As Predicted: The SEC and the Further Denial of Shareholder Access (The Parties Make Their Case) (Part 3)

AFSCME and CA filed their briefs on Monday as required by the Delaware Supreme Court.  It was, as is usually the case, a contest between Sections 141 and 109(b) of the Delaware General Corporation Law. 

The position of CA was predictable, not because of the absence of creativity on the part of counsel but because there was no need. The Company primarily argued that the proposal, one that required in some cases the mandatory reimbursement of proxy solicitation expenses, violated Delaware law because it intruded into the Board's discretion to determine a company's expenditures.

• By its terms, AFSCME’s Proposed Bylaw would usurp the decision-making authority of CA’s Board of Directors by directing that “[t]he board of directors shall cause the corporation to reimburse a stockholder,” regardless of the particular circumstances, for costs incurred in successfully unseating at least one CA director using a so-called “short slate” of directors (i.e., a set of candidates running for fewer than half the seats on CA’s Board).

Leaving open the possibility that a proposal would be valid if providing the board with some discretion, the Company contended that "the Mandatory Reimbursement Bylaw would be automatic in operation, and leave no role for Board discretion or analysis of whether reimbursement of the costs of a subset of CA’s stockholders, regardless of their interests and motives, is in the best interests of CA and all CA stockholders."

Secondarily, the Company argued that proxy solicitation expenses could only be paid where there were "clear disagreements over corporate policy issues, not when the contest involves personal disagreements or issues not of concern to stockholders generally." Because the proposal provided for payment in all circumstances where an insurgent director was elected, the board would not have the discretion to make this distinction in the purpose of the contest. Finally, to implement this type of policy would require an amendment to the articles of incorporation. See Section 102 (certificate of incorporation may “create, limit, define, or regulate” board authority").

AFSCME took the position that Section 141 (which assigns to the board the authority to manage day to day affairs of the company) was all but irrelevant, with the matter controlled by Section 109(b). That is the section that permits the adoption of bylaws, including those by shareholders. As long as the bylaw is valid, it makes no difference that the proposal emanates from shareholders. As the brief notes:

• Thus, a bylaw that would require a corporation to reimburse proxy solicitation expenses, if legal under Delaware law (and it is), is not somehow rendered illegal simply because shareholders vote to adopt it. Given Delaware ’s historic policy of requiring a clear and unambiguous restriction on the shareholder franchise before limiting shareholders’ statutory rights, the Court should not interpret Section 141(a) to eliminate the ability of shareholders to adopt the Bylaw here.

Because the bylaw addresses the process of nominating and electing directors, "it is an appropriate subject matter for shareholder action under established Delaware law."  Moreover, the fact that it potentially requires the expenditure of funds does not itself result in a violation of Delaware law.  "Delaware courts, including this Court, routinely have upheld bylaw provisions that require the expenditure of corporate funds."

We will offer a prediction on Tuesday.  In addition, we will put up a post tomorrow morning asserting that the Delaware Supreme Court violated its own rule in hearing the case so stay tuned.

The briefs will eventually be posted on the DU Corporate Governance web site. In the meantime, if you want copies, email this Blog.