953 A.2d 227
- AFSCME was a shareholder of CA. They submitted a shareholder proposal to amend the bylaws of CA.
- The proposal would require that CA reimburse reasonable expenses incurred by a dissident nominating a rival slate of directors, provided that at least 1 nominee from the dissident slate was victorious.
- The directors of CA objected to the proposal and asked the SEC to exclude it from the proxy statement.
- CA argued that the shareholder proposal was improper because under Delaware law (8 Del. §141(a)), the decision as to whether or not to reimburse election expenses was at the discretion of the directors.
- Securities Exchange Act (1934) Rule 14a-8 allows the exclusion of shareholder proposals that would be illegal.
- AFSCME (D) argued that a different section of Delaware law (8 Del. §109) grants shareholders the right to adopt bylaws. So their shareholder proposal was not illegal under Delaware law and Rule 14a-8 did not apply.
- The SEC certified the question to the Delaware Supreme Court, asking them what to do.
- The Delaware Supreme Court ruled for CA.
- The Court found that in general, the proposed bylaw related to director elections and, thus, was a proper subject for a shareholder proposal under Rule 14a-8.
- However, the Court found that a shareholder proposal to amend the bylaws in the way AFSCME proposed would violate Delaware law because it "mandates reimbursement of election expenses in circumstances that a proper application of fiduciary principles could preclude" and, if adopted, could cause CA to be in violation of the law.
A Delaware corporation sought a no-action letter from the Securities and Exchange Commission of the United States.
-The letter claimed that a bylaw proposed by the stockholder was not a proper subject for shareholder action.
-General counsel for the stockholder argued that the proposed bylaw was in fact a proper subject.
-A corporate bylaw directed the board to reimburse the proxy expenses.
-The current bylaws and certificate of incorporation, however, did not address the issue of reimbursement.
-A determination of whether the bylaw was a proper subject for stockholder action and also whether any law would be violated if the bylaw was to be adopted was sought.
-The court found that both the board and the shareholders, both independently and concurrently, had the power to adopt, amend and repeal the bylaws.
-The court found that the shareholders' statutory power to adopt, amend or repeal bylaws was not coextensive with the board's concurrent power and was limited by the board's management prerogatives under §141(a).
-The court concluded that the bylaw fell within the scope of Delaware law and was a proper matter for stockholder action.
-The bylaw, as drafted, had violated the prohibition derived from §141(a) against contractual arrangements that committed a board to a course of action that would preclude them from fully discharging their fiduciary duties to the corporation and its shareholders.
-Relation to director elections is a proper subject matter for a bylaw.
-It was not okay to mandate reimbursement of election expenses in instances that proper fiduciary principles could preclude.
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