As Predicted: The SEC and the Further Denial of Shareholder Access (The Actual Result) (Part 18)

The SEC certified two questions.  The first was whether the bylaw as a proper subject for action by shareholders.  The Court concluded that it was, an apparent victory for shareholders.  But this is Delaware and things are not as they always seem.  In doing so, the Court distinguished between procedural and substantive bylaws. 

• The process-creating function of bylaws provides a starting point to address the Bylaw at issue. It enables us to frame the issue in terms of whether the Bylaw is one that establishes or regulates a process for substantive director decision making, or one that mandates the decision itself.

Having framed the issue in that manner, the Court then agreed that the bylaw, although "infelicitously couched as a substantive-sounding mandate to expend corporate funds, has both the intent and the effect of regulating the process for electing directors of CA."  It was, therefore, a proper subject for shareholders.

While AFSCME won the argument, shareholders lost the war.  The need to have the bylaw involve process meant that any decision, no matter how small, that was not process oriented, would be invalid.  Bylaws requiring boards to undertake steps to curb global warming, to disinvest from companies doing business with terrorists, or to withdraw poison pills would, under the Court's reasoning in this case, to be on their face invalid. 

In other words, the Court used the case to dramatically broaden the types of bylaws that now must be excluded under Rule 14a-8.

The opinion is posted on the DU Corporate Governance web site.