Proposed Amendments to the Delaware General Corporation Law and the Resulting Reduction in Shareholder Rights

Legislative proposals for changing the General Corporation Law of Delaware have been submitted to the Corporation Law Section of the Delaware State Bar Association for approval. To the extent approved, they will be submitted to the legislature for approval. The expectation is that they will become effective on August 1, 2009.

We have examined one of the provisions, a sub rosa attempt to deprive shareholders of an emerging federal right to include nominees in the company's proxy statement. 

In addition, the proposed amendments would authorize bylaws that require the reimbursement of proxy expenses related to the election of directors.  The provision provides that reimbursement can be conditioned upon the number of directors nominated (limiting reimbursement to short slates, for example) and the amount can be conditioned upon the number of votes received by the nominee or the amount spent by the Company. 

The provision to some degree overturns the miserable reasoning by the Supreme Court in CA v. AFSCME.  In that case, the SEC certified to the Supreme Court (something that the SEC should disavow again; certification to an anti-shareholder court will only yield anti-shareholder decision, something the prior Commission presumably knew) a question about the legality of a shareholder proposal that would have required mandatory reimbursement of the costs of an insurgent's proxy contest where one or more directors were actually elected.  The Court took it, despite an apparent violation of its own rules, and held that without a fiduciary out, the bylaw was amended. 

In so holding, the Court ignored a number of pertinent issues (the issues were raised on brief or at oral argument), including that the bylaw only required "reasonable" payments and that reasonable did not contemplate payments made in violation of fiduciary obligations, that any concern about the reasons for the nomination were vitiated by the actual election of the directors, and that bylaws requiring violations of a board's fiduciary duties could be repealed.  Instead, the Court seemed to have a result oriented motive of making it clear that bylaws requiring board action or expenditures needed to have a fiduciary out.  Even if the proposed amendments to some degree overturn the actual holding of the case, the bad law about the need for a fiduciary out remains.  This is a legacy of the prior Commission. 

The CA decision, by cutting off a system of mandatory reimbursement, made the use of separate proxy statements much less likely.  In turn, the case increased pressure on the Commission to permit access to the company's proxy statements for shareholder nominees.  The proposed Section 113 allows companies to adopt bylaws that provide for mandatory reimbursement, subject to various conditions.  To that extent it overturns the CA decision and potentially makes direct access to the company's proxy statement for shareholder nominees less necessary, at least for companies that adopt the bylaws.

In the end, the reform (and it is a reform) is very modest.  Companies are not required to put the bylaws in place.  To the extent that they do, they can impose any set of legal limitations, including a fiduciary out, potentially making them useless.  Moreover, to the extent requiring a specified percentage of the vote, they effectively make payment uncertain.  Thus, shareholders funding proxy fights will likely still confront the risk that they will have to absorb the entire cost of their own solicitation.

In the end, the provision overturns a very poorly reasoned decision.  It does not, however, provide an adequate substitute for access.  Shareholders gaining access to the company's proxy statement for their own nominees at least know that those expenses will be borne by the company irrespective of the total number of votes received. 

We've copied the relvant provision below.  All of the proposed amendments are posted on the DU Corporate Governance web site.

Section 113. Proxy Expense Reimbursement.

(a) The bylaws may provide for the reimbursement by the corporation of expenses incurred by a stockholder in soliciting proxies in connection with an election of directors, subject to such procedures or conditions as the bylaws may prescribe, including:

(1) Conditioning eligibility for reimbursement upon the number or proportion of persons nominated by the stockholder seeking reimbursement or whether such stockholder previously sought reimbursement for similar expenses;

(2) Limitations on the amount of reimbursement based upon the proportion of votes cast in favor of one or more of the persons nominated by the stockholder seeking reimbursement, or upon the amount spent by the corporation in soliciting proxies in connection with the election;

(3) Limitations concerning elections of directors by cumulative voting pursuant to § 214 of this title; or

(4) Any other lawful condition.

(b) No bylaw so adopted shall apply to elections for which any record date precedes its adoption.