Mercier v. Inter-Tel (Delaware), Inc.
929 A.2d 786 (Del.Ch. 2007)

  • The directors of Inter-Tel decided to enter into an all-cash merger with another corporation called Mitel.
    • To make the deal official, the directors established a special committee (aka an independent committee) and put the issue up for a shareholder vote.
  • A number of shareholders expressed opposition to the deal with Mitel, and the directors decided that it was virtually certain that they would lose the vote. The special committee decided to postpone the vote on the day the vote was to occur.
    • The special committee figured that postponing the vote would give shareholders more time to consider that Inter-Tel was doing badly, and that the market wouldn’t sustain the expectations some shareholders had about the value of Inter-Tel.
    • In addition, a delay would give speculators and arbitrageurs time to buy up piles of Inter-Tel stock and sway the vote in favor of a merger.
  • Some shareholders, led by Mercier, sued for an injunction to stop the vote altogether.
    • The shareholders argued that postponing the vote was simply a way to manipulate the vote, and that was a breach of fiduciary duty.
    • The directors argued that their actions were covered by the business judgment rule.
  • The Trial Court declined to issue the injunction.
    • The Trial Court looked to the compelling justification test established in Blasius Industries, Inc. v. Atlas Corp. (564 A.2d 651 (1988)) and found that postponement is appropriate when there is a “compelling justification.
      • Compelling justifications include:
        • 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.
    • The Court combined the Blasius compelling justification test with the reasonableness standard set in Unocal Corp. v. Mesa Petroleum Co. (493 A.2d 946 (1985)). That standard required that the directors:
      • Identify a “legitimate corporate objective,” one that was “proper and not selfish,” served by its decision to postpone the meeting and set a new record date and
      • Show that the board’s actions were “reasonable in relation to their legitimate objective” and “did not preclude the stockholders from exercising their right to vote or coerce them into voting a particular way.”
    • The Court noted that the directors were serving with an “honesty of purpose” because if the deal with Mitel went through they would have lost their jobs anyway.
      • Therefore there was no possibility of a breach of the duty of loyalty where directors manipulate the system in order to keep their jobs.
  • Basically, this case said that under the standard set in Blasius, when directors take an action “for the primary purpose of thwarting the exercise of a shareholder vote,” even if the action is taken in subjective good faith, the directors must show that it had a “compelling justification” to take the challenged action.