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
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.