As Predicted: The SEC and the Further Denial of Shareholder Access (A Final Comment) (Part 22)

We offer one final comment on CA v. AFSCME.  The Court noted that those who "believe that CA’s shareholders should be permitted to make the proposed Bylaw as drafted part of CA’s governance scheme" could, among other things, accomplish the result by seeking "to amend the Certificate of Incorporation to include the substance of the Bylaw."  In other words, the Court all but held that a mandatory repayment scheme, with no board discretion, was valid if in the articles. 

But as we have noted, the offer is an empty one.  As we pointed out in Opting Only In: Contractarians, Waiver of Liability Provisions and the Race to the Bottom, management entirely dominates the process of drafting and amending the certificate. Amendments cannot be introduced by shareholders, only managers. Managers, therefore, introduce what they want, not what shareholders want. Moreover, as the paper empirically shows, management drafts the amendments and uses language most advantageous to its own interests.

The Court pretends that there is a solution to the problem created by its decision to strike down the bylaw but the solution is entirely in the control of the board.  Shareholders have no ability to obtain these types of amendments to the articles.  In other words, the Court would have us believe that its decision only forecloses one method of obtaining mandatory reimbursement for proxy expenses, that others are available.  But in fact there are no avenues available to shareholders and the Court's decision practically forecloses shareholders from obtaining these types of provisions.   

This is a result oriented decision designed to minimize shareholder participation in the nomination process.  It is not compelled by the law but by philosophy, a race to the bottom philosophy.

We have posted a copy of the opinion and many of the primary documents involved in the case  on the DU Corporate Governance web site.