July 14, 2006
An Ode to the Shareholder Franchise
Posted by Gordon Smith

One of my favorite Delaware decisions is Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988), written by then-Chancellor Bill Allen. Blasius has a narrow assignment in Delaware jurisprudence, requiring a "compelling justification" for any corporate action "intended primarily to thwart effective exercise of the franchise." Not many corporate actions over the years have been subjected to that standard, but Allen's defense of the shareholder vote is a classic:

The shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests. Generally, shareholders have only two protections against perceived inadequate business performance. They may sell their stock (which, if done in sufficient numbers, may so affect security prices as to create an incentive for altered managerial performance), or they may vote to replace incumbent board members.

It has, for a long time, been conventional to dismiss the stockholder vote as a vestige or ritual of little practical importance. It may be that we are now witnessing the emergence of new institutional voices and arrangements that will make the stockholder vote a less predictable affair than it has been. Be that as it may, however, whether the vote is seen functionally as an unimportant formalism, or as an important tool of discipline, it is clear that it is critical to the theory that legitimates the exercise of power by some (directors and officers) over vast aggregations of property that they do not own. Thus, when viewed from a broad, institutional perspective, it can be seen that matters involving the integrity of the shareholder voting process involve consideration not present in any other context in which directors exercise delegated power.


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Comments (4)

1. Posted by Jeremy Telman on July 15, 2006 @ 12:36 | Permalink

Every time I get to takeovers in my business associations course, I wonder why Blasius doesn't have wider application. For example, in the de facto merger context, if what is in fact a merger is structured as another kind of transaction so that one of the corporations involved can avoid triggering shareholder rights, including an up-or-down vote on the transaction, isn't Blasius implicated? Sure there might be a compelling justification for structuring the deal that way, but shouldn't a court at least inquire into whether there is one?

2. Posted by Christine on July 15, 2006 @ 13:41 | Permalink

I love Blasius, although Stroud seems to kick it in the knees. In the supplement to the Gilson/Black book, they throw in a more recent case, MM Industries, which resurrects Blasius, although it does not elevate it to the extent that Jeremy (or I) would like.

3. Posted by Gordon Smith on July 15, 2006 @ 17:11 | Permalink

Jeremy, I think that the problem with Blasius, from the standpoint of the Delaware judges, is that it is outcome determinative. Chancellor Allen pondered the possibility of adopting a rule of per se invalidity, but decided on "compelling justification" instead. You don't impose that unless you are pretty sure upfront that the action is not going to be upheld.

Christine, that Liquid Audio case is bizarre. It positions Blasius as a threshold to Unocal. ("When the primary purpose of a board of directors' defensive measure is to interfere with or impede the effective exercise of the shareholder franchise in a contested election for directors, the board must first demonstrate a compelling justification for such action as a condition precedent to any judicial consideration of reasonableness and proportionately.") I don't understand the need to do that, but there is much about Justice Holland's jurisprudence that eludes me.

4. Posted by Jeremy Telman on July 15, 2006 @ 17:44 | Permalink


I agree that Blasius is outcome determinative. Maybe Chancellor Allen should have come up with something like intermediate scrutiny. But still I wonder why Allen's paean for the shareholder franchise merits no consideration in the de facto merger context. It just seems like one of those few occasions where a shareholder vote must be held if the shareholder franchise is to mean anything.

In Hilton Hotels v. ITT Corp., the Nevada District Court engages in what it calls a Unocal/Blasius analysis. I've taught the case several times and have never really understood why one would bother with Unocal if one has already decided that Blasius applies, since, as Gordon notes, Blasius is outcome-determinative.

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