Blasius Industries, Inc. v. Atlas Corporation

Court of Chancery of Delaware, New Castle County
564 A.2d 651 (1988)

ELI5:

Rule of Law:

A board's defensive action taken for the primary purpose of interfering with or thwarting the exercise of the shareholder franchise is not entitled to the deference of the business judgment rule. Such action can only be upheld if the directors demonstrate a compelling justification.

Facts:

Blasius Industries, Inc. ('Blasius') acquired a 9.1% stake in Atlas Corporation ('Atlas') and proposed a leveraged restructuring plan to enhance shareholder value.
The Atlas board of directors was not receptive to Blasius's proposal.
On December 30, 1987, Blasius initiated a consent solicitation to ask Atlas shareholders to adopt a resolution to expand the seven-member board to fifteen members and to elect eight new directors nominated by Blasius.
The following day, December 31, 1987, the Atlas board held an emergency meeting.
At this meeting, the board voted to amend the bylaws to add two new director positions, increasing the board's size from seven to nine.
The board immediately appointed two individuals, John M. Devaney and Harry J. Winters, Jr., to fill these newly created seats.
This action was taken with the understanding and principal motivation of precluding Blasius's consent solicitation from succeeding in placing a majority of new directors on the board.

Procedural Posture:

On December 30, 1987, Blasius filed its initial lawsuit in the Delaware Court of Chancery challenging certain Atlas bylaws.
Following the Atlas board's action on December 31, Blasius amended its complaint to challenge the validity of the board's expansion and appointment of two new directors.
On March 9, 1988, Blasius filed a second action in the Delaware Court of Chancery concerning the outcome of the consent solicitation vote count.
The two cases were consolidated for trial in the Delaware Court of Chancery.

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Issue:

Does a board of directors breach its fiduciary duty by expanding its size and appointing new members for the primary purpose of preventing shareholders from electing a new majority of directors, even if the board acts in the good faith belief that the shareholders' proposed course of action would harm the company?

Opinions:

Majority - Allen, Chancellor

Yes. A board's decision to expand its size for the primary purpose of preventing shareholders from electing a new board majority constitutes an inequitable interference with the shareholder franchise and a breach of the duty of loyalty, even when taken in good faith. The business judgment rule does not apply to board actions taken for the primary purpose of interfering with a stockholder's vote. Instead, the board bears the heavy burden of demonstrating a compelling justification for such action. The shareholder franchise is the ideological foundation of directorial power, and actions interfering with it involve a conflict between the agent (the board) and the principal (the shareholders) over the allocation of corporate governance power. Such decisions are not merely business judgments but questions of authority that cannot be left to the agent's discretion. Here, the Atlas board's justification was that it knew better than the shareholders what was in the company's best interest. This paternalistic view is an insufficient justification for disenfranchising shareholders on the fundamental question of who should comprise the board. The board could have used corporate funds to inform shareholders of its views but could not exercise its power for the primary purpose of foreclosing effective shareholder action.

Analysis:

This case establishes the influential 'Blasius standard,' a heightened standard of judicial review for board actions that purposefully interfere with the shareholder franchise. It carves out a critical exception to the deferential business judgment rule, placing the burden on directors to show a 'compelling justification' for such actions. The decision reinforces the fundamental importance of shareholder voting rights in corporate governance, making it significantly more difficult for incumbent boards to entrench themselves by manipulating corporate machinery, even if they subjectively believe their actions are in the corporation's best interest. The Blasius standard remains a cornerstone of Delaware corporate law protecting shareholder democracy.

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