Corporate Governance

As Predicted: The SEC and the Further Denial of Shareholder Access (Oral Argument and the Illegal Payment Problem) (Part 11)

By J. Robert Brown

We have had the opportunity to listen 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.

How else might the board prevent the bylaw from requiring improper or illegal payments (that is payments to those who start a contest for personal or political reasons).  Another answer came up in the exchange between the Court and Barry, counsel for AFSCME.

• JUSTICE:  “If this bylaw was adopted by the shareholders the board could repeal it.”
• COUNSEL:  “In theory yes. Then it would raise questions as to their fiduciary duties in making that decision to do so. But there wouldn’t be anything under the statute that would prohibit them from repealing the bylaw.”

In other words, the board has the authority to repeal bylaws (if the authority is in the articles).  See 8 Del. C. § 109 (2008)("provided, however, any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors").  In other sections, the right of the board to repeal is expressly removed.  See  8 Del. C. § 216 (2008)("A bylaw amendment adopted by stockholders which specifies the votes that shall be necessary for the election of directors shall not be further amended or repealed by the board of directors.").  The RMBCA provides that the board may not amend or repeal bylaws if "the shareholders in amending, repealing, or adopting a bylaw provide that the board of directors may not amend, repeal, or reinstate that bylaw." See RMBCA § 10.20(b)(2). 

But under Delaware law, so long as the authority is in the articles, the board may repeal a shareholder bylaws.  This is controversial and largely untested power.  Any authority for the board to repeal bylaws would be subject to its fiduciary obligations.  Whether the fact of adoption by shareholders would reduce board discretion in this area is unclear.  Nonetheless, the ability to repeal the bylaw provides another "out" for the board.  If it looks like there will be reimbursement for a contest instigated for personal or political motives, the board could repeal the bylaw. 

But to find this, the Court would have to discuss the limits of the board's authority to repeal shareholder bylaws.  The issue, however, was not briefed.  In other words, its possible that in order to answer the questions certified by the Commission, the Supreme Court will have to delve into uncharted waters that were not fully developed in the case.  It is not a good position for the Court to be in.  But it is a consequence of the Court agreeing to hear a certified question without a developed record or the parties having an opportunity to brief all issues.

The Supreme Court will, therefore, likely avoid the issue by avoiding the need for the fiduciary out and instead focusing on the fact that the bylaw requires the expenditure of money, a second, separate challenge to the bylaw.  We will deal with this argument in the next post.   

The primary materials, including the briefs, are posted on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on July 14, 2008 (boomark / email).