This Delaware Supreme Court decision has been anticipated by the corporate legal world with great interest since oral arguments were heard by Delaware’s High Court last week. My post with some background can be found here. More background discussion of prior Delaware decisions that have addressed related issues, as provided by Professor Bainbridge, can be found here.
In sum, a shareholder of CA, Inc., the trillion dollar pension fund of AFSCME, proposed a bylaw amendment that would require the company to reimburse the shareholder for expenses related to nominating a less than full slate to the board of directors.
Here are the two issues presented by the SEC to the Delaware Supreme Court in a procedure authorized last year and now used for the first time:
1. Is the AFSCME Proposal a proper subject for action by shareholders as a matter of Delaware law?
2. Would the AFSCME Proposal, if adopted, cause CA to violate any Delaware law to which it is subject?
Bottom line of the decision: Yes and yes. Although bylaws, in general, are permissibly used to address the process and procedures related to board elections, in the particular circumstances of this case, the bylaw proposed would impermissibly restrict the managerial and fiduciary duties of the board. However, the court suggested other means by which the shareholder could achieve the same goal in a way that would be consistent with Delaware law: for example, amend the certificate of incorporation.
Here is the court’s reasoning, in part, for its affirmative answer to the first question:
The shareholders of a Delaware corporation have the right “to participate in selecting the contestants” for election to the board. The shareholders are entitled to facilitate the exercise of that right by proposing a bylaw that would encourage candidates other than board-sponsored nominees to stand for election. The Bylaw would accomplish that by committing the corporation to reimburse the election expenses of shareholders whose candidates are successfully elected. That the implementation of that proposal would require the expenditure of corporate funds will not, in and of itself, make such a bylaw an improper subject matter for shareholder action. Accordingly, we answer the first question certified to us in the affirmative.
That, however, concludes only part of the analysis. The DGCL also requires that the Bylaw be “not inconsistent with law.” Accordingly, we turn to the second certified question, which is whether the proposed Bylaw, if adopted, would cause CA to violate any Delaware law to which it is subject. (footnotes omitted).
For its affirmative answer to the second question, the court provided the following reasoning:
… the Bylaw mandates reimbursement of election expenses in circumstances that a proper application of fiduciary principles could preclude. That such circumstances could arise is not far fetched. Under Delaware law, a board may expend corporate funds to reimburse proxy expenses “[w]here the controversy is concerned with a question of policy as distinguished
from personnel o[r] management.” But in a situation where the proxy contest is motivated by personal or petty concerns, or to promote interests that do not further, or are adverse to, those of the corporation, the board’s fiduciary duty could compel that reimbursement be denied altogether.
It is in this respect that the proposed Bylaw, as written, would violate Delaware law if enacted by CA’s shareholders. As presently drafted, the Bylaw would afford CA’s directors full discretion to determine what amount of reimbursement is appropriate, because the directors would be obligated to grant only the “reasonable” expenses of a successful short slate. Unfortunately, that does not go far enough, because the Bylaw contains no language or provision that would reserve to CA’s directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award
reimbursement at all. (footnotes omitted)
Footnote 14 which directly addresses the issue of: "what is the scope of shareholder action that Section 109(b) permits [regarding bylaws] yet does not improperly intrude upon the directors’ power to manage a corporation’s business and affairs under Section 141(a)," explains exactly what the court did–and did not–decide:
We do not attempt to delineate the location of that bright line in this Opinion. What we do
hold is case specific; that is, wherever may be the location of the bright line that separates the shareholders’ bylaw-making power under Section 109 from the directors’ exclusive managerial authority under Section 141(a), the proposed Bylaw at issue here does not invade the territory demarcated by Section 141(a).
One of the great things about covering this area of the law on this blog is that many experts in the field cover the same issues, so I can link to their scholarly analysis as a supplement (and sometimes in place of) any comments I have. A few samples of the corporate law professors who have already provided scholarly analysis of this opinion within hours of its release, are: here, here, here, here and here.
I invite readers to tell me if they are aware of any other state’s highest court that can be counted on, predictably, to render such a weighty decision within a week of hearing oral argument–and when the briefs were only submitted a mere two (2) days prior to oral argument.
UPDATE: As one would expect, an enormous amount of high quality commentary continues apace in the blogosphere about this case, and I may update this post or supplement it in the coming days. Also, as an aside, perhaps I will never get accustomed to it, as I am still thrilled when one of my posts is quoted by a luminary like Professor Bainbridge, as he was kind enough to do today here.