Corporate Governance

As Predicted: The SEC and the Further Denial of Shareholder Access (Oral Argument and the Illegal Payment Problem) (Part 9)

By J. Robert Brown

We had the benefited of listening to the oral argument in CA v. AFSCME. The oral argument is publicly available and can be found on the Delaware Supreme Court web site.

Both sides wanted to avoid the interplay between section 141(a) and 109(b), each essentially arguing that the bylaw was per se valid or per se invalid. Giuffra took the position that the bylaw was not related to the shareholder franchise because “the bylaw comes into play after the election.” As such, it was nothing more than a limitation on the board’s discretion. Because the bylaw was mandatory, and lacked a fiduciary out, it was “asking the board to close its eyes to its fiduciary duties.” Allowing it to be upheld would turn the board “into puppets, robots and completely ignoring whatever duty or discretion they might have.”

The neat argument began to fall apart under questioning from the Justices. First, it was clear that not all of the Justices bought the argument that the provision was unrelated to elections.

• COUNSEL: “This only focuses on what happens after the election is over after the votes have been counted after the director from the short slate is sitting in the board room.”
• JUSTICE: “Well I understand that but isn’t it logical to assume that one of the issues in submitting nominations on a short slate or a full slate is the expense of doing so. And if the corporation is mandated to pay the expenses of a successful contest at least to a certain threshold, doesn’t that facilitate nominating persons for election of directors and isn’t that inextricably linked to the election process?”

The argument also had imbedded two entirely separate reasons why the bylaw violated Delaware law. On the one hand, the requirement that reimbursement is mandatory, irrespective of the purpose of the proxy contest, threatened to require the board to do something that was illegal, an issue that clearly troubled some on the Court. Existing law in Delaware seemed to suggest that a proxy contest engendered for entirely personal or political reasons was not in the best interests of shareholders and it would be illegal to award payment for these sorts of contests. Thus, as one Justice asked: ““If its mandatory why is it permissible to expend corporate funds when someone accomplished an exclusively personal goal?”

In that regard, Giuffra agreed that the bylaw was invalid and, relying on the Quickturn analysis, conceded that it was invalid even if adopted by the board.

• JUSTICE: “Is it your position then that this bylaw would be invalid even if it were adopted by the board of directors?”
• COUNSEL: “Yes. . . .We would think that the board could not tie its hand prospectively for all purposes and all circumstance.”

But the oral argument shredded this approach. We will pick up that theme in the next post.

Full post as published by The Race to the Bottom on July 12, 2008 (boomark / email).