iv) to afford stockholders the opportunity to consider definitive proxy materials filed by the Company's founder, who was proposing a recapitalization that included a Company buy-out of a significant portion of his holdings; and (v) an indication by the stockholder advisory group Institutional Shareholders Services that it would recommend a "no" vote on the Merger in the absence of a postponement of the special meeting. According to the Court, "Although the minutes do not put it this way, the Special Committee believed the stockholders were about to make a huge mistake."
The Special Committee changed the record date and set a new meeting date of August 2, 2007. Between the record dates for the June 29 and August 2 meetings, new holders who supported the Merger acquired Inter-Tel stock. Additionally, following the release of the Company's revised sales figures, ISS changed its recommendation and advised its clients to vote in favor of the Merger. Upon ISS's change of position, the Company's founder withdrew his competing recapitalization proposal. At the August 2 special meeting, an overwhelming majority of Inter-Tel's stockholders voted in favor of the Merger.
Plaintiff then moved to enjoin the consummation of the Merger. The crux of plaintiff's argument was that the last-minute rescheduling of the Merger vote, when it was clear that a majority of Inter-Tel's stockholders were about to vote it down, was an attempt by the Special Committee to thwart the will of the majority of the Company's stockholders by interfering with the stockholder franchise. That, according to plaintiff, should have triggered the "compelling justification" standard of review announced in Blasius. In a thoughtful analysis, the Vice Chancellor discussed the history of the Blasius standard of review and how, in his opinion, it is too often a label placed on an after-the-fact conclusion that the challenged board decision does not pass muster, as opposed to a useful tool for evaluating that conduct in the first instance. Indeed, the Vice Chancellor noted:
It would hardly be indiscreet for me to acknowledge yet again the widely known reality that our law has struggled to define with certainty the standard of review that this court should use to evaluate director action affecting the conduct of corporate elections. The results in the cases make sense, as the decisions do a good job of sorting between situations when directors have unfairly manipulated the electoral process to entrench themselves against insurgents and those when directors have properly used their authority over the election process for good faith reasons that do not compromise the integrity of the election process. The problem that remains though is that there is no certain prism through which judges are to view cases like this.
In particular, the Court's concern was how to tailor the applicable standard of review to cases involving electorally-directed action in the M&A context. In that context, the Court opined that it makes sense to look to the standard of review articulated in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), which requires directors to demonstrate the reasonableness of defensive action taken in response to reasonably perceived threats to corporate policy and effectiveness. Looking to relatively recent Delaware Supreme Court precedent, the Vice Chancellor opined that the "fit" test used in Unocal can be applied to cases like Mercier that arise in the M&A context, but also implicate the impact of director conduct on stockholder voting issues. To this end, the Vice Chancellor reasoned:
One can read Liquid Audio [MM Companies, Inc. v. Liquid Audio, Inc., 813 A.2d 1118 (Del. 2003)] as suggesting that the heightened scrutiny that Unocal's fit test employs to assess defensive actions by directors, was to be ratcheted up to a form of strict scrutiny when the directors' actions affected the corporate franchise. Although it does not use those precise words, Liquid Audio can be viewed as requiring the directors to show that their actions were reasonably necessary to advance a compelling corporate interest.
Based on this reasoning, the Court applied a reasonableness standard to judge the action taken by the Inter-Tel board of directors in connection with rescheduling the Merger vote. Specifically, the Court held that the board would bear the initial burden to identify a legitimate corporate objective served by its decision to postpone the vote. Then, the board was required to demonstrate that its actions in furtherance of such an objective were reasonable and did not preclude stockholders from exercising their right to vote or coerce them into voting in a particular way. Although the Vice Chancellor formulated the test he would apply as something akin to a Unocal analysis, he recognized that he was constrained by controlling precedent, referring to a "compelling justification" standard of review. Employing a reasonableness analysis, the Court ultimately concluded that there existed a "compelling justification" for the postponement of the Merger vote.
The Court denied plaintiff's request for an injunction and found that defendants had a compelling justification for a postponement of the Merger vote when the directors (i) were well-motivated and independent; (ii) believed the Merger was in the stockholders' best interests; (iii) knew the Merger would have been voted down at the June 29 meeting; (iv) reasonably feared that, if the Merger were rejected, Mitel would walk away and the Company's stock price would plummet; (v) wanted more time to communicate with and provide information to the stockholders before they voted and risked an irrevocable loss of Mitel's offer; and (vi) rescheduled the meeting within a reasonable time and did not preclude or coerce the stockholders from voting freely to accept or reject the Merger.