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Delaware Court to Hear Reimbursement Bylaw DisputeSubmitted by: Ted Allen, Publications

In a historic move, the Delaware Supreme Court has agreed to rule on the legality of a shareholder bylaw proposal at CA Inc. that would provide reimbursement for expenses incurred by successful dissidents in a short-slate proxy contest.

The court will hear arguments on the matter on July 9 in Dover. This is the first time that the Supreme Court has agreed to resolve a legal question presented by the Securities and Exchange Commission (SEC). Delaware lawmakers approved legislation in 2007 to allow the SEC to directly ask the Supreme Court to rule on disputes over shareholder proposals.

The bylaw proposal--filed by the American Federation of State, County, and Municipal Employees (AFSCME)--would require the Islandia, N.Y.-based software company to reimburse successful dissidents for their ?reasonable expenses? in future short-slate contests. To qualify for reimbursement, the dissidents would have to seek less than 50 percent of the board seats, win at least one seat, and there not be cumulative voting in place. In addition, the reimbursed expenses could not exceed the sum spent by the company on that election.

Attorneys for CA asked the SEC?s Corporation Finance Division in April for permission to exclude the proposal, arguing that it is barred by SEC Rule 14a-8(i)(8), is not a proper subject for shareholder action, and could violate Delaware law. Lawyers for AFSCME?s pension plan responded by asserting that investors have broad authority under Delaware law to enact bylaws and may constrain actions by directors.

On June 27, the SEC asked the Supreme Court to rule on: 1) whether the resolution is a proper subject for shareholder action; and 2) whether the proposed bylaw would cause CA to violate any Delaware law. On July 1, the court agreed to hear the case, and directed the parties to submit briefs on the dispute by July 7.

Richard Ferlauto, director of pension and benefit policy at AFSCME, said he is encouraged that Delaware now allows disputes over shareholder proposals to go directly to the Supreme Court. In past disputes over Delaware law, investors have had to file a lawsuit in Chancery Court and then wait ?months or years? for the case to reach the Supreme Court, he noted.

AFSCME has filed several short-slate reimbursement proposals as an alternative to proxy access resolutions, which the SEC allowed companies to omit this year. Reimbursement generally is not an issue in full-slate contests, as dissidents who win board control typically are able to recover proxy expenses. An AFSCME reimbursement proposal is on the ballot at computer maker Dell on July 18. A similar proposal went to a vote May 8 at Apache, which has not yet released official vote results. A reimbursement resolution received 13.9 percent support at the Houston-based oil firm in 2007.

Feraluto said he is ?optimistic? about the labor fund?s chances in the CA bylaw dispute. ?While a corporation has wide latitude for the actions it takes, that?s based on the premise that directors are agents of shareholders,? he said. ?The corollary is that shareholders should be able to structure the procedures for nominating and electing directors.?

In a memo on the case, the law firm of Wachtell, Lipton, Rosen & Katz, which represents directors and companies, noted that Delaware law ?has generally limited the ability of shareholders pursuing special interests to recover their solicitation expenses.? The firm concluded that the Supreme Court would ?have a strong basis to reaffirm the traditional prerogatives of the board under Delaware law to manage the business of the corporation and decide how to spend its funds.?

The Supreme Court likely will rule on the dispute quickly. CA plans to file its definitive proxy statement by July 17 for its Sept. 9 annual meeting. This case may have broad significance for U.S. companies and shareholders, as 61 percent of New York Stock Exchange and Nasdaq-listed firms are incorporated in Delaware, according to Bloomberg News. ?Whatever happens, it will be precedential,? Ferlauto said.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on July 07, 2008 (boomark / email).