Blasius Industries, Inc. v. Atlas Corp.
564 A.2d 651 (Del.Ch. 1988)

  • Blasius started buying up shares of Atlas, and ended up with about 9% of the stock. They suggested that Atlas liquidate most of their assets and give the shareholders a nice big dividend. Atlas’ management was not keen on this idea.
  • Blasius sent Atlas’ management a precatory resolution saying that they should restructure, double the size of the board of directors, and elect Blasius’ candidates to those positions.
    • A precatory resolution, is a letter sent to a board of directors from a powerful shareholder threatening them to acquiesce to a particular policy or else they would try to get their way through a shareholder vote.
  • In response, Atlas management held an emergency meeting of the board, amended the by-laws to add a few more directors, and appointed Atlas-friendly people to those new directorships. Blasius sued.
    • Blasius argued that the directors do not have the authority to act for the primary purpose of thwarting the exercise of a shareholder vote.
      • Blasius argued that Atlas’ action were selfishly motivated in order to protect the incumbent board from a perceived threat to its control.
    • Atlas argued that the Business Judgment Rule prevented the courts from looking into the reasons for why the management voted to increase the size of the board of directors.
  • The Trial Court found for Blasius and undid the directors’ actions.
    • The Trial Court found that Atlas’ management was not acting selfishly because they were worried they might lose their jobs, but acting in what they perceived to be the best interests of the corporation because they honestly believed that Blasius’ goals would harm the corporation.
    • However, the Court found that even when an action is taken in good faith, it could constitute an unintended violation of the duty of loyalty that the directors owes to the shareholders.
      • The directors are in effect agents of the shareholders. If the purpose of an action is to obstruct the shareholders’ reasonable control over their business, that is inequitable. Basically, the directors work for the shareholders, so if there is a disagreement between the shareholders and the directors, the directors have to defer to the judgment of the shareholders.
    • The Court noted that there might be some possible “compelling justification” for the directors’ action (so the directors actions aren’t necessarily per se forbidden). Compelling justification might be:
      • 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.
  • After this case, Blasius sold off their interest in Atlas. A few years later Atlas declared bankruptcy and all the shareholders lost their investments.